The State of Some Scholarly Economic Literature and the State of the Union Address

President Obama could have provided a more accurate assessment of the state of the union by acknowledging the state of our economic knowledge, particularly related to my area: transportation.

First off, the president stated that:

When we rescued our automakers, for example, we worked with them to set higher fuel efficiency standards for our cars. In the coming months, I’ll build on that success by setting new standards for our trucks, so we can keep driving down oil imports and what we pay at the pump.

The success of our rescue, at a cost of $10 billion and generous tax benefits to GM, and the Corporate Fuel Efficiency (CAFE) Standards are far from confirmed as successes. First, there is the unresolved debate about whether a carefully managed bankruptcy of Chrysler and GM would have been a less costly solution than a bailout in both the short and long run. Bear in mind that those companies have been declining for decades and foreign competitors have more than picked up the slack. Second, CAFE has nothing to do with the bailout as it raises auto prices in return for higher fuel efficiency. The justification for CAFE depends on the extent that consumers accurately value savings in fuel economy. The literature has not yet sorted out that issue.

Later, he discussed infrastructure:

Moreover, we can take the money we save with this transition to tax reform to create jobs rebuilding our roads, upgrading our ports, unclogging our commutes – because in today’s global economy, first-class jobs gravitate to first-class infrastructure. We’ll need Congress to protect more than three million jobs by finishing transportation and waterways bills this summer. But I will act on my own to slash bureaucracy and streamline the permitting process for key projects, so we can get more construction workers on the job as fast as possible.

No one is opposed to eliminating red tape and streamlining transportation projects. The problem is that the president did not indicate how that would be done. Moreover, since he was on the subject of efficiency, he failed to mention well-known reforms based on established economic literature that could improve pricing, investment, production, and technical change in infrastructure services. 

As I recently wrote in the Journal of Economic Literature, inefficiencies in the transportation sector from poor public policies have continued to grow over time and currently cost more than $100 billion per year and that does not include the costs in employment because of poor commuter access, the lower benefits from trade because of delays and congestion, and the like. The solution is not to spend significantly more taxpayer dollars. There is a lot that we could do to fix our transportation woes by applying market practices, combined with better policies, but not necessarily more government.  For example

• Base user prices on actual costs:
  • Charge people tolls for congestion, not just road use via the gas tax.  By substantially reducing delays and sprawl because the out-of-pocket cost of commuting would no longer be underpriced, such tolls could generate annual gains of $40 billion, accounting for the travel time savings, lower costs of public services from greater residential density, and revenues to the government;
  • Charge for street parking with real-time prices – charge more for crowded streets and less for others;
  • Charge trucks for the damage their weight does to the roads and bridges instead of a gas tax; and
  • Charge planes more to take-off and land in high-volume times, which could save $6.3 billion in time and money to passengers and the airlines.  Also charge passengers for air traffic control based on the plane’s use of congested airspace as opposed to a set per ticket tax.
• Improve federal investments in infrastructure:
  • Improve highway design by increasing the number of lanes and shrinking the lane width in high volume traffic when people drive slower;
  • Use thicker pavement to keep maintenance costs down and  lessen wear-and-tear of drivers’ vehicles; and
  • Fund projects based on cost-benefit analysis, not earmarks and underpriced estimates (aka Boston’s big dig).
• Streamline regulations so that highway projects do not distort wages and raise project prices:
  • Reduce the number of federal and state employees who focus on contractors meeting regulations (200,000 employees);
  • Expedite environmental reviews — EPA reviews end up costing billions and decades to create new runways.  New runways could save $16 billion;
  • Change labor regulations which make it hard to fire transit workers – it can cost $400,000 per severance package.
• Open the skies and seas by liberalizing international airline routes and shipping lanes
• Privatize a city bus service to see if it can be better operated than the public bus company and be more responsive to travelers’ preferences.
• Privatize highways so that the federal government and states could explore whether it leads to lower costs of highway services and better service to motorists.

Efficiency and equity do not have to conflict because any distributional concerns of higher prices for certain groups could be addressed through vouchers and other mechanisms.