Paths to Economic Recovery

William G. Gale and
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

Bruce Katz
Bruce Katz Founding Director of the Nowak Metro Finance Lab - Drexel University

November 24, 2008

Congress has punted to next year the prospects for a stimulus package with an infrastructure investment that could provide more jobs, a stronger transportation network and a better-running economy. The clock stopped on legislative action, but not on the deterioration of our infrastructure and our financial system.

Meanwhile, the president-elect has directed his team to come up with an economic recovery plan, a two-year nationwide effort to put people back to work on modernizing schools and building wind farms, among other things. We should use this time-out to reset the line.

Since the beginning of our republic, transportation and infrastructure have played a central role in advancing the American economy, whether it was the canals of Upstate New York, the transcontinental railroads or the interstate highway system.

Other nations around the globe have picked up on this calculus, too. Witness the recent half-trillion-dollar investment plan China just rolled out.

Infrastructure investments are also highly touted for their ability to put people to work in a slow economy. In 1991, President George H.W. Bush said the federal transportation authorization he signed “could be summed up in three words: jobs, jobs, jobs.” This was a six-year, $155 billion program that set off a long-term vision for transportation policy in the United States.

Yet infrastructure investments have a mixed track record.

Lost in a morass of pork and politics, federal infrastructure policy today is an unaccountable free-for-all. Though there is little economic justification for making broad improvements in all places, that is exactly how the American transportation structure operates. The 6,373 earmarked projects in the latest federal transportation authorization illustrate the problem. It’s not just the distaste for earmarks but the politically driven scattershot approach. The result is that only half of the projects go to places that matter most to the American economy and would benefit most from the investments: the 100 largest metropolitan areas, where 75 percent of GDP is produced.

Recently, policymakers have also avoided infrastructure as a short-term stimulus because of timing problems. In previous cycles, the economy has already been back on the road to recovery by the time infrastructure legislation is enacted and the funds authorized and spent. Even last winter, when Congress opted to authorize $170 billion in economic stimulus, it eschewed infrastructure because it wasn’t the quick jumpstart the economy was thought to need.

So why would infrastructure be the right approach now?

For one, timing is less of an issue when a recession is prolonged. Over the past 50 years, the average recession has lasted less than a year; this recession is likely to last until the end of 2009 or longer, according to recent surveys of economic forecasters. This means that infrastructure spending — even if it takes longer to kick in than rebate checks or interest rate cuts — will still stimulate the economy during a downturn.

Yet infrastructure spending will only be effective if Congress defines a tight framework for the “shovel-ready projects” that can put federal funds to work immediately. The focus should be on investing in infrastructure that supports the competitiveness and environmental sustainability of the nation instead of funding individual states or spending on singular needs.

To score this, the nation needs a strong, deliberate and strategic federal government to do what is necessary to keep America competitive. What would that mean?

It means setting strict criteria for the billions of infrastructure dollars that are spent as part of the stimulus. Such criteria should include a real assessment of economic benefits and costs that consider environmental, energy, and social impacts. We should only invest those dollars where the nation has assurances of high returns.

It means holding the grantees — the states and metropolitan planning organizations — accountable through ongoing audits to ensure public dollars are being spent as efficiently and effectively as possible. The direct loss of future federal funds should be a genuine consequence for failing to meet basic accountability standards.

It means making focused, targeted investments in those gateways and corridors that are the critical nodes of international trade and inter-metropolitan commerce, rather than spreading infrastructure funding around the country like peanut butter. An independent national infrastructure bank should be established to define and finance those projects of substantial regional and national significance now and in the future.

Recognizing that infrastructure investment takes time to reach fruition, Congress should also enact more rapidly acting stimuli. The best scenario is federal aid to state governments. State governments with balanced-budget rules often cut spending as tax revenues drop in a recession. Federal aid to the states is sure to be spent, while rebate checks will often be saved by recession-weary taxpayers.

Our nation is in for tough economic challenges in the months, and perhaps years, ahead. But with challenge comes opportunity. The next Congress and administration have the chance to address critical infrastructure issues while creating more jobs and stimulating the economy.