Thursday, August 09, 2007

Highway Funding: Don't Forget the States' Role

In response to the tragic collapse of the I-35 Interstate bridge in Minneapolis, politicians in campaign mode are predictably jumping on the bandwagon for increasing the amount of federal government spending on highways. Hillary Clinton, for example, has proposed a $10 billion increase in federal spending over 10 years. (A story on this topic can be found here: http://www.townhall.com/news/politics-elections/2007/08/08/clinton_bad_roads,_bridges_harm_economy )

Oddly, however, a good portion of her spending proposals involve public transit and inter-city rail services, which don’t have much to do with road safety. An extra billion per year will not significantly impact the economic infrastructure, especially if deployed to programs that are affecting transit within major cities, rather than the roads connecting them. (This also highlights differences between urban and rural communities. It makes sense that a NY senator will focus on mass transit and inter-city rail, which are not so vital to rural American interests. )

It is also important to consider that state spending is also involved in highway funding, and this dimension should not be overlooked in policy discussions. A GAO study completed in 2004 provides some cautionary information about the propensity for states to substitute federal aid for their own spending, as opposed to supplementing it. In many cases, state spending may be diverted from highways to other projects unrelated to transportation. The report states in part:

"The federal-aid highway program is particularly susceptible to substitution because in general the current matching requirement for states is not high enough to require states to maintain or increase their spending in order to receive increases in federal funds. In most cases, the federal-aid highway program requires that the federal contribution be no more than 80 percent of the total cost of the project, while the state’s matching contribution be at least 20 percent. If the federal highway program worked to stimulate state spending, this might suggest that every $1.00 increase in federal funds would result in a total spending increase of $1.25 ($1.00 is 80 percent of $1.25), $0.25 of which would be funded with state and local government funds ($0.25 is 20 percent of $1.25). However, because in most cases state funding already exceeds the required state matching contribution, often by large amounts, states are not required to increase or even maintain their level of funding for projects in order to receive increases in federal funds."

The full text can be found here:
http://www.gao.gov/new.items/d04802.pdf

Bear in mind that the states collect significant revenues from gasoline taxes imposed on consumers. If there are greater federal appropriations devoted to highways (and who knows what else given the scandalous system of earmarks – which is another topic), some attention to this issue is required to ensure that it does not result in merely substituting federal for state spending. Thus, if you believe more spending is the answer, then more careful attention to sources may be desirable.
EAM

1 comment:

Shawn said...

Hi Ed,

I agree with most of your posting except with your paragraph on Hillary Clinton, which isn’t surprising. Clinton's plan of funding inter-city rail goes about financing transportation in a different way. Senator Clinton's proposal of $10 billion over 10 years dwarfs in comparison to the federal study showing a required investment of at minimum of $12 billion over 20 years to repair deficient bridges across the country.

At minimum, the effort shows the government can cause fast and powerful change if desired. Another illustration of this happened just this past week, when the Federal Reserve Board invested $62 billion dollars in the bond market over this past Thursday and Friday as there were disproportionately more sellers than buyers. This caused the government to invest some liquidity in order to save the market from further market corrections. Without the Federal Reserve’s investment, the market would have likely continued its downward trend on Thursday and Friday. The jury is not out yet on the soundness of these investments by the Federal Reserve.

Good or bad, these two instances show the government's ability to quickly respond and with enough resources for the response to matter.