Robert Reich Doesn’t Understand Surface Transportation Funding

Over at Salon, former Labor Secretary Robert Reich has a predictably empty article on the debt ceiling deal in which he denounces Republicans for holding America “hostage” (at least he didn’t equate them with mass-murdering terrorists, as that would be totally inappropriate in the post-Loughner Era of New Civility).

How the supposed fiscal hawks in the Republican party were holding anyone hostage to gain anything is unclear, at least to me. They had repeatedly offered President Obama cushy deals, and the Boehner deal they ended up passing doesn’t do a damn thing to change the country’s fiscal and economic trajectory into the Sun. (It’s the entitlements, stupid!) There was certainly very little for libertarians or true fiscal conservatives to be happy about.

That’s fine. Reich is not the first, nor will he be the last, partisan hack to use some really silly rhetoric when “discussing” the debt deal. But then he goes on to talk about something he knows even less about: surface transportation infrastructure. You see, he criticizes President Obama for ceding too much ground, and claims that the debt deal puts at risk the president’s proposed National Infrastructure Bank (and unified Transportation Trust Fund):

He says he wants an “infrastructure bank” that would borrow money from private capital markets to pay private contractors to rebuild our nations roads, bridges, airports, and everything else that’s falling apart.

Fine, but the new deal he just signed may not let him do this either — if the infrastructure bank relies on federal funds or even federal loan guarantees to attract private money. The only way he could create an infrastructure bank without sweetening the pot would be by privatizing all the new infrastructure. That means toll roads and toll bridges, user-fee airports, and entry fees everywhere else.

Apart from its potential unfairness to lower-income people, such a privatized infrastructure would have the same effect as a tax increase. After paying more for roads and bridges and all other infrastructure, Americans would have less cash for to spend on goods and services. That means no boost to the economy.

First, there is no need to create an i-bank, which will do little to bolster responsible transportation infrastructure investments and will do a lot to further distort investment decisions and create more opportunities for waste, fraud, and abuse.

Second, the “privatization” aspect is also not as radical as he makes it sound. In the United States, there is very little interest in true privatization, i.e., government divestitures and design-build-operate-own projects. Rather, most so-called “privatization” comes in the form of concessions, where government-owned infrastructure is leased to and then maintained by private companies.

In my recent paper, “The Limitations of Public-Private Partnerships,” I highlight the advantages of allowing more private-sector participation in this important market — one that is generally dominated by inefficient government monopolies, ones that Reich seems to a priori support.

Contrary to what Reich appears to believe, concessions create net benefits. When a concession agreement is signed, the bid-winning company or consortium pays the government owner a windfall up-front payment in exchange for a multi-decade lease.

In the case of the Indiana Toll Road concession, the state was paid $3.8 billion by Spanish firm Cintra and Australia’s Macquarie in exchange for a 75-year lease. Cintra-Macquarie have since upgraded the ITR’s infrastructure and integrated their toll collection with the E-ZPass electronic tolling network, something Indiana’s Department of Transportation failed to do for years.

So, for consumers and taxpayers, not only do they get to keep all sorts of welfare state bells and whistles that they would otherwise have to raise taxes to fund, they get a better highway that can move more traffic — both personal and freight — for less. Personal mobility is enhanced and the price of consumer goods falls thanks to a more efficient supply chain. That, Mr. Reich, means Americans would have more cash (and time) to spend on goods and services, not less, as you falsely claim.

It is simply not true that “privatization” means consumers will end up paying more for the same services. Consumers will likely pay more directly for their use, which almost everybody in the transportation policy community agrees is a good thing (this is called the “user pays/user benefits” principle), but where does Reich think the money comes from to pay for existing highways? Well, much of it comes from Highway Trust Fund revenues, most of which are collected via federal excise taxes on gasoline and diesel sales.

The gas tax is a regressive tax that hits the poor harder than the rich and does not price use based on congestion or the cost of infrastructure. As far as taxes go, it is a pretty dumb one. But at least it used to somewhat efficiently pay for roads in the days before electronic tolling. The problem is that pro-transit Democrats and Republicans have been robbing highway users since the early 1980s (by creating the Highway Trust Fund’s Mass Transit Account) to pay for streetcars and other wasteful pet projects with fuel tax revenues, meaning that more and more road upkeep and expansion is paid for out of general revenues. And where do those general revenues come from? More taxes!

The poor are already paying taxes for the roads on which they drive. A reliance on user fees and the inherent constraints of private financing help contain costs better than public-sector funding mechanisms, meaning that, if anything, more privatization will help the poor, not harm them.