Costs and Benefits, Part 4

This is a continuation of our in-depth look at the way that cost/benefit analyses are done to justify infrastructure spending, particularly in large grant programs such as the recent TIGER II. We are focusing specifically here on a $9.9 million overpass being built with mostly Federal dollars in the city of Staples, MN. Before you begin reading this post, we highly recommend that you review Part 1 (background on cost/benefit analyses), Part 2 (analysis of time savings and distance savings benefits) and Part 3 (analysis of safety, carbon reduction and O&M benefits) of this series.

Today we are looking at the cost side of the equation. Going back to Part 1 of this series, we detailed a theoretical equation for conducting a public cost and benefit analysis that is as follows:

Government ROI: financial benefit + (constrained) social benefit > financial cost + (constrained) social cost

The "constrained" adjective is meant to indicate that the social benefits and costs are constrained by political and social constructs. We will look at financial and social costs separately.

Financial Costs

The cost of the project in dollars is $9.85 million. This is the direct cost, paid today, for building the overpass. Of this cost, $8.85 million is being paid by the Federal government and $1 million is being paid by the State of Minnesota.

It is important to understand where the money is coming from. The Federal money is coming from two sources: TIGER II and Federal Surface Transportation funding. The state money is coming from a direct bonding appropriation.

The original TIGER money came out of the 2009 stimulus funds, but TIGER II is a direct appropriation from Congress. In either case, it involves deficit spending. We are borrowing this money, which is $7.65 million of the Federal government's contribution. The remaining $1.2 million was appropriated from the Federal Highway Trust fund (Federal gas tax) in 2005, which was solvent at the time but is now also running a structural deficit

The State of Minnesota is also borrowing the money it is spending on this project, but unlike the Federal government, the State has a plan to pay the money back. On the Federal side, the deficit spending is essentially an interest-only loan (of which we are borrowing to pay a portion of the interest as well). 

With the current 20-year Treasury note sitting at 3.66%, the total amount of interest accumulated in the 20-year timespan is $8.3 million. In present value terms, this is an additional cost for Federal financing of $4.6 million. It should be noted that, without a plan to pay this debt down, the actual financing cost is infinite. If we just analyze the life of the project  -- 100 years -- then the present value of the interest is $16 million (assuming we keep our cheap borrowing rates for the next 100 years). This is the destructive power of compounding interest.

For Minnesota's portion, we're not sure the rate at which they bonded and so we'll assume the same, low federal rate. The big difference is that the State is paying off the debt, reducing the principle and and interest payments each year. We'll assume a 20-year bond, which yields a total of $380,000 in present day financing costs.

In summary, the financial cost includes both the project cost of $9.85 million and the present value of the financing costs, which is $4.6 million for the Federal government and $380,000 for the State government. These are revenue outflow commitments each level of government is making by funding this project using the mechanisms they have.

Social Costs

What this series is meant to do is to pull back the curtain for people who, when they hear that the benefits of a project exceed the costs by nine times, assume that the government is ultimately getting money back -- through new income tax, sales tax, property tax, etc... -- in an amount that significantly exceeds the cost of the project. There is a common assumption across the population that new infrastructure built in the American model we use today is an "investment" in our future prosperity, an investment that pays real, dollar returns. 

Nothing could be further from reality.

If readers take one thing from this analysis it should be this: The way we spend money today on infrastructure responds to our preferred lifestyle choices, but provides no financial return.

We are spending enormous amounts of money on an American way of living that cannot be financially sustained. At this point in our development, nearly every project we do in this model costs us vastly more money than we will ever recoup in added tax revenues. Our economy is stifled and, despite our extraordinary efforts, we can't revive it, largely because we're choking on an infrastructure platform that sucks wealth instead of creates it. We've used private and public leverage and a variety of perverse incentives to create thousands of local Ponzi schemes, each providing the illusion of growth and prosperity. It is not real, and we as a people inherently know that.

Despite our efforts to deny reality by using bogus analyses that convert nominal social benefits into monumental, but fictitious, financial gains, the emperor has no clothes. But understand, the "emperor" is not the city of Staples. It is not local economic development professionals, engineers and planners or even politicians.

The emperor that has no clothes is us, the American people. 

It is we who value that 45 seconds saved on a wider road over the money to invest in our schools. It is we who value the ability to live far from where we work more than we value having parks and quality public spaces. It is we who want to invest in a platform for easy growth in strip malls and big boxes rather than configure our communities for a slow, but far more resilient, economy. It is we who value our private space more than building communities we want to be part of.

And it is we who do not want to pay the enormous costs associated with our choices.

What is the social cost that we should weigh in a cost/benefit analysis on a project like the Staples overpass? Some would argue that the $16 million presents a lost opportunity. The money would be better spent educating our kids. Or finding a cure for cancer. Or providing for the nation's defense. We all have priorities we value.

But for me, the true social cost of our approach is how it has embedded in our minds the destructive notion that, as Americans, we can all get something for nothing.

We are the emperor, and we have no clothes. 

Posts in this series: 

  • Part 1: Background on cost/benefit analyses
  • Part 2: Review of time savings benefit and distance benefit
  • Part 3: Review of safety, carbon reduction and O&M benefits
  • Part 4: Review of the project cost analysis 
  • Part 5: Finale

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