…because I’m an economist and a mom–that’s why!

The Virginia Debate Over Tobacco Taxes

December 21st, 2008 . by economistmom

Here’s a humorous cartoon by Tom Toles, who draws for the Washington Post and thus no doubt represents the elitist northern Virginia perspective on tobacco taxes–which would be basically mine–which thinks that tobacco taxes are a pretty appealing way to raise revenue because unlike most taxes that (usually unavoidably) discourage productive activities, tobacco taxes would discourage destructive (or at least socially inefficient) activities.  (Toles teases that even the liberals may oppose this tax increase this time around, on the grounds that like any tax, it would reduce the deficit and hence “kill jobs”–pun intended.)

But here’s a totally different perspective, from the Fredericksburg, VA Free Lance-Star newspaper–just another example of the divide between northern VA and the rest of the Commonwealth (and even with Fredericksburg being not that far south, just down I-95 about halfway between DC and Richmond):

Let’s get out of the way the obligatory acknowledgment that cigarettes are bad things. They’ve put millions of people in the ground, including some non-users forced to “smoke” through their nostrils the gaseous detritus of actual puffers. They’ve degraded the health of countless others, driving up medical costs. Their slovenly use, manifested in roadside litter, annoys the majority who don’t mistake public space for an ashtray. No wonder Gov. Kaine, facing a serious budget shortfall, wants to double Virginia’s cigarette tax to 60 cents a pack.

Yet let’s recognize that Mr. Kaine’s proposal represents a kind of classism. Cigarette smokers generally occupy the lower economic strata, which means that few of them inhabit the social sphere of governors and of the business and journalistic elites with whom the political class hobnobs. A cigarette tax, in short, is a tax on “them,” not “us.” Elites still like their microbrews, their merlots, and their double-malt Scotches, which is perhaps why Mr. Kaine isn’t pushing higher taxes on another socially problematic substance, alcohol.

This is the distributional argument against many taxes that economists would consider “good,” externality-correcting and/or socially-conscious taxes.  They all tend to be regressive taxes, burdening lower-income households relatively more than higher-income ones, simply because consumption of goods in general represents a higher fraction of the incomes of poorer households.  The Free Lance-Star goes further to argue on the unfairness of a tobacco tax, by pointing to the other possible “bad” things we could tax in a “good” way, but we don’t:

Mr. Kaine, citing federal data, says that smoking-linked illnesses cost the state $400 million a year in Medicaid expenses. But what of other iniquitous products and habits? The scarcely estimable toll of alcohol abuse includes everything from liver disease to fatal accidents to lost productivity. Obesity costs 12 percent of the U.S. health care budget, yet Mr. Kaine isn’t targeting doughnut shops and KFC for extra taxes, or putting state levies on chocolate sin cake. The price tag of irresponsible sex is stupefying: In California in 2005, for example, 1.1 million new cases of sexually transmitted infections imposed a direct medical cost of $1.1 billion. But with the possible exception of Del. Bob Marshall, nobody in Richmond is talking about a promiscuity tax. Why should chaste smokers pay the medical freight for satyrs and tramps? And though the average problem gambler imposes social costs of at least $14,000 a year, it’s inconvenient for Mr. Kaine to suggest taxing that vice, since the state, through the lottery, is its primary purveyor.

Verily, all have sinned and fallen short of the glory of clean living–or at least almost all. This fact, at a time of fewer dollars to treat Virginia’s sick and poor, argues for a general tax, not one pinned on a single group of self-abusers. If a doubled cigarette tax means fewer nicotine junkies, that’s a very fine thing. But fairness? Cough-cough. Let’s change the subject.

Oh, but we could consider taxing those other “bad” things (recall my post on Governor Paterson’s idea and other related ones I suggested), and such taxes would still be economically and socially preferable to taxing the consumption or income in general of even lower-income households.  There may be administrative complexities that make it too hard for the tax system to effectively chase after those “bad” things, but can’t you imagine that if we had more “sin taxes” that people would be more willing to pay those taxes as a small price for those sins?  (Why, maybe folks would proudly pay and even brag about owing a “promiscuity tax”….)  And those who cannot afford to pay for their sins might be encouraged to stop “sinning.”

As a northern Virginia mega-church’s (McLean Bible Church’s) radio ad campaign is famous for saying: “Not a Sermon, Just a Thought.”

Bailout Envy?

December 20th, 2008 . by economistmom

Compare the auto industry perspective, as depicted in this cartoon by Steve Sack of the Minneapolis Star Tribune, with the border collie pictured in the post about dogs feeling “envy” from a few days ago.  And even though the automakers eventually got their last-second rescue deal (just yesterday as the Chrysler plants were shutting down for at least a month), I know the Detroit community still holds a lot of ill will toward the Washington policymakers who they say clearly played favorites and held double standards in their dealings with financial companies like AIG compared with their handling of the auto industry.

It is true that the Detroit auto industry’s $13.4 billion is just a fraction of the $85 billion that AIG received, justifying some of the envy.  But it’s also true that one of the most vocal opponents to the automakers’ rescue, Senator Richard Shelby (R-AL), also had a lot to complain about when the AIG bailout went through back in September (emphasis added):

A spokesman for Sen. Richard Shelby of Alabama, the top Republican on the committee, said the senator “profoundly disagrees with the decision to use taxpayer dollars to bail out a private company” [(AIG)] and is upset the government has sent an inconsistent message to the markets by bailing out AIG after it just refused to save investment bank Lehman Brothers from bankruptcy.

“The American taxpayer should not be asked to unwillingly assume the inordinate risks that financial experts knowingly undertook, particularly when taxpayer exposure is increased by the ad hoc manner in which these bailouts have been engineered,” said Shelby’s aide, Jonathan Graffeo.

Now, I’m not one to defend the behavior of Republican members of Congress (or that of many Democrats, for that matter), but it does seem that Senator Shelby has been somewhat consistent in that he hasn’t really been fond of any of these government rescues, because he (consistently) opposes big government.  And if there’s one thing for certain, it’s that government keeps getting (necessarily) bigger and bigger.

A Happy New Year for Chrysler?

December 19th, 2008 . by economistmom

Today the Bush Administration came through with TARP funds for the auto industry (intended to prevent a “disorderly bankruptcy”), just as Chrysler closes its last day of production for at least a month.  Now we have to hope that despite the bad timing of the plant shutdowns (coming just before the holidays), that 2009 will be a happier year for Chrysler and the rest of the Detroit auto industry.  Of course, I have more personal reasons for hoping so, but if this federal assistance is given and received intelligently, I believe that it will help make the entire country (entire economy) happier in 2009.

The Detroit Free Press’ Mark Phelan seems to have the right ideas when it comes to how the automakers can intelligently respond to this aid package and prove themselves to the rest of the American public (note that the Free Press continues to avoid the term “bailout”–in contrast to the DC papers):

The $17.4-billion lifeline the federal government threw today is the best chance General Motors Corp., Chrysler LLC and Ford Motor Co. will ever have to regain the American people’s trust and reshape their business models for long-term profit and success.

First and foremost, they must get the vehicles right. Every new model they introduce must be a fuel-efficiency leader for its class.

Second, they must build great small cars. Cars that don’t just match, but exceed, the quality, fuel economy and flair of models like the Honda Civic, Nissan Versa and Mini Cooper. Then they must demonstrate that 40 m.p.g midsize sedans and 50 m.p.g. subcompacts are just around the corner, and that when they come into view, they’ll be gorgeous.

To win back American buyers’ respect, the automakers must show the aid package was a sound investment, not a handout…

In the case of Chyrsler, Mark Phelan explains it’s not so easy to follow the “build great small cars” directive, but they can still respond intelligently:

Chrysler faces the toughest task. It doesn’t have the technology and resources to produce small, technically advanced vehicles like those coming from GM and Ford. Chrysler will offer the quirky and efficient little Dodge Hornet, but that car was engineered and produced by Nissan in Japan.

The Hornet may have the looks and features to please buyers, but it won’t make the case that the aid supported American technology and manufacturing.

Chrysler must use the breathing room the loans provide either to form more alliances with other companies, or – as appears more likely – find a buyer or partner that will provide the technology for small vehicles and let Chrysler develop and build the models it does superbly: minivans, Jeeps, the Chrysler 300 and Dodge Charger and Ram…

Yep, the smart response is for the auto industry to immediately “downsize” and “streamline” to produce only the vehicles that people apparently want to buy (and not a single SUV or large sedan more), while figuring out (with unusual-for-Detroit foresight) how to “transform” to the industry that will be able to produce the vehicles that we expect people will want to buy in the future.  I think it’s a good time for us all to be hopeful.

And speaking of hope and gratitude and good sentiment in general, here’s a little “thank you note” from Detroit to the President, written by the Free Press’ Tom Walsh:

Detroit says thank you, Mr. President.

And a Merry Christmas and Happy New Year to you, too.

President’s George W. Bush’s 9 a.m. holiday gift basket for Detroit automakers was $17.4 billion in short-term bridge loans to help General Motors Corp. and Chrysler LLC survive to see 2009.

The gift basket comes with lots of stern words about concessions, viability plans and possible bankruptcy in the future. But there’s little in the way of enforcement mechanisms. It will be up to the incoming Obama administration to set the strict terms and timetable for the profound changes to come for Detroit’s automakers, workers, suppliers, dealers and debtors.

This is not cause for wild celebration of the party-like-it’s-1999 variety.

Rather, it’s an occasion for thanks and relief that GM and Chrysler will still be around to slog through the messy, difficult times that 2009 will bring.

And for now, that’s good enough.


So I am hopeful for a Happy (or at least happier) New Year for Chrysler and the rest of the Detroit auto industry.  And I have a lot more optimism today than I did yesterday that in the New Year I’ll get to tour that Chrysler truck plant after all. 

Governor Paterson on a “Sweet” Tax

December 18th, 2008 . by economistmom

Governors are all the rage on EconomistMom today.  As I drink my so-called “vitaminwater” that admits to me “contains less than 1% juice,” New York’s governor, David Paterson, writes on that New York should start to tax “sugared drinks”:

ALBANY, New York (CNN) — Like many New Yorkers, I remember a time when nearly everyone smoked. In 1950, Collier’s reported that more than three-quarters of adult men smoked. This epidemic had a devastating and long-lasting impact on public health.

Today, we find ourselves in the midst of a new public health epidemic: childhood obesity.

What smoking was to my parents’ generation, obesity is to my children’s generation. Nearly one out of every four New Yorkers under the age of 18 is obese. In many high-poverty areas, the rate is closer to one out of three.

That is why, in the state budget I presented last Tuesday, I proposed a tax on sugared beverages like soda. Research has demonstrated that soft-drink consumption is one of the main drivers of childhood obesity…

We estimate that an 18 percent tax will reduce consumption by five percent.

Our tax would apply only to sugared drinks — including fruit drinks that are less than 70 percent juice — that are nondiet. The $404 million this tax would raise next year will go toward funding public health programs, including obesity prevention programs, across New York state.

I like the idea of this tax, for the same reasons I like the idea of the higher tobacco taxes that Governor Kaine proposes, especially when tied to the funding of health-care initiatives.  (We have unsuccessfully in the recent past tried funding federally-financed health programs (the “State Children’s Health Insurance Program” (SCHIP)) with higher federal-level tobacco taxes.)  Along those lines, I think we should also  consider a tax on trans fats (years ago I heard this nicknamed a “Twinkie tax”) and maybe a tax on video games that do not encourage movement (Wii sports games would be exempted) which perhaps could be labeled the “couch-potato tax.”  I also think that if we want to find ”good subsidies” (as we’re trying to also stimulate the economy), the government(s) could consider funding things like after-school fitness programs and workplace yoga classes (of course) and healthy foods.  Over the long run, these policies have the potential to generate significant savings on health care costs, and even if structured as subsidies (versus taxes) could be expected to generate large net economic benefits.

One problem is that our ideas for “good” taxes and subsidies may sometimes have to fight against the existing mix of (not-so-good) taxes and subsidies.  For example, the federal government already subsidizes sugar production to the tune of billions of dollars a year, so the effectiveness of any state-level tax on sugar is already handicapped significantly.  If our government soon considers pursuing another very wise, externality-correcting tax, the carbon tax (or a higher gasoline tax), it would seem at least a little hypocritical to at the same time leave in place the preferences for the oil and gas industry and even SUVs that are contained in the federal tax code.

So I like that the governors are thinking of using their state budgets as little laboratories for policies that probably would make a lot of sense at the federal level as well, in pursuing ideas for more sensible taxes and government spending.  But I think we have to recognize that bringing in the “good” would work a lot better if we also cleaned out some of the “bad” along the way.  That’s especially true when the overarching problem we’re trying to cope with is that we are running out of money (and that no money is “free”).

Governor Kaine Tries Fiscal Responsibility, Again

December 18th, 2008 . by economistmom

Back in July, Virginia Governor Tim Kaine (my governor) tried in vain to be fiscally responsible, proposing tax increases to pay for transportation needs which were rejected by the Republicans and even some Democrats in the Virginia legislature.  Back then the tax increases being discussed–and which make sense being tied to transportation funding–were an increase in the gasoline tax (bad timing in July), and an increase in the sales tax on autos (bad timing now).

Now the needs are much broader and the lack of revenue much more severe.  As today’s Washington Post reports:

RICHMOND, Dec. 17 — Gov. Timothy M. Kaine launched a budget-balancing proposal Wednesday that would transform the commonwealth’s old-guard fiscal policies into ones that reflect the political conversion from red state to blue.

Many of the prescriptions to address a $2.9 billion budget shortfall that he unveiled would have been inconceivable 10 years ago. He proposed doubling the tax on tobacco in a state that once based its economy on cigarettes. He wants to offer early release to some prisoners doing time for nonviolent offenses in a state that trails only Texas in executions. And he has suggested taking steps to end Virginia’s long history of housing the severely mentally ill in institutions.

“It strikes right at Old Virginia,” Sen. Ken Cuccinelli II (R-Fairfax) said of Kaine’s proposals.

Kaine (D) declared “Old Virginny is dead” after he helped President-elect Barack Obama carry the state in the November election. Analysts say he is embracing a strategy that would force Republican lawmakers to accept through legislative proposals and electoral defeats that the state has changed in lasting ways…

“We try to make cuts that position us better for the future rather than just find savings for today,” Kaine said. “Wherever possible, we propose real, long-term savings.”

Some of Kaine’s proposals were painful but expected. State agencies, including colleges, would face 15 percent cuts. He proposed a $400 million cut to education funding and a $400 million cut to Medicaid, which helps cover medical needs for the indigent, elderly, blind and disabled.

But many of Kaine’s budget moves were designed to spare programs he considers politically important. Many social service and environmental initiatives will be protected from deep cuts, while once-sacred constituencies could be hurt.

Kaine’s 30-cent-a-pack increase in the cigarette tax will be debated in a state that was once home to thousands of tobacco farms and is still home to one of the world’s largest cigarette makers, Richmond-based Philip Morris. Kaine said the proposed increase, which GOP lawmakers vow to derail, would prevent further cuts to Medicaid while discouraging smoking…

Sounds like a reasonable mix of both tax increases and spending cuts–exactly the kind of all-fronts approach that’s needed when the entirety of the budget is in such dire straits.  And the tobacco tax increase is one of those “good” taxes that can be justified with a mix of externality and paternalistic arguments.  Will the Republicans in the Virginia legislature be any more receptive to any kind of tax increase than they were back in the summer though–especially those who still think in “old-school/Virginny” ways?

It seems to me that the state governments are being forced to play out these battles over fiscal responsibility ahead of the federal government (most states having balanced budget requirements when the federal government does not), so that we should be paying close attention to how they work out.  Will the kinds of tough choices that are so badly needed and that Governor Kaine has spelled out so clearly (there’s really no such thing as a free lunch) make it through the ugly reality of politics?

Even 0% Financing Doesn’t Mean It’s Free

December 17th, 2008 . by economistmom

Hey!  Looks like it’s no-money-down, 0% financing for everyone these days!  First we hear that rates paid on Treasury debt have fallen to essentially zero, and then that the Fed has followed suit with their key rate (slashing their target for the federal funds rate to a record low of between 0 and 0.25 percent).  From the Bloomberg story on Treasuries (by Matthew Benjamin and Liz Capo McCormick):

Dec. 15 (Bloomberg) — Bill Clinton was forced to abandon spending initiatives to boost the economy at the start of his presidency when advisers warned him that the borrowing needed to fund the programs would push interest rates higher. President- elect Barack Obama may not have the same problem.

While the total amount of U.S. government debt outstanding rose to $10.7 trillion in November from $9.15 trillion a year earlier, the amount of interest paid in the last two months fell by $10 billion, according to the Treasury Department.

Instead of shunning the U.S., where losses on subprime mortgages in 2007 triggered a global seizure in credit markets that led to the downfall of securities firms Bear Stearns Cos. and Lehman Brothers Holdings Inc., investors can’t get enough Treasuries. Even as estimates of Obama’s stimulus package and the budget deficit rise to a record $1 trillion, demand continues to increase as investors flee risky assets around the world and put their cash into U.S. bonds paying, in some cases, nothing in yield just to ensure the return of their principal…

“This is not about return and yield and value; investors are functioning out of raw fear,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., which oversees $90 billion in fixed-income assets. At the same time, “this is fabulous for the Treasury because they are borrowing at virtually nothing,” he said…

“It’s good news,” said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities in Washington. “Even though we’re borrowing larger amounts of money, the total amount we’re going to pay in interest is going to be somewhat lower.”…

But really, it’s not as good news as some might want to think, because even 0% financing on our private and public borrowing doesn’t mean that borrowed money is “free.”  The unfortunate reality beyond the next few months to a year is:

  1. We still have to pay it back; and
  2. Interest rates will eventually (and inevitably) come up.

I worry that the downside of currently very-low interest rates is the same kind of downside that led to the subprime mortgage crisis.  Rates near zero give individuals, businesses, and government the false sense that borrowing is costless, and that they can afford to take on more debt than they really can.  Interest rates cannot stay near zero for very long, as there are ultimate limits on the worldwide supply of capital that prevent it from keeping up with our insatiable demands.  The interest rate paid on Treasury debt is near zero now, not because investors are not worried about the government’s ability to pay down the debt in the future, but because they’re more worried about the current riskiness of other investments.  That dynamic will change over the next few months.  And if consumers and businesses begin to see the zero percent Fed rate passed through to much lower interest rates on their own borrowing, they will be encouraged to borrow and consume again–which is what we want to happen with the monetary stimulus–but will they be encouraged to borrow and consume too much, such that when interest rates start to rise again as the economy recovers, they will find themselves (yet again) overextended?  Are the now near-zero interest rates like “teaser” rates–the kind of only-temporarily-low rates that encouraged unsustainable debt burdens that got us into this mess in the first place?

My “bottom-line worry” is that the news of these near-zero interest rates will make politicians and the American public believe (falsely) that deficit spending is free.  Today’s Washington Post reports on a new poll showing that public support for a massive increase in government spending is strong, but only when people don’t think about the costs:

The poll found that nearly two-thirds of Americans support new federal spending to stimulate the economy, and majorities of both Democrats and Republicans back the idea. Concern about deficit spending, however, mutes enthusiasm for the stimulus plan. When respondents were asked whether they would back the plan if it increased the deficit, support dropped to 47 percent. Overall, nearly nine in 10 said they are worried about the size of the federal budget deficit, including nearly half who are “very concerned.”

So the danger is that in a world of no-money-down, 0% financing, people will start to over-discount the costs of borrowing, start to think (falsely) that money is free, start to think (falsely) that anything with any potentially positive marginal benefit is worth pursuing–regardless of the marginal costs.  In other words, people (and the government) will start behaving as if there are no budget constraints and no need to scrutinize and prioritize, when exactly the opposite attitude is needed going forward.

As Alice Rivlin is quoted at the end of the Bloomberg article on Treasury rates:  “We can’t press our luck”… “Eventually, we’ve got to show the world that we are fiscally responsible.”

But we Americans are not good at self-discipline.  That’s why I worry about the “good news” of near-zero interest rates. 

Shedding Light on What Taxpayers Pay For

December 16th, 2008 . by economistmom

Yesterday the Pew Charitable Trusts launched their “Subsidyscope” initiative, a project designed to “raise public awareness about the role of federal subsidies in the economy.”  With the help of the Sunlight Foundation in creating the public-access, searchable database, Pew hopes that Subsidyscope will improve transparency, encourage greater scrutiny and accountability, and ultimately help lead to better government.  From the Pew press release:

“The current financial crisis has led to historic market interventions by the federal government and has invigorated the national debate about the appropriate role of government in the economy,” said John E. Morton, managing director of Pew’s Economic Policy Department. “Too often policymakers speak as if subsidies are limited to direct expenditures on assorted social programs. The reality is that, increasingly they flow through the tax code and are not subject to the same level of public oversight. In our fiscally constrained environment—and with government interventions shifting new burdens onto American taxpayers—there is more need than ever for a comprehensive and transparent fact base to inform future discussions about subsidies.”

“Federal subsidies go well beyond direct payments from the federal government to private businesses,” said Douglas Hamilton, deputy director of Pew’s Economic Policy Department. “They also include tax breaks for individuals and corporations, loan guarantees, stock purchases and other financial interventions. And they’re massive. By some accounts, the tax breaks for individuals alone cost hundreds of billions of dollars a year.”

Pew will work closely with representatives of partner organizations to call attention to the study of subsidies, both in the project, but also through the work of contributing organizations.

“By working together, we believe that we can improve the definition of what constitutes subsidies, and highlight the full extent of their reach in the market,” said Morton. “In this phase of the project, we won’t take a position on whether certain subsidies are better than others – we want to move the facts into the public arena. We hope the data are used by advocates on all sides of the issue.”

I am fortunate enough to have been asked to serve on Subsidyscope’s advisory board, and I am looking forward to working together with my colleagues on this very important initiative over the next few years.  The Subsidyscope database will make it easier for policy analysts, politicians, and the public to begin to better understand which subsidies work the best and are “worth it,” which could be improved, and perhaps which should be eliminated, to help ensure that taxpayers receive their money’s worth.  In other words, this project will make it easier to practice fiscal responsibility.

How Fiscal Compromise Has “Gone to the Dogs”

December 15th, 2008 . by economistmom

Today’s Washington Post contains an article by Rob Stein reporting on new research proving that dogs feel emotions more complex than just “happiness” or “fear”; the article focuses on “envy”–more sophistically referred to as “inequity aversion”:

[P]ooches would eventually get upset if their partner was getting rewarded while they got nothing.

“The dogs that were not getting the reward started to hesitate. You had to prompt them more often to give the paw,” said Range, noting that some of the deprived dogs would start acting frustrated, scratching themselves, licking their mouths and yawning. “They would refuse to look at you, start looking at their owners or at the other dog chewing, and eventually refuse to cooperate. They would look away or lay down and not give the paw anymore if they were not getting rewarded.”

…to see if the dogs were refusing to give their paw more out of frustration than from a sense of inequity, [the researchers] repeated the experiment with dogs by themselves sometimes rewarding them and sometimes not. In that situation, the dogs continued to cooperate for much longer even when they were not getting a treat. The same thing happened when neither dog in a pair got rewarded.

“It’s not just ‘Oh, shoot. I’m not getting rewarded, so I stop working,’ ” [scientist Friederike] Range said. “If both are not rewarded, that is not a big problem. But if you rewarded one and not the other, that’s where you saw a problem.”…

The story on dog envy concludes with an interesting analogy between dogs and dog treats, and humans and government spending (or more specifically “bailouts”):

The findings are especially intriguing given the current economic crisis…

“If you look at the crisis in the U.S. and the automobile industry, people are upset because the executives are driving private jets and we are driving lousy cars,” [scientist Frans B.M.] deWaal said. “There are many studies of inequity aversion in humans. Economists have studied this and said only humans have this. This shows it’s not limited to our species. Some of these elements are also evolved in other animals.”

I think the analogy can be more broadly applied to why fiscal discipline has been so hard to do given the way fiscal policy negotiations and compromises have tended to work lately (at least in the past eight years or so).  When different parties want different things, the compromises have been “OK, I’ll let you have your spending if you let me have mine”–rather than “I’ll give up some of my spending if you give up some of yours.”  And once the government has already agreed to a $700 billion “rescue” for the financial sector, well, it creates a lot of envy and resentment when the auto industry’s plea for help seems to get snubbed, and suddenly there seem to be a lot of envious industries and people lining up at the feet of federal policymakers saying (begging?) “what about me?”

And reports like this one on the now “toothless” restrictions on executive compensation at those rescued Wall Street firms sure don’t help control the envy from the auto industry and its supporters–nor that of taxpayers more generally.  Everyone now seems to have the inclination and perhaps the right to ask “when is it my turn?”

That’s why I think the $700 billion TARP, and how it was constructed and implemented, and how it has worked so far, probably set a very bad precedent.

Can We Build Bridges to a Better Place?

December 14th, 2008 . by economistmom

photo of construction of new bridge in Minneapolis, from a New York Times story earlier this year

This week’s Economist magazine, and this morning’s (Sunday) Washington Post both discuss whether it’s possible to do massive amounts of infrastructure spending both promptly (for stimulus/recovery) and wisely (for longer-term economic growth).  Can “quick and easy” also be “smart” from a “transform-the-economy” perspective?  From the editorial column in the Economist:

Done correctly, a big public-works programme can do two valuable things at once: deliver a useful stimulus and at the same time boost the economy’s long-run rate of growth…

The danger comes when these two objectives conflict. Given that stimulus is likely to be regarded as the primary aim, a premium will tend to be placed on actions that yield the most rapid results. America’s governors are already falling over each other to submit their lists of “shovel-ready” projects to Washington, DC. But quick and easy is not necessarily good.

The federal government is not good at discriminating between infrastructure schemes. Too much cash has gone into encouraging sprawl or keeping senators from small states happy with showy projects; too little into building things that are harder to get approved but encourage economic growth or control congestion, such as light railways or road-rail freight systems. Obviously each project should be measured on its merits. But a good broad test will be where the money goes. The 100 biggest metropolitan areas account for 65% of America’s population and 75% of its output. That is where the infrastructure is needed. But if “bridges to nowhere” start springing up in the boondocks, it will probably be money wasted.

And this article in the same issue of the Economist magazine explains why just throwing more money to the states for infrastructure projects is not likely to bring much “change” and “transformation” to what we build and how we do it:

The greater problem [with infrastructure spending, above even lack of funding] is the lack of a strategy. No federal office oversees spending on infrastructure. Congressmen appropriate money for individual projects, a few of which are ludicrous (Alaska’s “bridge to nowhere”) and most of which bear no relation to each other. Cash for roads is given to states with few strings attached. “It is as close to a blank cheque as the federal government comes to writing,” says Robert Puentes of the Brookings Institution, a think-tank…

The lack of federal cash has…provoked states to think boldly about how to manage demand and recoup infrastructure investments. There is growing interest in public-private partnerships, although America still lags well behind Europe. Oddly, the corruption-tainted state of Illinois has been unusually forward-looking. In 2005 Chicago became the first city to lease a toll road to a private company.

So a wiser approach to public works is slowly taking shape. Unfortunately, it is now in danger of being washed away by a torrent of money. Speed in spending is prized above all; but this is no way to build something that lasts as long as infrastructure. 

And today’s front-page story in the Washington Post shares this worry:

Most of the infrastructure spending being proposed for the massive stimulus package that Obama and congressional Democrats are readying, however, is not exactly the stuff of history, but destined for routine projects that have been on the to-do lists of state highway departments for years. Oklahoma wants to repave stretches of Interstates 35 and 40 and build “cable barriers” to keep wayward cars from crossing medians. New Jersey wants to repaint 88 bridges and restore Route 35 from Toms River to Mantoloking. Scottsdale, Ariz., wants to widen 1.5 miles of Scottsdale Road.

On the campaign trail, Obama said he would “rebuild America” with an “infrastructure bank” run by a new board that would award $60 billion over a decade to projects such as high-speed rail to take the country in a more energy-efficient direction. But the crumbling economy, while giving impetus to big spending plans, has also put a new emphasis on projects that can be started immediately — “use it or lose it,” Obama said last week — and created a clear tension between the need to create jobs fast and the desire for a lasting legacy.

“It doesn’t have the power to stir men’s souls,” said David Goldberg of Smart Growth America. “Repair and maintenance are good. We need to make sure we’re building bridges that stand, not bridges to nowhere. But to gild the lily . . . where we’re resurfacing pieces of road that aren’t that critical, just to be able to say we spent the money, is not what we’re after.”

Minneapolis Mayor R.T. Rybak is proud that his city was able to quickly rebuild the Interstate 35 bridge that collapsed into the Mississippi River in 2007 while making sure to include capacity for a future transit line on it. But he worries that many of the road and bridge upgrades around the country will not be done in a similarly farsighted way, given the time pressures.

“The quickest things we can do may not be the ones that have the most significant long-term impact on the green economy,” he said. “Unless we push a transit investment, this will end up being a stimulus package that rebalances our transportation strategy toward roads and away from [what] we need to get off our addiction to oil.”

Mayors say there would be a better chance for a long-term impact if the money were focused on metropolitan areas where investments could make the most difference in reducing congestion and lessening dependence on cars. They doubt that will happen if infrastructure funding goes directly to state capitals.

And meanwhile, what to do about the Big Three automakers still hangs over us, and this week’s Economist also points out the uniqueness of the Detroit situation, compared with other parts of the country that also produce automobiles:

Michigan remains the most dependent on the Big Three, even more so than the BEA’s numbers suggest. The BEA’s classification does not include headquarters and research facilities, most of which are clustered in the state, according to Donald Grimes, an economist at the University of Michigan. The BEA also groups together foreign and domestic carmakers. Ohio and Indiana have lured more foreign carmakers than their northern neighbour. The day before Rick Wagoner, GM’s chief executive, first visited Congress with his hand out, Indiana’s governor applauded the dedication of a new Honda factory.

Michigan, by contrast, has risen and fallen with the fortunes of the Big Three. The state’s concentration of Big Three workers is 12 times the national average, explains Mr Grimes. This year’s annual forecast from the University of Michigan charts how the state gained almost 800,000 jobs between 1991 and 2000, and then proceeded to lose more than half of them, 415,000, from 2000 to 2007. A main reason, according to the report, is that the firms’ car sales fell from 11.5m units in 1999 to 8.1m in 2007.

The outlook remains dismal. The report predicts that Michigan will have a net job loss of 674,000 from 2000 to 2010. The university’s economists have long made a plaintive request to their state: diversify. That plea is suddenly more urgent.

So could at least part of the infrastructure spending we’re talking about do a thoughtful job of putting Detroit autoworkers back to work (as quickly but as thoughtfully as possible) while helping Detroit diversify and transform?  And could we repeat that strategy over and over again, in all of the infrastructure spending we pursue all over the country over the next couple years?  Instead of just digging deeper holes and building “bridges to nowhere,” could we build them to a better place?

Just Take It from the TARP

December 12th, 2008 . by economistmom

With the Big Three assistance bill failing in the Senate last night, it seems the only hope for federal aid to the automakers before the end of the year is for the Administration to take some of the Treasury “TARP” money for it.  Apparently the Bush Administration is more seriously considering this option this morning:

Dec. 12 (Bloomberg) — The Bush administration would consider using money from a fund intended to rescue U.S. financial markets to prevent the collapse of the nation’s auto companies, White House spokeswoman Dana Perino said.

“Under normal economic conditions we would prefer that markets determine the ultimate fate of private firms,” Perino told reporters aboard Air Force One. “However given the current weakened state of the U.S. economy we will consider other options if necessary, including use of the TARP program to prevent a collapse of troubled automakers.”

(An updated Washington Post story with this latest development is here.) 

The TARP option is what the Democratic leadership wanted in the first place, and it also seems to make sense and to be the “fair” thing to do.  If rescuing the financial firms with federal money was justified as really saving Main Street, not just Wall Street, then surely a just-as-strong (or even stronger?) case can be made for rescuing the automakers.  You’d think that out of the $700 billion worth of economic life support already committed, carving out just $14-$15 billion for the Big Three is reasonable and in the end more likely to pass the cost-benefit test than some of the other chunks of tens of billions of dollars already spent from the fund.

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