The Auckland Transport Alignment Project (ATAP) report, which was released last week, identified the need to spend more money on transport infrastructure in Auckland. ATAP estimates that we need to spend $24 billion on new transport infrastructure over the next decade, around $4 billion of which would not be funded by current transport budgets.
While $4 billion is a sizeable gap, it’s smaller than previously assumed, due in part to ATAP’s recommendation to defer costly projects like the Additional Waitemata Harbour Crossing. But meeting it will mean raising fuel taxes, fares, rates, general taxes, or implementing congestion pricing to manage demands until funding is available.
ATAP’s obviously identified a need to spend more money on transport infrastructure in the Auckland context. But is spending more money on infrastructure in general a good idea? In other words, should any additional spending in Auckland be balanced by proportionately higher spending everywhere else in the country?
Two prominent American economists, Larry Summers and Ed Glaeser, recently took contrasting views on this question. Summers is most well-known as a policy advisor to Democratic administrations and (in recent years) an advocate of fiscal policy as a cure for long post-GFC recession. Glaeser, on the other hand, is best known for his work on urban economics, including his great book Triumph of the City.
Summers lays out the case for spending more (in the Financial Times). His key argument is that low interest rates signal an underemployed economy where the “opportunity cost” of paying people to build more stuff is relatively low, and that infrastructure spending is a good way to do this as it can enhance a country’s long-run productive potential:
There is a consensus that the US should substantially raise its level of infrastructure investment. Economists and politicians of all persuasions recognise that this can create quality jobs and provide economic stimulus without posing the risks of easy-money policies in the short run. They also see that such investment can expand the economy’s capacity in the medium term and mitigate the huge maintenance burden we would otherwise pass on to the next generation.
The case for infrastructure investment has been strong for a long time, but it gets stronger with each passing year, as government borrowing costs decline and ongoing neglect raises the return on incremental spending increases. As it becomes clearer that growth will not return to pre-financial-crisis levels on its own, the urgency of policy action rises. Just as the infrastructure failure at Chernobyl was a sign of malaise in the Soviet Union’s last years, profound questions about America’s future are raised by collapsing bridges, children losing IQ points because of lead in water and an air traffic control system that does not use GPS technology.
In particular, Summers argues that priority should be placed on funding deferred maintenance, which is a major problem in the US:
What is the highest priority? The fastest, highest and safest returns are likely to be found where maintenance has been deferred. Maintenance outlays do not require extensive planning or regulatory approvals, so they can take place quickly. And they tend naturally to take place in areas where infrastructure is most heavily used.
Glaeser sets out a considerably more skeptical perspective in the City Journal. Contra Summers, he argues that infrastructure spending isn’t a particularly efficient way of getting unemployed people back to work, and that the political incentives facing decision-makers tend to mean that additional funding is misspent in declining areas like Detroit or on projects that don’t do much good:
While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes inefficiencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollars.
Glaeser takes more specific aim at the notion that infrastructure investment inevitably generates broader economic returns:
Infrastructure spending is a form of investment: just as building a new factory can boost productivity, laying down a new highway or opening a new airport runway can, at least in principle, generate future economic returns. But the relevant question is: How do those future returns compare with the costs? Just because infrastructure is a form of capital doesn’t mean that spending a lot on it is always smart. When a firm estimates the rate of return for a new factory, it can calculate the expected net profits and compare those with the expense. The analog for, say, new or improved roads is to estimate the benefits to users from reduced travel times, add the likely modest spillover benefits to nonusers, and then subtract the spending needed to construct and maintain the infrastructure. The results can differ significantly across projects. A well-known 1988 Congressional Budget Office survey found that spending to maintain current highways in good shape produces returns of 30 percent to 40 percent—but that new highway construction in rural areas showed a much lower return. A clever study that used firm inventories estimated that the rate of return to new highways was sizable during the 1970s but sank below 5 percent during the 1980s and 1990s.
The existence of plausible transportation alternatives and the law of diminishing returns have also tended to reduce the benefits of infrastructure investment over the past two centuries. The opening of the Erie Canal in 1821 brought enormous value because the inland transportation options at the time were dismal. In the early nineteenth century, it cost as much to ship goods 30 miles over land as to send them across the entire Atlantic Ocean. Yet the very existence of canals, as much of a breakthrough as they represented, reduced the benefits of the later rail system, as Nobel economist Robert Fogel has shown. The returns for new transportation infrastructure in places with terrible roads, such as much of Africa and India, will be much higher than in the United States, which already enjoys an impressive, if under-maintained, array of mobility options.
While Summers and Glaeser take different views on the value of spending more money on infrastructure, there are some important points of agreement, such as:
- Prioritising maintenance spending to replace or upgrade run-down infrastructure
- Better cost benefit analysis to ensure that money is being spent in more beneficial ways
- Where appropriate, funding new infrastructure more from user charges and fees, rather than general taxes.
Lastly, it’s worth asking whether these issues look different in New Zealand than in the United States. I don’t have a complete answer to this, but in previous posts I have looked at the issue of infrastructure spending from a variety of perspectives. For instance, I’ve asked:
- Does additional road spending have an inflationary impact? (Yes, meaning that the sector faces capacity constraints to scaling up)
- Is road spending characterised by cost blowouts? (Yes, but cost overruns don’t seem extreme by international standards)
- Are we generally spending money on the most beneficial road projects? (There’s been a trend away from economic efficiency)
- Is spending spread around the country proportionately? (Yes, with exceptions)
- Do higher levels of road spending have broader macroeconomic benefits? (There is no good evidence for this phenomenon in New Zealand)
On balance, I’d say that those posts present a moderately skeptical view of the case for significantly ramping up transport investment – ie more in line with Glaeser’s view than Summers’. That’s not to say that we shouldn’t spend a bit more, but any additional spending should be backed by robust analysis.
What do you think about infrastructure spending? More or less?