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Still no free lunch: Infrastructure investments must be carefully evaluated

By: Ryan Nunn
February 14, 2018

The President’s 2019 Budget gives a prominent place to infrastructure policy, proposing $100 billion of matching funds to state and local governments, as well as $50 billion in funding for rural infrastructure and $50 billion in other spending. The matching funds are intended to spur state and local investment, and would be provided to state and local governments that commit to allocating new revenues to infrastructure projects several times larger than the federal grant. The administration argues that this would leverage the federal investment, generating new state and local spending far in excess of the federal commitment.

Policymaker attention to infrastructure policy is certainly merited. A Hamilton Project blog post, “No Free Lunch: The Pros and Cons of Public-Private Partnerships for Infrastructure Financing,” explored this very issue. Falling public investment at all levels of government—shown in the figure below—presents a challenge for building and maintaining American infrastructure at levels that can support robust economic growth.

While the discussion of the administration’s infrastructure plan has revolved around a $1.5 trillion spending goal, only $200 billion would be in the form of federal spending. In addition, there are other places in the budget where spending on transportation is cut, making the net new federal investment possibly much smaller. Moreover, it is not clear that the leverage sought for the $100 billion of matching funds could realistically be achieved. State and local governments would have a strong incentive in their grant applications to create “new” revenues that would qualify for matching grants, and that would be offset by revenue reduction elsewhere in their budgets.

Another concern with the administration’s matching funds proposal is the minimal consideration it gives to cost-benefit analysis of new investments. Only 5 percent of federal evaluation criteria are allocated to “evidence supporting how the project would spur economic and social returns on investment.” Instead, the administration’s selection criteria focus on whether states generate new revenue sources for infrastructure, meaning that projects may be selected based on funding options in the states, not the overall national benefits. By giving preference to revenue sources—including private capital—over social benefits, the proposal may reallocate infrastructure spending away from socially important projects that are true public goods and are not attractive to private investors.

All of these concerns suggest the need for a clear framework that can be applied to infrastructure policy. In a 2017 paper, The Hamilton Project outlined the case for additional infrastructure investment, the criteria that should be applied to project selection, the considerations that determine who should pay for particular investments, and the appropriate means of funding and financing infrastructure. Among the principles articulated in that framing paper is the vital importance of applying cost-benefit analysis when selecting projects. Policymakers should set in place non-political processes to allocate investments—whether through an infrastructure bank or otherwise—in order to maximize the effectiveness of taxpayer funds.

Previous Hamilton Project proposals have addressed a number of challenges associated with infrastructure policy. A 2013 proposal by Jack Basso and Tyler Duvall recommend that user fees be employed to reduce congestion and adequately fund maintenance and operation. In addition, a 2015 Hamilton Project paper by Roger Altman, Aaron Klein, and Alan Krueger offers a host of proposals that would improve U.S. infrastructure, from the reintroduction of Build America Bonds to pooled procurement systems for state and local governments.

Policymakers should lay the foundation for sustained, broadly shared economic growth in the decades ahead by implementing these much-needed reforms. A properly funded federal infrastructure investment plan, informed by the best available evidence, is sorely needed.