How can a country that is so wealthy be in such enormous debt? How can a country that can build such marvelous transportation systems not find the money to sustain them? How can a people that enjoyed decades of unrivaled economic hegemony -- staggering levels of growth beyond anything seen in human history -- be facing such economic turmoil after a couple years of, not even decline, but just slowing growth? The answer to these questions reveal some uncomfortable truths about who we are, how we got here and what options we have for our future prosperity.
I wanted to provide a brief message for our podcast listeners who have now gone three weeks without an update. I'm so sorry. Like our politicians and engineers with our highway systems, I have had the best of intentions. I've brought along recording equipment on our recent trips to California and Memphis but never had the time to put something quality together. There are two answers to this problem. First, I'm going to make some time this week and next week, with CNU, I will have a ton of content. Keep your ears open for that. Second, we need some help around here, and that can only happen with your assistance. We have an amazingly small budget when compared to everything we do. If you are in a position to support our high return operation, we would value your contribution and put it to good work. Thank you for your support.
I'm struck by how strongly our culture associates growth and prosperity with highway construction and expansion. Tom Friedman, a respected left-of-center columnist with the New York Times, had an entire chapter in his most recent book, That Used to Be Us: How America fell behind in the world it invented and how we can come back, devoted to the concept that "our winning equation" is, in part, to invest in infrastructure and then watch prosperity flourish, just like it did in the 1950's and 1960's.
Of course, this ignores that fact that our investments during the first generation of America's Suburban Experiment (1950-1975) were higher return investments that generated a lot of positive cash flow. I like to point out that, when we built the 35W bridge here in Minnesota for the first time, it connected far flung areas of the Minneapolis/St. Paul metropolitan region in a way that had not been done before. Following that investment, new commercial real estate was developed, new residential housing went in and the resulting influx of tax receipts made us feel wealthy. When the bridge fell down and had to be rebuilt, we didn't experience all that new growth, just the costs of construction and delay. Maintenance has an entirely different set of financial metrics than new construction.
Which is why our transportation spending is set up to favor new construction. It is just so much more fun. Maintenance is simply a pain, a local concern. That highway fix it project means nothing but congestion and delays and, when it's all done, all you have is a little smoother ride. By contrast, new construction is so much better. Not only do the politicians get a ribbon cutting scene, but we can all (once again) "solve" congestion while getting a new WalMart, Taco Bell and Quiki Mart in the process. New growth just feels so much better.
How else can you explain what I experienced last week in Memphis? Here is a city with enormous infrastructure maintenance problems having spent untold sums running highways all over the region. Their local transportation board is proposing the region spend $10 billion more, almost all of it adding new capacity on the far flung (new growth) extremes of the network. Maintenance? That's someone else's problem.
How else can you explain a state (Minnesota) that would prefer to spend more on one bridge to aid exurban commuters from the neighboring state than on maintaining all of the state's 1,149 bridges that are currently rated as structurally deficient? We culturally believe in the power of new growth to solve our problems, that investments in highway capacity and combating congestion pay dividends to us as a society.
Unfortunately, we base this belief on the illusion of wealth that was created in the early years of the Suburban Experiment, where the first life cycle of horizontal expansion had produced growth for our economy and that pesky overhang of maintenance was still a decade or more away. We should know better by now, but there are few in a position to change the system that don't benefit, at least in the short term, from it being perpetuated.
The emperor has no clothes, indeed, but we're still in the phase where we jeer and deride the one pointing it out. That will change soon.
What will speed up that change is an understanding of the fact that our transportation investments are not creating wealth, they are destroying it. Now I'm not talking about just the investments where the old Target store at the old interchange is induced to move into the new Target store at the new interchange four miles up the road. I mean almost all of our highway spending. It costs more to build and maintain than it generates in returns and, therefore, will only continue so long as we have the capacity and the desire to delude ourselves.
Let me provide an example. Pretend you were a local elected official and I came to you and said that I had a project that would reduce congestion, allow us to improve traffic safety, create local economic development opportunities and return 2,194% of the cost of the project to the local economy? Sounds good.
What if I then said that the federal government would pick up 90% of the cost, making the local share just $716,000? This is now a no-brainer, right?
Today let's just look at the federal contribution. I did a Google search for a Diverging Diamond enhancement project with a cost benefit analysis and came up with this one from Kentucky Colorado. Yes, I have an obsession with the delusion that is the diverging diamond interchange, but the selection of Kentucky Colorado was just random. The report for the project contains an appendix that has a cost benefit analysis as follows:
You can see that by the time you get to 2030, for the diverging diamond without the added enhancements, the cost is $7.2 million but the benefit is nearly 22 times that at $157 million. That is an AWESOME rate of return. Graphically, it would be presented to public officials like this, which makes it easy to understand why it could be supported.
At this point, we're not going to delve too deeply into what this benefit is. That will come later. Let's give it the most optimistic spin. Nobody is suggesting that this is money that will pour back into the government. What is being suggested here is that transportation investments like these will reduce congestion, increase mobility, create jobs and that will all grow the economy. So the $157.1 figure could be thought of as the increase in Gross Domestic Product (GDP).
Still sound good? Consider that the federal government -- through all means of taxation, including income tax, tariffs, business taxes, estate taxes and even including the gas tax -- currently captures 15.8% of the economy. Put another way, for each dollar of GDP, about sixteen cents finds its way to the federal government. That means that our whopping $157.1 million in GDP growth only returns $24.2 million to the federal coffers. Graphically, it would look like this.
Okay, this still feels like a good project, doesn't it? The Federal government spends 90% of $7.2 million and, over the subsequent 15 years, brings in $24.2 million. We should just do this over and over again because we're just getting richer, right?
Not so fast. It is not like the $24.2 million is going to be spent on transportation, or even that $7.2 million of that is going to be spent on transportation. The Federal government does many things, has tremendous obligations and spends the vast majority of its funds on things that our society deems more worthy of our investment than transportation. In fact, in 2011, the Federal Highway Administration's budget was 41.1 billion, just 1.07% of the Federal budget. If we are only going to spend 1.07% of what we bring in on transportation, that means this project yields just $259,000 in funds that actually pays for transportation investments.
If the problem here is not obvious to you at this point, let me elaborate. We spend money on transportation. We feel wealthy and experience this enormous "return" (more on that in a second). Only a fraction of that wealth is actually cycled back into the system, however, and an even smaller fraction of that will actually be captured to pay for the project. The amount recouped is ultimately nowhere near the amount invested.
The most obvious "solution" to this problem is to devote more of our Federal budget to transportation projects. That would be the solution of the American Society of Civil Engineers and their adherents in the Infrastructure Cult. Okay, let's not bother calculating the time value of money (the fact that the costs are today but the benefits are spread out over many future years), but just evaluate what it would take in terms of an increase in our budget to go from $0.26 million returned to break even at $7.2 million. That increase -- 27 times the current budget -- would make the Federal Highway Administration's budget $1.1 trillion, bigger than the national security budget ($895 billion), Social Security ($730 billion), Medicare ($491 billion) or Medicaid ($297 billion). That's not going to happen.
So what if we just raised taxes and the federal government captured more of the wealth generated by this improvement? The calculations reveal that the Federal government would need to increase its take of GDP from 15.4% to 19.8% of the economy, a tax increase of $640 billion with all that extra money devoted just to roads. Only the true socialists and/or the true believers in the power of the Suburban Experiment will think that is a good idea.
Now let me drop the bomb I've been alluding too: Those "benefits" that we kind of think of as prosperity, wealth or GDP; they really aren't. There are derived from a set of narrow correlations between time saved and prosperity that we witnessed in the early 1950's when we built those initial highways. We connected these far flung places -- places only served by railroads or poorly constructed roadways prior -- and we saw all kinds of economic gains. We then used that knowledge to build equations to justify expansion of the system. Nobody ever questions those equations today (why would they) and nobody stops to consider the diminishing returns of the system.
So there is not actually any money here, just a few seconds of saved time here and there that economists and engineers equate with money when they are trying to justify a project. Do you take home more money, generate more wealth for the economy or spend more of your income when you can arrive at work 45 seconds more quickly? Not me either. These equations are a joke. (If you want to learn more, read our 2010 series on Costs and Benefits.)
So when I say we are going broke, that this system provides the illusion of wealth in the near term but ultimately destroys wealth, that the decay you see around you in our transportation system is not due to a lack of investment but to the lack of financial viability of the system, you can get a sense of how far gone we are. We are literally operating in a totally different paradigm from reality.
When someone like James Howard Kunstler says we need to rebuild our passenger rail system, that the highway era is a transitional phase that is going to come crashing down on us, we all smile and nod to his face and then giggle behind his back because "that guy is a little crazy". Like I said earlier, the emperor has no clothes, but we're still in the phase where we ridicule the guy pointing it out. We need to get past that. Quickly.
Yes, this is just one project, but I picked this project because it is a low cost, high return endeavor. That is the argument that the engineering profession is making and one of the reasons people got so mad at me when I did my earlier posts on the diverging diamond; the diverging diamond makes better use of existing infrastructure and pays a high return, especially when compared to things like adding another lane or building another interchange. Even so, the math on it is ridiculous. Imagine what the math on a project like the infamous St. Croix bridge would be.
In a follow up post I'm going to look at the original construction of our passenger rail system and show how important capturing value to pay for capital costs is to making transportation systems work as well as how such a system naturally resists excessively ridiculous spending, or at least creates systems that break early enough to avoid catastrophe. In the process, I'll explain why funding the highway system with gas tax dollars was flawed but also why continuing to fund it with deficit spending is perilous. I'll also, if needed, address any engineers (or those sympathetic to them) that want to argue that we shouldn't look at the revenue for a single project because it's the system, dude, that generates the prosperity. Yeah, how's that working out?
The time to shift our focus to building Strong Towns is now.
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