March 4, 1995

March 4, 1995 | Report on

Clinton's Flawed North Korean Nuclear Deal: An Opportunity for Strengthening U.S. Policy

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9

January 15,1993

WHY INFRASTRUCTURE SPENDING WON'T JUMP START THE ECONOMY

As a prominent part of our commitment to put people first, we will create a Rebuild America Fund, with a $20 billion Federal investment in each yearforfour years.... Bill Clinton, hating People First: A National Economic Strategy for America

EXECUTIVE SUMMARY During your presidential campaign, President-elect Clinton, you told audiences that the fed- eral government should spend $80 billion over the next four years to create jobs, while at the same time upgrading America's roads, bridges, and other physical facilities. Not surprisingly, the word "infrastructure" has been on the lips of many policy makers looking for ways to jump start an economy perceived as dangerously weak. It also has been on the lips of many lobbyists. But while there are real issues involving both infrastructure and jobs that you should address, a federal spending strategy would not achieve your goals. And such a strategy would make the budget deficit even worse. Among the problems with your approach: + Infrastructure spending already Is scheduled to grow. In December 1991, the Bush Administration won approval to spend $151 billion over the next six years on such projects. + More government Infrastructure spending Is not likely to put more Americans to work in the near future. Infrastructure projects take time to plan. Local public hear- ings must be held, bids sought and contracts issued. If jobs are created, it can be years after federal funds are approved. And the cost can be many times that of jobs created in the private sector. Each new job created for the unemployed with mass transit funds in the Emergency Jobs Act of 1983, for instance, cost over $300,000 during the first year of spending. + The quicker the federal government doles out money for infrastructure, the more likely It Is that the money will go to pork barrel projects. Local interest groups will profit, but real local and national problems will not be addressed.

2 Why Infrastructure Spending Won't Jump Start the Economy

+ More spending will mean that the system that currently misallocates Infrastructure funds will be perpetuated. Federal grant formulas create incentives for local gov- emments to waste money on inappropriate approaches to problems. A better approach to solve infrastructure problems would be to reform the federal regulations that drive up costs and block more efficient and less expensive solutions. Local governments and the private sector often see ways of solving their own problems but find their hands tied by the federal government. Ironically, this forces them to go to the federal government for more money to overcome the burden that the federal government imposes on them. Among the specific actions you should take:

Action 1: Use your Executive authority to suspend the Davis-Bacon Act, which artificially raises the cost of projects. Then press for repeal. Davis-Bacon mandates union scale wages and reduces job openings for less-skilled workers.

Action 2: Instruct the Transportation Secretary to develop guidelines for selling airports to the private sector and to publicize the benefits of privatization to local governments that own airports. While George Bush signed an executive order to make such privatiza- tion possible, he did virtually nothing to implement the order.

Action 3: Press for legislation to repeal Section 13(c) of the 1964 Urban Mass Transportation Act. This union protection law forces up the cost of operating mass transit systems.

Action 4: Work to remove federal government barriers to the privatization of roads. Private owners often can maintain roads with fees to users better than the government can. Federal regulations must be changed to allow sale of roads to the private sector.

Action 5: Urge Congress to remove bans on blending private and public funds for mad pro- jects. Short of complete private ownership, public-private joint ventures can mean less costly infrastructure. Public-private roads could be developed if federal govern- ment bans on such partnerships were lifted.

You are correct, Mr. Clinton, to make job creation a top priority for your Administration. Giving Americans the opportunity to prosper through their own efforts is the best way to help the economy and individuals. Yet spending more taxpayers' money on infrastructure, even as spending in this area continues to rise, will not create quick jobs. It will create an even higher budget deficit and make it more difficult to reform the current wasteful system of doling out federal funds. Recent history gives no indication that your spending will be any more effective than past spending. Since you stand for reform, Mr. Clinton, it would be better for you to initiate a review of cur- rent federal infrastructure spending to detennine how costs can be brought down and pork bar- rel spending eliminated. To create jobs and rrstore economic prosperity, you need a very different strategy for taxation and spending.

1 See Daniel J. Mitchell. "An Action Plan to Create Jobs," Heritage Foundation Memo to President-Elect Clinton No. 1. December 14, 1992; and Scott A. Hodge, "How to Get Spending Under Control," Heritage Foundation Mem to President-Elect Clinton No. 8, Januuy 15,1993.

Why Infrastructure Spending Won't Jump Start the Economy 3

THE ILLUSORY APPEAL OF INFRASTRUCTURE SPENDING A major theme of your campaign, Mr. Clinton, was the need to spend more on America's in- frastructure. You had in mind traditional permanent facilities such as roads, bridges, urban mass transit systems, and sewers, as well as less traditional ones, such as magnetic levitation trains and electronic networks. You call spending on such infrastructure "investment." This presum- ably is because, like a business that purchases factory buildings, machinery, and delivery trucks as capital to increase its earnings, infrastructure spurs commerce and improves public health and safety. You see another benefit to infrastructure spending. With unemployment still high, you be- lieve that more infrastructure spending will create jobs quickly and trigger faster economic growth. But when the government spends money it must distinguish between wise and wasteful in- vestments, just as a business must. A well-run business does not purchase equipment or build- ing space that will remain idle or unprofitable. And businesses cannot run budget deficits for long. If income continually fails to meet expenditures, the business will not be able to pay work- ers or suppliers and will go broke. The federal government has, of course, run up huge deficits that are weighing down the coun- try with debt. That shrinks funds for private investment. But you, Mr. Clinton, have promised to address the deficit problem. Thus, you must look at infrastructure spending as carefully as a business looks at its own investments. If deficits grow at the expense of private investment, the benefits of new infrastructure spending will be at best marginal and difficult to discern. At worst such spending on public "investment" and job creation will cause a bigger fall in private investment and new employment.

INFRASTRUCTURE SPENDING ALREADY IS HIGH If higher federal government. spending were the way to get the economy going, Mr. Clinton, the recession never would have occurred. This is because over the past four years, government spending has been growing rapidly. Domestic spending under your predecessor, George Bush, grew by $441 billion above the level of inflation. And this figure excludes interest on the debt and the cost of bailing out the savings and loan banks. By contrast, under eight years of Ronald Reagan, domestic spending, using the same measures, rose by only $57 billion. But this huge spending increase under Bush did not put people to work. Rath fr, unemploy- ment rose, from 5.2 percent in June 1990 to a high of 7.8 percent in June 1992. Higher taxes and more government spending did not create jobs and faster growth. Instead, higher taxes meant consumers had less with which to purchase goods and services and businesses had less to invest in new job creation. Still, you might contend that while general spending levels should be held down, spending on infrastructure or other programs specifically meant to create jobs will stimulate the economy. But the facts simply do not support that view. Federal infrastructure spending since 1980 has averaged about $25 billion per year.

2 Numbers represent civilian unernployment@ taken fimm the February 1992 Economic Report of the President, put together by the Council of Economic Advisors, Table B-30, p. 333, and from dw August IM issue of Economic Indicators, also from the Council of Economic Advisors, p. 12.

4 Why Infrastructure Spending Won't Jump Start the Economy

Further, George Bush in December 1991 signed the Intermodal Surface Transportation Effi- ciency Act. This authorized $151 billion in new infrastructure spending over the next five years. The additional $80 billion over 1990 Infrastructure Spending is Higher Than four years that During the Massive Highway Programs of the 1 960s you propose will. be on top of this Fiscal Federal Infrastructure Spending (Billions of 1990 Dollars) amount. Years HIghways Translt Sewage Avlatlon Water Rail Total This almost ...... 11!@@ ....... ......... $3.5 $2.3 I.Z.-:@IUXXXX .3 ......... ...... ..X .1 . Q doubling of infftra- 1966 1:7.1: 0.3 0.7 4.6 22.7 0 60 0.11010 AING ...... structure spend- ::::1: 1.......... ............................. .. 1976 9.7 1.8 4.3 1.0 4.6 $1.0 22.4 ing raises two ............ 10 "W:N: questions. First, 198'1 11.2 3.3 5.5 1.0 4.6 0.6 26.2 X X::::@'.N1QV,,,A ........... is the infrastruc- ture itself 19 83 10.7 3.4 4.1 1.0 4.0 0.6 23.6 :.: . .......... . ... ...... -X X-,:::::::::: OXXX1.4 X . ......... I... x . . ........ ......... ..........

.... ..... needed? And sec- .. ........... 1986 14.4 2.7 3.7 1.4 4.2 0.4 26.8 .... . ......... R., i ix; 0,10: ond, will infra- ......... .............. Z'."" structure 1987 13.6 0. 3.2 2.0 25.2 L NE spending create 1989 13.5 2.7 2.6 2.6 24.6 jobs efficiently, 0 -,@j or simply mean a Note: * Indicates an amount less than $60 million. Figures exclude school construction funds job for Peter at and several other infrastructure categories. the expense of a Source: Congressional Budget Office. cited in AllationalJoumel November 28, 1992. pink slip for Paul? Is More Infrastructure Spending Needed? While every American motorist grumbles about potholes, it is unclear that a heavy dose of new federal infrastructure spending is needed. Says Rudolph 0. Penner, former director of the Congressional Budget Office, and now at the accounting firm of KPMG Peat Marwick, "From a long-run point of view, I think the problem is much exaggerated." Adds Penner, "I think you've not even seen the effects of the highway act of '83 yet, and we have put more money i there in the 1990 budget agreement, and then we had the surface transportation act [of 1991]."l You should also note that the Bush's and Clinton's Planned Infrastucture Spending: federal govern- Over $230 Billion in the Next Six Years ment provides as FIscal Years little as 15 per- ---- ------- -:-X: W-:-: X ........... N. :91 IP .-Igg 0 tf R. IMIN, I Ne L I, 11M, .11 1 W." cent of total pub lic infrastructure spending. State Bush $26.16 $25.16 $25.16 $26.16 $26.16 $26.16 $151.00 and local govern- Clinton 20.00 20.00 20.00 20.00 - - $80.00 ments provide 4 the rest. They :X: a 4-V)A4Wv 116. 111 % 8. .2 1 are, in general, facing financial Sources: Clinton Campaign. Putting People FiMIntermodal Surface Transportation problems of their Efficiency Act of 19 9 1.

3 Aid. 4 Calculation by Steven M. Robirmn, Republican Study Committee, using U.S. Department of Commerce statistics.

Why Infrastructure Spending Won't Jump Start the Economy 5

own. A larger federal contribution thus, in all probability, would not have the impact that you expect. More likely, it would simply permit states and local governments to substitute federal money for their own. Even if spending more federal dollars on infrastructure made sense, how would you avoid a damaging increase in the deficit? When asked this, Mr. Clinton, you say that you will pay for spending hikes in part by eliminating wasteful government spending. While waste should in- deed be cut, you will find this to be one of the most difficult challenges of your Administration. Ronald Reagan, though often accused of making deep cuts in spending, in fact at best slowed the growth of federal spending and eliminated few major programs. George Bush could do little to constrain the deficit. Thus, if you agree to infrastructure spending hikes before the cuts mate- rialize, you will likely increase the budget. deficit even more. This is hardly going to improve the economy and create an atmosphere conducive to private investment. Will Infrastructure Spending Create Jobs? The federal government should be concerned about the unemployed. The problem is that well-meaning but inappropriate policies help the unemployed little if at all. And major govern- ment projects are not generally effective as countercyclical economic policy. Governments often devise policies for the future to solve yesterday's problems. "Emergency" jobs come on line long after they are needed. Infrastructure spending to create jobs is a case in point. Federal spending on infrastructure is not a good way to put people to work quickly, much less to do so efficiently. For example, a December 1986 General Accounting Office (GAO) re- port on the ETfrgency Jobs Act of 1983 was appropriately subtitled "Funds Spent Slowly, Few Jobs Created." The GAO found that over two years after the $9 billion Act was passed in March 1983, only about $4.5 billion had even been spent. This was well into the recovery from the 1981-1982 recession. The GAO noted particularly that "funds for public orks programs, y such as those that build highways or houses, were spent much more slowly' than funds for other programs. I And this pattern can be expected to occur again. An internal memorandum to Congressional Budget Office Director Robert D. Reischauer shows that spendout rates fF federal infrastruc- ture programs tend to be slow for the first year that funds are to be spent. In the first year, for example, on average only 17 percent of federal funds for highways are spen@ with 52 percent spent the second year and the remainder spent over the following four years. Only 16 percent of airport improvement funds are spent the first year, with a meager 22 percent spent the sec- ond year. Experience shows, Mr. Clinton, that spending may be meant to create jobs during a recession, but the bulk of the funds are likely to be spent well into the economic recovery. Further, the number of jobs that the 1983 Act supposedly created was minimal at best. The GAO found that the number of jobs attributed to spending under the Act peaked at 35,000 in June 1984, less than one percent of the jobs created in the economy afterpe Act was passed. The number of jobs attributed to the Act dropped to 8,000 by June 1985. And GAO figures do not take into account employment that might have been lost in other sectors due to the federal

5 "Emergency Jobs Act of 1983: Funds Spent Slowly, Few Jobs Created," Report to the Chairman, Subcommittee on Employment and Productivity, Committee on Labor and Human Resource, U.S. Senate, GAO/IiRD-87-1, Washington, D.C., December 1986. 6 Ibid., p. 3. 7 Memorandum from Bob Sunshine to Robert Reischauer, November 5,1992. 9 Cited in Bruce Ingersoll, "Clinton Economic Stimulus Plan May Be Delayed As FewTransportation Projects Are Ready to Go," The Wall Street Journa4 November 23,1992, p. A16. 9 GAO, op. cit., pp. 4,22-23.

6 Why Infrastructure Spending Won't jump Start the Economy

government taking more money, in the form of taxes, from individuals and businesses who would otherwise invest it or spend it on their own needs. By comparison, during the height of the economic expansion in the 1980s, the economy was creating some 25,000 net new jobs per day. The GAO also found that most of the additional work created by new spending went to those who already had jobs, not the unemployed. Said the report, "In 8 of 10 programs we surveyed, no more than N percent of the people employed as of September 20, 1984, were previously un- employed ......IOnly 20 percent of the jobs created in the Urban Mass Transportation and Air- port Improvement infrastructure categories went to those who were previously unemployed. As bad is the cost of infrastructure programs per job created. The GAO study, for example, found that as of March 1984, some 91. 8 million had been spent to create 466 jobs in the Urban Mass Transportation category. But survey data in the saint study found th 11 only 18 percent of the jobs created in mass transit went to persons previously unemployed. This sug- gests that only 84 of the transit jobs went to the unemployed, at a cost of some $307,000 per job. By contrast, the private sector generally can create such jobs for around $40,000 each. Bare-Shelf Syndrome. It is not difficult to see why job creation through infrastructure spend- ing would be delayed. It takes time to plan projects that are appropriate to a city, county, or state, and which best serve the interests of the community as a whole. Projects must be devel- oped by engineers, bids must be sought, and contracts must be issued. Thus many local officials do not find themselves in a position to start up projects immediately. The Wall Street Journal quotes Ronald Zook, chief engineer for the Ohio Department of Transportation, as saying, "My self is bare." Adds Zook, "It's pretty, hard for me to hire 100 engineers on the chance the new administration may do something." 3 So, Mr. Clinton, the past record suggests that spending more taxpayers' dollars to create jobs will have a minimal and delayed effect at best. It would be no match for the jobs that would be created by the kind of tax cut and deregulatory policies followed in the 1980s. Pork, Not Investment. You were elected, Mr. Clinton, in part on your promise to reform the current system of federal spending. And spending on infrastructure is an especially egregious example of misallocated resources. More and faster spending federal spending on infrastructure will only perpetuate the system. If federal funds are distributed to localities faster than they can efficiently be absorbed, the money likely will go to wasteful pork barrel spending. The result will be local projects that help a particular developer or business with good political connections, or padded local transit pay- rolls. Pork barrel projects and featherbedding, Mr. Clinton, can hardly be called investment.

HOW TO SPUR EFFICIENT INFRASTRUCTURE INVESTMENT Most federal infrastructure spending currently requires local matching funds. But the match- ing grant formulas, despite some small changes in the 1991 transportation bill, favor capital pro- jects that often are inappropriate for best dealing with local needs. For example, the federal government will provide some 75 percent of the funds for building a new bridge, but no funds for maintaining an old one. So local governments often find it less costly-for them-to let a

10 Ibid., p. 53. 11 Ibid.. pp. 45,87. 12 Ibid., p. 54. 13 IngersolL op. cit.

Why Infrastructure Spending Won't Jump Start the Economy 7

bridge deteriorate and be replaced, rather than properly maintaining it so that it will last. Fur- ther, because large capital projects, such as subways, create more local jobs than regular mainte- nance, officials have a incentive to seek such federal funds. But eventually localities often end up stuck with a large, money-losing systems with high maintenance costs. Rather than disbursing millions of new dollars, a better approach would be for your Adminis- tration to examine ways in which infrasructure could be provided more efficiently. In many cases infrastructure problems are due to government-imposed regulations. These rules add to costs or block attempts by local governments and the private sector to apply innovative solu- tions to infrastructure needs. You support the notion of "reinventing government," and have talked about fostering creativity in sta@@ and local governments. There are several ways you could encourage this in infrastructure: 4

Action 1: Suspend the 1931 Davis-Bacon Act, which mandates that higher wages be paid to workers on federally funded construction projects even when adequate, lower wage labor Is available.

This law, originally meant to exclude minorities from construction projects during the De- pression, drives up the costs of local road construction that is financed even in part with federal money. Davis-Bacon forces up infrastructure costs and assures less infrastructure for the money. And because above-market wages are mandated, fewer workers can be hired for pro- jects. President Bush used his authority to suspend the Act in Florida, Hawaii, and Louisiana after recent natural disasters. You could do the same, on an emergency basis, for the entire country or, at minimum, for areas of high unemployment, such as inner cities, that are suffering the most from the current government-created economic disaster. 15

Actlon2: Instruct the Transportation Secretary to develop guidelines for selling airports to the private sector and to publicize the benefits of privatization to the local governments that own the airports.

Currently, airports are owned primarily by local governments. Until recently, a technical rul- ing by the Department of Transportation effectively prohibited any airport that had received fed- eral funds from being sold to private owners. But on April 30, 1992, in Executive Order No. 12803, George Bush removed this barrier. The problem is that Bush never followed through on this change. What you should do, Mr. Clinton, is instruct your Transportation Secretary immediately to de- velop guidelines that would allow local governments to sell airports. Further, you should in- struct the Secretary of publicize to local governments and airport authorities this privatization option.

14 For more details and a inclusive list, see Edward L. Hudgins and Ronald D. Utt, eds., How Privatization Can Solve America's Infrastructure Crisis (Washington, D.C.: The Heritage Foundation. IM). 15 See Scott Hodge, "Creating Inner-City Jobs By Suspending the Davis-Bacon Act," Heritage Foundation Executive Memorandum No. 333, May 21, 1992.

8 Why Infrastructure Spending Won't Jump Start the Economy

Action3: Urge Congress to repeal Section 13(c) of the Urban Mass Transportation Act of 1964.

This provision requires local transit authorities to hold special negotiations with transit unions as a condition for federal assistance, forcing wages and transit costs to grow much faster than labor productivity. Its repeal would put transit labor on the same footing as other workers and would remove a major factor that has driven mass transit costs up far above increases in productivity or use of the system by commuters. Actlon4: Work to remove federal government barriers to the privatization of roads. 16

Many roads could be better maintained by private owners charging tolls to users. Mainte- nance also might be financed by a private owner charging for use of the rights-of-way to public utilities for pipelines or phone wires. Merchants might be charged a fee for the right to establish outlets on rights-of-way. The problem is that federal regulations make it impossible to sell roads to the private sector. You should, Mr. Clinton, instruct your Transportation Secretary to develop guidelines for pri- vatizing roads and seek appropriate legislation where necessary.

Action 5: Urge Congress to remove bans on blending private and public funds for road projects.

There are cases when, short of privatization, a government-business partnership could pro- vide much-needed roads. But federal grant policy generally prohibits use of private funds in projects receiving federal funds. The Surface Transportation Act of 1987, for example, author- ized funds for seven demonstration projects-but explicitly stated that they be fidly publicly owned and operated. You should ask Congress to amend the condition for highway grants to allow private sector participation.

Edward L. Hudgins, Ph.D.

16 SeeTerree P. Wasley, "A Private Sector Foundation for Roads and Bridges," in Hudgins and Utt, op. cit.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office