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The economic case for infrastructure maintenance

In a recent speech at the Brookings Institution, former US Treasury Secretary and Harvard economist Lawrence Summers made a strong case for a sustained increase in infrastructure investment in general and maintenance in particular. The economic logic is powerful and while Summers had the US in mind the arguments apply more generally. For example, Germany has long neglected infrastructure spending and maintenance in the name of balancing the budget, while the UK’s narrow cost-benefit analyses of infrastructure projects routinely fail to take into account systemic-structural economic effects. It helps explain the UK’s persistent lag in rail infrastructure for example, or pricing that reflects scarcity and distorted markets but not value.  The full Brookings transcript which includes a debate and contributions by other economists can be found here. Summers also summarized his opinions in the Financial Times (gated). The whole thing is highly recommended for those interested in a succinct economic analysis of an important and relevant topic. Here we’ll briefly summarize a couple of points:

Summers starts from the fact that given the current low unemployment rate in the US (or in Germany or the UK) infrastructure investment needs to be justified on the basis of  long-term policy and micro-economic efficiency, in other words this is not about Keynesian “pump priming” (where government expenditure is increased in order to bring down the unemployment rate or lift the economy from recession). Nevertheless Summers advocates a sustained increase in infrastructure spending as a means to combat “secular stagnation” (a situation where interest rates cannot fall far enough to spur sufficient investment (to clear an excess of savings) and the economy languishes in slow growth mode for a long time). He then examines a number of key issues, including:

  • Infrastructure investment is integrative and therefore most of the benefits cannot be picked up by standard rate of return investment calculations. Transport infrastructure for example, integrates regions and promotes agglomeration, thus increasing the range over which business can be conducted. Such primary effects spur private investment, drive productivity and improve competitiveness over decades or centuries. Trying to quantitatively capture these effects ex-ante in investment calculations is often futile and other approaches are needed. A case in point: The Transcontinental Railways in the US integrated the West, created a huge market, induced a paradigm shift in labor mobility and brought the country together in a myriad other ways over a at least a century. Furthermore, direct benefits from infrastructure spending tend also to be very localized. A major project such as an airport, a port or a major railway station can spur local development significantly, more in fact than other types of public investment such as education
  • There is a particularly compelling case for investment in maintenance. As Summers notes:

“there was a presumption that this should be the case since all the incentives facing political decision makers work against adequate maintenance. Deferred maintenance liabilities are largely unmeasured, unnoticed and passed on to subsequent generations of elected officials. No one can name a maintenance project. The desire to come in on budget discourages what might be called “pre-maintenance”, such as when the high-return insulation investments got stripped out at the last moment of Harvard building projects. As another example, the American Society of Civil Engineers calculates that US car owners pay the equivalent of $0.75 per gallon of gasoline for additional car repairs due to the inadequacy of road conditions (current US gasoline prices are approx. $2.35 per gallon).

Therefore, Summer says:

As with potentially collapsing bridges, prevention is cheaper than cure and in many cases the return on “un-derferring” maintenance far exceeds government borrowing rates. Borrowing to finance maintenance should not be viewed as incurring a new cost but as shifting from the fast-compounding liability of maintenance to the slowly compounding liability of explicit debt. It should also be noted that inevitably one maintains what has been used, so maintenance investment is much less likely to turn out a white elephant than new infrastructure investment. My guess is that the US could profitably spend an additional 0.5 per cent of GDP, or about $1.25tn over the next decade, on maintenance of its infrastructure.

This is a particularly interesting (and rarely seen) way of looking at things for a public good such as roads                 and equivalent to private sector calculations of lack of maintenance opportunity cost such as downtime and         lost production.

  • And this is what Summers has to say about quality of investment, execution and pricing:

“Progressives are right to decry the inadequate level of public investment in the US. Conservative complaints about regulatory obstacles, problems in project selection, inefficient procurement and inattention to the use of pricing in assuring the efficient use of infrastructure are equally valid. The short 300-foot bridge outside my office connecting Cambridge and Boston has been under repair with substantial traffic delays for nearly five years. Julius Caesar built from scratch a bridge seven times as long spanning the Rhine in nine days! Famously, it has taken longer to repair the eastern span of the Bay Bridge in San Francisco than took to build the original. Yes, Robert Moses and his contemporaries were too heedless of the environment and the interests of local communities. But we can surely find ways of coming to far more rapid decisions with far less promiscuously distributed veto power than is the case in much of the country today.

There is too much pork barrel and too little cost-benefit analysis in infrastructure decision-making. Projects should be required to pass cost-benefit tests and proposals like a national infrastructure bank that would insulate a larger portion of decision-making from politics should be seriously considered. Ed Glaeser is right that new infrastructure investment in declining areas is often a terrible idea as shrinking populations means that these areas have if anything too much infrastructure. And Field of Dreams — “build it and they will come” approaches do not have a very good track record. Ways should be found to make the costs of procrastination on maintenance more salient and to institutionalise resistance to low-ball cost estimates from advocates of more visionary projects.

The goal of building rapidly at minimum cost should be the primary objective in infrastructure procurement. Deviations from this principle should take place only with compelling justification.

Crucially, modern technology makes possible much more pricing of infrastructure usage than was once the case. In particular, transponder technology means that usage of roads can be priced with sensitivity to exact location and time much as power is priced today. To date, congestion pricing has been very difficult politically. My hope is that in the same way that pricing in the environmental area was once decried as “purchased licences to pollute” but is today quite widely accepted, formulas can be found to introduce congestion pricing. The benefits are potentially very large. And it should be possible to find formulas to compensate losers.”

 

 

 

 

 

 

 

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