Tuesday, July 15, 2008

Infrastructure Part 2

I went to the Senate Banking committee's hearing on national infrastructure the other day to see Michael Bloomberg (mayor of NYC), Shirley Franklin (mayor of Atlanta), John Peyton (mayor of Jacksonville) and Mark Funkhouser (mayor of Kansas City) give testimony.

Senator Dodd (former presidential candidate) in his opening remarks affirmed his support for a national infrastructure bank that would be an independent institution which ranks and funds projects on their merits. All the witnesses, and especially Bloomberg, expressed their support for such an infrastructure bank, emphasizing the need to fund infrastructure projects on merit.

This seems like a common problem that needs to be addressed, and one that in the current system of national infrastructure funding is certainly not. Accountability and a system meritocracy for the infrastructure projects that are funded by the federal government is virtually non-existent. In the current system, most infrastructure projects are funded through earmarks - projects particular to certain constituencies that are added solely for political reasons. The main argument for an infrastructure bank, besides the increased funding for infrastructure that it would represent, is that it would be an independent commission not privy to political whims.

The proposed infrastructure bank has been compared to the Federal Deposit Insurance Corporation, which I think is an apt comparison - a federal agency that is nevertheless not subjective to the political process. The infrastructure bank would be different, however, in that it would work in close conjunction with Congress in securing funding, but outside of funding (which it could also receive from other sources, such as user fees and puplic-private partnerships), it would be independent.

Along the same lines, Bloomberg and Funkhouser complained about the vision-less-ness of the nation's infrastructure program (or lack thereof). Bloomberg recommended a national commission, similar to the one proposed by Representative Blumenauer in his testimony to the House of Representatives, that would lay out a national vision for infrastructure and make funding recommendations. This, like an infrastructure bank, would provide independence from the political process. One proposal I've heard is that the funding proposals from such a commission would need to be voted down by 3/5 of Congress, providing additional insularity from politicization.

None of these proposals will come to fruition without political initiative, however. What was mentioned by Bloomberg was the "unsexiness" of infrastructure funding, and the disadvantage it receieves from that. This is true: Mayor Funkhouser talked of the $2.3 billion needed to fix Kansas City's sewage system, which emits 6 billion gallons of sewage into nearby lakes and rivers due to deficiencies. Nobody, however big the problem may be, wants to talk about sewage, or even crumbling roads and bridges for that matter. It is encouraging, however, that Congress, and the nation, seem to finally be taking notice - I expect substantial progress on the infrastructure front to be made in 2009, especially if we get a Democratic Congress and a Democratic president (although, to the Republicans' credit, all major infrastructure proposals in Congress to date have been largely bipartisan).

Infrastructure Part 1

I attended a hearing on infrastructure the other day in the House of Representatives and heard testimony from a few representatives about possible solutions.

One solution, proposed by Representatives Keith Ellison (the guy from Minnesota who put his hand on a Qur'an when he was sworn in) and Rosa DeLauro, is to establish a national infrastructure bank that would act as a specially-chartered federal entity charged with investing in major infrastructure. Robert Goodspeed writes of the proposed infrastructure bank,
  1. An infrastructure bank would solve solves the short-sighted funding problem, and creates a new body to fund large projects beyond existing programs, expanding capital for infrastructure. However as planners are well aware, not all transportation infrastructure is self-supporting. The interstate highway system, many bus and subway lines, and an intercity transportation network would not exist today if each of their parts were required to be self-supporting, but that doesn't mean they are bad investments. I worry it would create additional funds for high-visibility projects, leaving the rest to fight over a limit pool of money.
The bank's funds would come from direct subsidies, direct loan guarantees, long-term tax-credit general purpose bonds, and long-term tax-credit infrastructure project specific bonds, with an aim of making the entity self-sustaining in five years. It's a good idea, and one supported by Barack Obama, but I think proposals for the infrastructure bank need to be more ambitious in terms of funding. If required infrastructure improvements alone are estimated to be $1.6 trillion, $60 billion for the bank is not nearly enough. It's also not enough to fund these "large" projects - most infrastructure projects of even moderate size run well into the tens of billions of dollars.

Representative Blumenauer proposed establishing a commission to assess the nation's infrastructure needs and draw up a national vision for infrastructure. He said that this vision should be tantamount to FDR's massive infrastructure plan, and I think that's a good idea. The problem is, Blumenauer's plan doesn't address funding, which is the major impediment to initiating federal infrastructure projects. Hiking up the gas tax is unreasonable andpolitically unpalatable. It is also a conceptually bad idea, as the emphasis should be on reducing driving; if that is achieved, revenue from a gas tax won't be enough to effectively fund infrastructure projects. Indeed, it already isn't - the Highway Trust Fund (which is funded by the gas tax) will go into deficit in 2009 for the first time ever.

It's quite obvious that funding from the federal government will not be able to sustain infrastructure projects alone, which is probably why Ellison's proposed national infrastructure bank is so modest in its funding proposals. One idea, put forward by DeLauro and supported by Representative Mica, is extensive public-private partnership programs. In such a program, which was said to be "more like a business deal," by Mica, the government and the private sector would jointly raise capital for an infrastructure project, with the government assuming a portion of the risk. User fees, usually taking the form of tolls or fees for ridership, are another solution to making infrastructure investment more viable. Regardless, more federal funding is needed, and fortunately Congress will now probably be more willing to release more money for infrastructure, especially transit.

There are also minor funding proposals, such as the container fee on incoming cargo proposed by Representative Calvert. This is a good idea, and a solid incremental step in securing additional infrastructure funding, but a more comprehensive national funding program, such as establishing a national infrastructure bank, is needed to ensure proper funding both for new infrastructure projects, and for infrastructure repair.

In sum, Congressional progress on this issue is encouraging, but if tax hikes are necessary to ensure sufficient funding it will be interesting to see if Congress' mettle holds up. Regardless of the political situation, massive funding increases are required in order to secure America's infrastructure future, especially considering the need, in face of higher gasoline prices and global warming, of a much more extensive nationwide transit system.

Family Leave

There are only four countries in the world that do not offer some form of paid maternity or parental leave, those being Papau New Guinea, Lesotho, Swaziland and the United States. Besides this being an overtly feminist issue, it is also an economic one and one that, I think, would be beneficial to examine.

The first matter that should be addressed is the one of efficiency. If paid family leave is not provided by firms voluntarily - that is, if in a free market with no governmental mandate, paid family leave is not provided, it is assumed that family leave is inefficient. Market theory espouses that in such a situation, the costs of paid family leave outweigh the benefits. Therefore, mandating paid family leave would result in a situation that is not socially optimal. Mandated paid family leave can be efficient, however, if it corrects a market failure - and a market failure does arise in the externalities associated with raising children. Studies have shown that children are healthier and more successful when they are well-cared for, and when their parents raise them (as opposed to a nanny). Healthy and productive children grow up to become healthy and productive adults, accruing benefits for society - thus, there is a positive externality associated with taking good care of children: it is under-provided by the market, and must therefore be subsidized in some manner by the government. Mandated paid family leave is just such a subsidy.

Also, adverse selection is a problem addressed by mandated paid family leave. If only certain firms offered paid family leave, the individuals most likely to work at such firms will have a higher probability of taking advantage of the benefit, and thus the cost of the benefit to the firm will increase. This will result in lower wages, which further worsens the problem of adverse selection, since the only workers willing to work for the lower wage would be the ones most likely to take advantage of the paid leave benefit. Adverse selection results in a lower than optimal number of firms offering paid family leave. Government mandated leave fixes this problem - there will be no downward wage cycle associated with adverse selection if every firm is forced to offer paid family leave.

The most prescient question regarding mandated paid family leave, in my opinion, is one of wages. If mandated paid family leave has a substantial negative effect on wages (particularly woman's wages) then the externality it corrects might not be worth it. According to economic theory, mandated family leave would shift the supply curve for labor to the right (the attractiveness of the benefit will draw more people into the workforce) and the demand curve to the left (as a result of an increase in costs for the firm). This unambiguously lowers wages, but the true result of mandated paid family leave is not so simple. Wages could increase as a result of paid family leave if it encourages longer job tenure and increases the potential for an individual to move up in the company. So, the net effect of paid family leave is somewhat ambiguous.

Studies have shown that paid family leave not in excess of 3 months results in an increase of 3-4% in women's employment relative to men, and no decrease in wages. Paid family leave programs in excess of that amount of time (and especially in excess of 9 months), however, have shown a noticeable drop wages, albeit increased women's employment.

The ambiguous economic effects notwithstanding, having mandated paid family leave is clearly something that is beneficial - if not to wages, then to society. The most obvious reason is to correct the externality of raising children, but paid family leave also works to create a more hospitable work environment for women, something that is certainly needed.