In February 2011 Matt Kahn and I released a report for Brookings Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways. In the 2013 State of the Union Address, the USDOT Co-opted some of our ideas and language when the President announced a Fix-It-First plan.

Reihan Salam asked me via Twitter to contrast these proposals. Ask and ye shall receive.

The proposals were not identical. We identified the same problem, existing infrastructure is aging and without additional resources will deteriorate more seriously.

There is room for debate as to who should fund this infrastructure, but given the Federal government believed constructing an Interstate Highway System was of national interest, and paying for a National Highway System is of national interest, and that there are existing funds which are largely returned to the states proportional to where the revenue is generated, keeping existing revenue sources in the short term is consistent with broader policies and is politically prudent (it is easier to maintain an existing tax than to fight 50 fights in 50 state legislatures about raising new taxes to pay for the same roads).

(1) Fix-It-First: Obama wanted $50B in new funds. Kahn and I proposed redirecting existing Gas Taxes to the problem. We identified the problem as preserving the National Highway System network. There are gas taxes already spent to some extent on this problem, but gas taxes (highway road user fees) are also spent on new projects, and for transit projects, neither of which seemed to us to rise to same level of national justification. (Identifying the amount spent on transit is easy. Disentangling capacity expansion from preservation is tricky, since many reconstruction projects wisely bundle both to achieve efficiencies).

Further new projects generally have lower Benefit/Cost ratios (if even above 1.0) than existing projects, since (a) we already picked the low-hanging fruit, and (b) we have built our lives and land use around the existing network. In contrast, transit capital projects are seldom of an interstate nature, and federal funding currently distorts transit decision-making by making it very capital intensive. Further transit projects are currently funded by road users rather than by transit users (or the general population). [There are of course many pollution externalities created by car usage, which should be internalized through pollution taxes of some kind, but that should not be dedicated to road expansion, and my idealized world would be politically separate taxes. As someone playing an economist, I also am required to say by the economist’s guild “We should also have congestion charges.”]

(2) Expand-It-Second: Obama proposed a National Infrastructure Bank, ours was a more limited Highway Bank where borrowers would need to repay funds through from project beneficiaries (user charges or land value capture). Ours was a self-sustaining, independent Government Sponsored Enterprise. These are reasonably similar ideas, earlier ideas for an Infrastructure Bank have included grant-making powers, our view (and what appears to be the Administration’s current view) is that the Bank should lend money, and expect repayment, with interest, and should thus expect to be revenue positive over the long haul.

The Administration also proposed enacting America Fast Forward Bonds, and implementing the TIFIA program. Implementing TIFIA is of course current law, so that is not really a new initiative. TIFIA does many similar things to the proposed Highway Bank, but it is lodged within USDOT rather than independent. It is also not well funded. We did not have any particular viewpoint on bonds, except to the extent we envisioned the Highway Bank selling Bonds based on portfolio of projects (much like how mortgages were once bundled before financial deregulation) to raise funds, and imagine that similar tax benefits can be used. The market in the end will limit the availability of funds for self-liquidating projects.  So rather than bond investors being paid from individual projects, they would be paid from a bundle of projects, lowering risk and interest payments. Many communities have difficulties participating in the municipal bond market, since, especially small communities, do this infrequently, while the professionals on Wall Street know many angles. (Hamilton Project has another proposal on Municipal Bonds).

(3) Reward-It-Third Our Highway Bank would require Benefit/Cost analysis. Outperforming projects would get a rate subsidy from the Highway Performance Fund (basically funded by the profits of the Highway Bank). This would help encourage jurisdictions to under-sell their projects (under-estimating demand and over-estimating costs) so that they can outperform, rather than the current strategy of over-selling the projects (over-estimating demand and under-estimating costs) to get initial funding.

The administration also proposed cutting red tape. That sounds like a good idea.

Previous links on the topic of Fix-it-First.