Stop Financing Local Public Infrastructure Projects Using Federal Funds

Who Should Pay for California's High Speed Rail and Local Levees?

Recently, the Federal Government has been asked to finance the California High-Speed Rail project and the construction of a levee in Grays Harbor County, Washington State. There are countless other examples of mega-project infrastructure subsidies. I oppose such subsidies.

Why?

During a time when the Federal Deficit continues to grow, why should the Federal Government be subsidizing local infrastructure projects? What incentive effects are introduced when state and local governments can rely on “other people’s money” to pay for projects that mainly benefit local people?

I have been working on this topic for 25 years now. My first research project here focused on the effects of cities building expensive heavy rail and light rail transit systems, where the city would receive a roughly 75% subsidy for building the system. Here is our 2005 Brookings Paper.

Imagine a case where if you go to a restaurant with your family, a stranger will pay for 75% of what you order. You will be more likely to go out to eat and to eat a delicious and expensive meal. This same logic holds with local infrastructure projects. The local construction union loves the job-creating project, and the local mayor will claim credit for obtaining the subsidy and will enjoy the ribbon-cutting ceremony. Everyone wins! (Of course, I am kidding.)

Who Loses from the Infrastructure Subsidy Game?

#1 The American Taxpayer has to eventually pay these bills for all of the subsidies that have been offered to the various localities. As these projects contribute to our Federal Deficit, our children will face higher tax bills and will also pay the interest on this extra debt.

#2 The local democracy in subsidized areas suffers because the voters are implicitly treated like children. They never face the harsh reality of having to prioritize what projects to implement and how to hold elected officials accountable for using their scarce tax dollars. If voters in areas anticipate that they must pay using their own earnings for local projects, they will invest more time and effort to become more sophisticated voters. Note, the human capital investment point here! Just as NBA players practice free throws, voters will read more local news if their dollars are being spent locally.

#3 The local newspapers currently suffer from lower demand. In an alternative universe where cities and states had to finance their local projects, the taxpayers would seek out information and coverage of how the Mayor is managing funds. There would be a demand for real local newspapers to investigate what the Mayor is actually doing all day long. There would be a forensic accounting of a city’s contracts to identify corruption in contract issuance. Has the City done a good job choosing contractors? Are these guys obeying their contract’s terms, or are they shirking and seeking more $?

#4 For projects such as levees that make a city safer, there can be a moral hazard effect that more people move to the leveed area because it is perceived to be safer. If the price of levees to cities increased (because Federal subsidies decreased), the city would be more likely to upzone in safer areas (those above sea level), and this would likely enhance the overall safety of the local populace. Fewer people would move to this place if they anticipate that they will face the future tax price for new infrastructure to defend the risky place. They will be more likely to move in if they anticipate a Federal subsidy. This moral hazard effect is even more important if the area is beautiful and risky.

What is the Proper Role of the Federal Government Here?

The Federal Government should offer guidance to localities considering the implementation of infrastructure projects. The Federal Government can convene leaders from the States to share best practices and discuss which national contractors have done a good job with the construction work. The Federal Government can team with nations around the world (such as the Dutch, who have expertise in flood risk) to learn about best practices. The Government could use its satellite data to inform localities about the local pace of spatial threats and help to do arm’s-length audits of the quality of existing infrastructure.

Localities (and Universities) can always lower their expenditure costs by engaging in deferred maintenance. The Federal Government could conduct audits and release this information for voters to make an informed decision.

Local areas with weak and declining infrastructure that face emerging risks such as sea level rise would be identified. Firms that were considering moving to the area would be less likely to locate there. This competition between regions for footloose people and firms would create an incentive for these localities to invest in resilience using their own money.

After all, the first idea in real estate is location, location, location. Real estate prices will decline in areas that face risks and do not take proactive steps to adapt to them.

Can Localities Pay for Their Own Infrastructure?

Just as firms can finance their projects using cash or borrowing, cities can either raise property taxes or issue bonds. If the local voters reject a proposal (for an excellent project that truly offers a positive net benefits into the future), then the Mayor has not done a good job explaining the project. Do you reject local democracy as a way to allocate scarce resources?

Now, the more nuanced case would be for small cities that are losing people and for whom the average person is low income. These areas do face borrowing constraints. How should their infrastructure be financed? This gets back to property rights. Milton Friedman supported a Universal Basic Income and people who live in a given area could devote part of their UBI payment to pay for their community’s common levee. If the total funds contributed by the community isn’t large enough then a lower quality infrastructure project could be implemented. (Here the details would matter concerning how lumpy is the “required infrastructure” to provide some level of protection to the place?).

In my 2010 book, Climatopolis, I expand on the themes presented in this Substack. Competition between jurisdictions that use their own currency to defend themselves protects all of us.

A final thought related to my Tweet here;

A silver lining of the rising U.S. federal Deficit is that President Trump and future Presidents will have greater credibility in cutting future infrastructure subsidies. This will put more of the financing decision back to state and local governments, and they will spend their own $ more prudently. A more efficient state and local government will emerge because of the Federal deficit! That’s both interesting and funny!