Economics of Infrastructure Investment

Mathew Kahn discusses the ramifications of the major transportation spending recently passed by the UC Congress. Of course, as the pie chart shows, infrastructure as many people think of it—construction or improvement of bridges, highways, roads, ports, waterways, and airports—accounts for only $157 billion, or 7%, of the plan’s estimated cost.  Still that is a lot of money (“A billion here, a billion there, and soon it adds up to real money”–US Senator), and Kahn provides a list of concerns in his article What Insights Does Economics Offer About the Nascent Biden Administration Transport Infrastructure Investment Program?   Excerpts in italics with my bolds and images.

The Washington Post has published a piece stating that the Secretary of Transportation, Peter Buttigieg, is the big winner of the Biden Infrastructure Bill as he will be attending many ribbon cutting ceremonies as grateful local mayors shake his hand.

Economic research offers many insights here about the efficiency and equity effects of this multi-billion dollar investment.

Point #1: This is an irreversible investment. When a city builds a new subway line, this billion dollar project cannot be later sold on Ebay and use the $ to do something else. In contrast to light rail and subway lines, dedicated buses feature more option value because they can be sold off or redeployed on different routes in the same city. Given that we don’t know how cities will develop over time, this real option has value.

Point #2; Past expansions of public transit have not significantly increased ridership with the exception of Washington DC. In the case of Los Angeles, improves in rail service (such as the Light Rail on Exposition that I ride) has taken bus riders away from the bus. See our 2005 paper. If crime rates continue to be a concern in cities then the middle class will be even less likely to use the “shiny new” infrastructure. The poor do rely on public transit to move around cities and an expansion will improve their quality of life. An economist would ask whether they value this benefit more than the cash equivalent?

Point #3: The older infrastructure in the nation is located in older cities, where the population is barely growing (or shrinking) and where the voters are mainly Democrats.

Point #4: The highways tend to be built in the suburbs where the voting base leans Republican. My 2011 Brookings piece with David offers several constructive ideas for how to “build back better” here.

Point #5: If progressive cities gain better infrastructure due to the Biden Investment AND if they don’t build much housing (the progressive city NIMBYism is well documented) , then housing prices will rise and the poor and middle class will be further squeezed by this new investment.

Point #6: There are many economics consulting firms that intentionally offer extremely optimistic ridership estimates ex-ante and this helps ambitious government officials to justify projects (i.e to say that it passes a cost/benefit test) when in reality — ex-post evaluations show low usage of the new infrastructure. See Pickrell 1992.

Point #7: Given that unions are powerful in progressive cities, what is the marginal cost of infrastructure creation in these cities? Is the Department of Transportation seeking to build a new capital stock or to enrich a special interest group that supports the Democrats? How many middle class new construction jobs will be created? Will the expansion of the public capital stock crowd out the expansion of the private capital stock as construction crews work on transport infrastructure rather than building private sector projects? What is the shape of the construction supply curve?

Point #8, once the new infrastructure is completed — will this greatly improve urban quality of life in cities such as Baltimore that have been shrinking? How will the Mayor and local civic leaders and private sector stakeholders change their investments and policy decisions? What positive synergies might emerge? Our 2021 Unlocking Book explores some of these themes of investment co-ordination between the private and the public sector.

via Science Matters

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November 29, 2021 at 08:18AM

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