You do not need to look veryfar to see what the government's newest response will be to stabilize the  economic volatility in our country: public works spending, particularly in thearea of transportation infrastructure.

Similar to Roosevelt's NewDeal programs in the 1930s, this approach would be another significantexpansion of government....and on the heels of the federal bailout, which bysome estimates, is the largest intrusion of government in the private market inhistory.

Highlighted by theMinneapolis bridge collapse and the growing negative economic impacts caused bytraffic congestion, there is no doubt that this country has a largetransportation infrastructure deficit. So disproportionate spending increasesin transportation infrastructure might be welcome by some unusual allies andmay avoid the "socialist" accusations that usually follow such largescale market manipulations.

Here is a great articlewritten by Ken Orski that discusses the background on the current issuessurrounding transportation infrastructure spending.

October 30,2008

Support for IncreasedPublic Infrastructure Spending is Growing

The push toincrease investment in public infrastructure is gaining momentum. It is stokedby the prospect of another "stimulus" (or "economicrecovery") package, a portion of which would be dedicated to roads,bridges, transit and other public infrastructure. Supporting the initiative isan influential coalition of trade associations, public interest groups andlabor unions including the American Road and Transportation BuildersAssociation (ARTBA), Associated General Contractors of America, NationalAssociation of Manufacturers, American Public Transit Association (APTA),American Society of Civil Engineers (ASCE), U.S. Conference of Mayors, and ahost of local governments.

While someobservers question the effectiveness of infrastructure spending as a short-termeconomic stimulus on the grounds that public works projects cannot be launchedquickly enough, proponents, such as AASHTO’s John Horsley, argue thatthere are many projects that could be advanced to construction within 90 daysif additional funds were made available. In a briefing paper prepared for anOctober 29 congressional hearing on public infrastructure (see below), thestaff of the House Committee on Transportation and Infrastructure cites aJanuary 2008 AASHTO survey of State Departments of Transportation thatidentified 3,071 "ready-to-go" highway and bridge projects at a totalcost of $17.9 billion. A further 559 "ready-to-go" transit projectsat a total cost of $8.03 billion have been identified in an October 2008 surveyby the American Public Transportation Association (APTA).

CongressionalHearing on Public Infrastructure Investment

Support fora second stimulus package was plainly on display at an October 29 hearing ofthe House Transportation and Infrastructure Committee. The hearing was convenedat the request of House Speaker Nancy Pelosi to lay the groundwork forlegislative action in the next Congress.

Witnessesgave the Committee ample ammunition why an economic recovery program with astrong focus on infrastructure investments would be desirable. New JerseyGovernor Jon Corzine (D-NJ) and former Michigan Governor John Engler, nowpresident of the National Association of Manufacturers emphasized that theinitiative is needed not just as a short-term stimulus to create jobs andassist in national economic recovery but also as part of a needed long termstrategy to repair and expand the nation’s infrastructure. Witnesses providedmany specific examples of ready-to-go projects. Lest the hearing be perceivedjust as a forum for special interests to plead for increased funding for theirfavorite local pork barrel projects, Committee Chairman James Oberstar stressedthe need for applicants to prioritize their wishlists based on objective standardsof need. He elicited a promise from Governor Corzine that he would"strictly adhere" to doing just that.

John Irons,Research and Policy Director of the Washington-based Economic Policy Institute,was the only witness to address the issue of financing. He testified that, inhis view, the recovery package should be deficit financed. "While deficitsshould not be ignored," he said, "deficit reduction must take a backseat to short-term stimulus." Allowing a temporary increase in thenational debt next year to levels no higher than what we averaged in the 1990s(46.1% of GDP) would allow room for about $900 billion in additional debt"Irons testified. Infrastructure investments should be seen as an insurancepolicy against a prolonged downturn, he added, to counter the argument aboutthe time lags encountered in construction contracts

Additionalsupport for increased spending on transportation infrastructure came from statetransportation officials. Meeting on October 20 in Hartford CT, the American Associationof State Highway and Transportation Officials (AASHTO) called for an overall$545 billion investment in surface transportation infrastructure over a periodof the next five years (2010-2015). The recommended allocation would provide$375 billion for highways, $93 billion for transit, $42 billion for freightimprovements and $35 billion for intercity passenger rail. Increased federalfunding would be coupled with national performance standards set to achievenational goals.

Supportfor the stimulus bill is not unanimous

Support fora stimulus bill and increased infrastructure spending is not unanimous. Inanother congressional hearing, held concurrently by the House Ways and MeansCommittee, witnesses offered a more skeptical view. Governor Mark Sanford(R-SC) opened his testimony with a ringing plea not to approve the contemplatedstimulus package, arguing that the money "may in fact further infect oureconomy with unnecessary government influence and unintended fiscalconsequences." "Common sense voices from both sides of the aisle areraising red flags about our national deficit," he warned. Governmentspending has grown 57 percent this decade alone and if the stimulus passage ispassed, this year’s budget could top $1 trillion — adding to the over $10trillion national debt, Sanford said. State debt across the country has alsoincreased by 95 percent over the past decade because of "unsustainablespending growth," he added.

Anotherskeptical witness, economist Alan Viard of the American Enterprise Institute,argued that, while in theory, increasing infrastructure spending could reducethe severity of a recession, in practice timing lags make it difficult todeliver the stimulus at the time it is needed. He cited the CongressionalBudget Office and a long list of economists in support of his conclusion.

Longcontracting lead times was also the reason why the White House andTransportation Secretary Mary Peters have come out in opposition to thestimulus package, with Peters citing past experience with time lags encounteredin construction contracting. On Capitol Hill, House Minority Leader JohnBoechner (R-Ohio) added to the skeptical opinion, saying that he would rejectany bill that includes "hundreds of billions in new pork-barrel spendingmasquerading as economic stimulus."

Ronald Utt,transportation analysts at the Heritage Foundation pointedly reminded peoplethat infrastructure provided and operated by the private sector, such aspipelines, electric power plants, transmission grids and telecommunicationnetworks do not seem to suffer from an "investment deficit. "Ourinfrastructure is deficient only where it relies on the public sector formaintenance and rehabilitation," Utt wrote in an October 23 HeritageFoundation commentary entitled "Is America’s Infrastructure ‘Crisis’ JustAnother Crisis for Socialism?". According to Utt, the solution is not topour more billions of dollars into a public works program but to begin shiftingmore responsibility for the maintenance and operation of infrastructure fromthe public to the private sector. It’s an observation that may haveconsiderable merit, but nonetheless is full of irony in these days of what isbecoming the largest expansion of the federal government’s role in the economysince the 1930s.

PrivateInvestment in Infrastructure

Thetransportation stakeholders are not the only ones supporting greater investmentin infrastructure. That also seems to be the sentiment of private investors.Infrastructure is one of the "rare bright spots in a tumultousmarket" wrote editors of Financial News. Several executives ofprivate equity firms whom we encountered at a recent New York meeting,concurred.

While theage of highly leveraged deals may be over, they said, there are still billionsof dollars in domestic and foreign infrastructure funds waiting to be investedin transportation facilities. Toll roads appeal to long-term investors becausethey generate strong demand even in times of slower economic growth and producesteady and predictable cash flow relatively unaffected by economic downturns.And long-term investors such as pension funds and insurance companies requirestable, income-oriented investments to match their long-term liabilities andpayout obligations. Given the current volatility of the equities market, thelow interest rates of the government bond market and the risky nature ofinvestments in corporate credit instruments and real estate, infrastructure isnow seen as a "safe haven" for long-term investors, a senior bankofficial told us. The reported decline in toll revenue in recent months is seenas a passing phenomenon tied to a recessionary economy. In the long run, tollroads have lost none of their revenue earning potential.

Of moreconsequence to the prospects for private investment in infrastructure, theprivate equity executives warned, is the nature and extent of the expectedgovernment oversight to be placed upon private toll concessions. If the capitalmarket should conclude that legal restrictions and regulatory barriers placed onsuch concessions are too onerous and burdensome, investors (especially foreigninvestors) may decide that investing in U.S. infrastructure is not worth thetrouble and they will turn instead to infrastructure investment opportunitiesabroad. Such a decision, in the judgment of the private equity executives,would be most unfortunate for it would deprive fiscally strapped state andlocal governments of a much needed source of capital to modernize and expandpublic infrastructure.

Calls torincreased spending on public infrastructure began before the current push for astimulus package. We called attention to them already one year ago ("TheInfrastructure Financing Debate is Gaining Momentum", NewsBrief, November2007) and again in March of this year ("The Problem of InfrastructureDeficit is Attracting Growing Attention, NewsBrief No.9, March 2008). Theinfrastructure debate was triggered by the bridge collapse in Minneapolis, anincident that jolted the public into realizing that we have allowed ourtransportation infrastructure to seriously deteriorate through decades ofunder-investing. But the earlier debate always assumed that additional spendingon infrastructure would require new sources of funding and a major financialcontribution by the states. The stimulus advocates, on the other hand, are nowpushing for deficit financing and a 100 percent federal share.

Whichpoint of view prevails will depend upon internal discussions among fiscalconservatives and liberals within the Democratic party, since the Democrats arevirtually assured control of Congress, probably with expanded majorities. OnCapitol Hill, conservative Blue Dog Democrats will argue that, with this year’sdeficit potentially approaching $1 trillion, now is not the time to abandon thepay-as-you-go rules which hold that any spending increases must be offset byequivalent new revenues (or spending cuts). The liberals, on the other handwill argue that, with a deepening recession and growing unemployment, containingthe deficit is the last thing on their mind. That posture was epitomized by aremark by House and Means Chairman Charles Rangel (quoted in the Wall StreetJournal, October 30): "For God’s sake," he said, "don’t ask mewhere the money will come from. I’m going to the same place [Secretary of theTreasury] Paulson went."

THENATIONAL INFRASTRUCTURE BANK

Along sidethe stimulus package, the concept of a National Infrastructure Bank (NIB)figures prominently among the infrastructure financing initiatives to beconsidered in the next Congress. The purpose of the bank would be to providefinancial assistance to major public infrastructure projects "notadequately served by current financing mechanisms." The concept has beenendorsed by presidential candidate Barack Obama and Speaker Nancy Pelosi aswell as by a number of private and public sector figures such as PennsylvaniaGovernor Ed Rendell (D-PA), former Treasury secretary Larry Summers and SenateBanking Committee chairman Christopher Dodd (D-CT).

The Bank, asinitially proposed by Senators Christopher Dodd (D-CT) and Chuck Hagel in theirbill, S.1926, has been resurrected in a fresh and more elaborate form byEverett Ehrlich and Felix Rohatyn in a recent article in The New York Reviewof Books ("A New Bank to Save Our Infrastructure," October 9,2008). Both Ehrlich and Rohatyn had been key figures in the CSIS Commission onPublic Infrastructure that had produced the original 2007 report recommendingthe National Infrastructure Bank.

In its newversion, the National Infrastructure Bank would replace the various modalprograms as the source of capital for highways, mass transit, airports andother public infrastructure. Rather than receiving grants through pre-setfederal formulas and congressional earmarks, states and other levels ofgovernment would come to the Bank with investment proposals they wished topursue. Unlike NASTRAC, the entity proposed by the National TransportationPolicy and Revenue Commission, the bank would not act on a top-down comprehensiveplan for the nation’s infrastructure. Proposals for infrastructure investmentwould continue to come up from state and local level. What would changeis the way projects are selected for funding. The Bank would rate projects andset funding priorities using a set of objective criteria reflecting regional ornational significance, productivity and economic benefit.

The authorshave proposed that the Bank’s capital would come from the funds now dedicatedto existing infrastructure programs — about $60 billion annually.Alternatively, the Bank could obtain its own capital by issuing long-term bondsbacked by its loan portfolio. The Bank could also rebundle its loans and sellthem to investors in the capital markets (not unlike Fannie Mae’s subprime homemortgage securities but presumably backed by sounder, income-producingprojects.)

WhetherCongress could be persuaded to adopt an Infrastructure Bank along the linesproposed by Messrs Ehrlich-Rohatyn is an open question. Asking Congress to cedecontrol over the federal public works programs, surrender its power to makeinfrastructure investment decisions, and abolish all modal distinctions seemsfar-fetched. Along with some members of the Transportation InfrastructureFinancing Commission, we think a more promising (and more congressionallyacceptable) model for the Bank would be the already existing TransportationInfrastructure Finance and Innovation Act (TIFIA). The TIFIA program, which hasbeen in existence since 1998, provides federal credit assistance totransportation projects of substantial regional or national significance.Projects must be eligible for federal assistance under Title 23 and generate adedicated stream of revenue from user fees. TIFIA assistance can take the formof secured loans for construction and permanent financing (for a term of up to35 years); loan guarantees to institutional lenders making loans for projects;and lines of credit that may be drawn upon to supplement project revenues.

Endowing the proposed National InfrastructureBank with TIFIA-like authority while expanding and liberalizing TIFIA’sconditions (e.g. by adding Title 49 (transit) to the category of eligibleprojects, substantially increasing its capitalization, and lifting the ceilingon credit assistance (currently at 33 percent of project costs) wouldaccomplish all the purposes of the Dodd-Hagel bill while preserving theexisting balance of power between federal and state government.