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Out of Control Policy Blog Archives: 3.31.13–4.6.13

How Obama’s Plan to Encourage Homeownership Will Hurt the Poor the Most

This morning the Washington Post reported:

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

…administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

The Obama administration is concerned that even in the midst of the housing market’s recovery, many young people and people with bad credit can’t borrow money to buy homes. Yes, this sounds eerily similar to the policies that helped create the housing bubble in the first place. And yes, while ensuring that homes loans are available to all borrowers is a well-intentioned plan to help low-income families, it will likely hurt them.

This is a bad policy idea for at least three reasons:

First, it’s important to note that the administration is only promising to bail out banks, not borrowers. These loans would be going to people who probably don’t qualify for a standard mortgage and may struggle to make their payments. As a result, many of the borrowers are likely to default. If they do, they’d suffer financial losses and damaged credit ratings that could haunt their families for years to come. Meanwhile, if the loans go bad, the bank executives receive bailout checks.

Second, subsidizing things makes them more expensive. In looking at the Obama administration’s previous mortgage programs, Reason’s Anthony Randazzo noted there was “clearly visible bump in the [price of housing] starting in March 2009 when a number of the programs to help housing started to kick in, including low interest rates and the first-time homebuyers credit.” Guaranteeing home loans encourages low-income individuals to take out bigger loans for the same amount of house. This in turn makes their coming defaults even more ruinous than they would have been in an unsubsidized market.

Third, buying a house limits labor mobility, or the ability to pack up and move when you need a new job. Labor mobility is especially important to low-income, low-skill individuals.

What’s wrong with renting? Many low-income or young people would actually be better off with the flexibility that renting brings. Renting gives people a lot more freedom to move from job to job without being tied to a home and mortgage. Financially, renting doesn’t require the upfront costs of many home purchases and if you need to move it is often much easier to get out of a lease than it is to sell a home.

The housing bubble helped cause the last recession; we shouldn’t be rushing to repeat the mistakes that were made.

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New Study Suggests Transportation Priorities for North Carolina

The Hartgen Group and the Reason Foundation have released Transportation Priorities for North Carolina, a report recommending several significant changes to North Carolina’s transportation management process such as setting clear performance measures and using maintenance contracting. The election of both Governor Pat McCrory and new legislators to the North Carolina General Assembly provides a rare opportunity for North Carolina to examine its transportation system. The full report is available here and the executive summary is available here. The analysis considered all transportation modes: highways, aviation, freight and passenger rail, ferry, transit and non-motorized transportation. 

The report reviews prior studies, plans, visions, legislation and other state practices to identify suggestions for transportation improvements. The report also solicited suggestions from stakeholder groups and others familiar with North Carolina’s transportation system. One-hundred fifty seven separate suggestions are analyzed by goal, time frame, mode, cost or savings potential, feasibility and regional equity. 

The suggestions can be grouped into 3 categories. The first includes major changes to the transportation program that can be implemented by increasing maintenance and limiting  expansions to highways of statewide signficance. One major recommendation included in this section is to constrain the State Transportation Improvement Program (STIP) to merit-based project selection and to shift some of the savings to maintenance, major projects and rural safety. Fully implemented, these recommendations could save $50 million annually. 

The second category includes several recommendations to strengthen maintenance management and project selection such as using head to head project evaluation, adding maintenance needs for funding formulas and contracting out maintenance. Fully implemented, these recommendations could cost $30 million but provide substantially improved system maintenance. 

The third category includes 10 smaller recommendations that are intended to strengthen Long-Range Planning and improve communications. These measures should also increase organizational efficiency by making increased use of design-build flexibility and strengthen measures of project and performance delivery. 

I want to highlight five report recommendations. More details on each can be found in the New Approaches section starting on page 41.

1) Public-Private Partnerships (PPP): While North Carolina has enabling PPP legislation, the state has made little use of PPPs. PPPs are not appropriate for all projects; typically PPPs are best for large or very large projects including new toll roads, new toll bridges, adding express toll lanes to congested freeways, major reconstruction of existing highways and major bridge replacements. PPPs have several major advantages including lower-risk funding, more total funding, greater risk transfer, guaranteed maintenance, minimized life-cycle costs, innovations. Additionally, these private partners pay taxes.

2) Tolling: North Carolina depends heavily on per-gallon fuel taxes as its highway funding source. But as the fuel-tax is not a dependable revenue source, the National Surface Transportation Infrastructure Finance Commission recommended that fuel taxes be replaced as the primary funding source. North Carolina does not have the funding to substantially expand or rebuild any of its major freeways. Tolling freeways that need to be substantially rebuilt or expanded is one solution. However, any new tolling needs to be implemented carefully. North Carolina should NOT put a per-mile charge on existing highways but it should consider tolling new highways, new express or HOT lanes, and reconstructing and modernizing existing highways.

3) Priced and Managed Lanes: Traffic congestion is a major problem especially in Charlotte and the Research Triangle areas. Adding Managed Lanes can substantially reduce congestion. Such lanes have the added benefit of improving transit service. There are several different types of Managed Lanes; all allow vanpools and buses to use the lane for free but some allow free access to 2 or 3 person carpools while others require carpools to pay a small toll. Potential candidates for Managed Lanes in North Carolina include I-40 in Raleigh and I-77 and I-85 in Charlotte.

4) Interstate/Freeway Widening: A modernized widened Interstate system has three main benefits. First, it makes commuting quicker and less stressful. Second, it makes logistics and shipping more dependable. Third, easily navigable roads may increase tourism. While North Carolina uses a Level-of-Service D standard for widening highways, funding constraints may force the DOT to hold off on widening. (North Carolina DOT typically widens a highway from 4-6 lanes if it is expected to carry more than 58,400 to 67,900 vehicles per day depending on topography and truck share.) Some potential candidates for widening include I-26 in Asheville, I-40 near Hickory, Winston-Salem, Greensboro and Raleigh, I-77 between exits 4 and 31 and I-85 around Gastonia and between Kannapolis and China Grove.

5) Performance-Based Highway Maintenance Contracting: Many transportation agencies in the United States have contracted some road and highway maintenance. However, outside of highway landscaping the NCDOT has made limited use of such contracting. Current best practices in highway maintenance contracting rely on longer-term, multi-year performance-based road maintenance contracts. The public agency defines an end goal and the contractor decides how best to meet that outcome. Such contracts create clearly defined performance measures and timetables. The Transportation Research Board has praised contracting as a way to reduce agency costs, increase service, change to a customer-oriented focus, shift risks from public agency to private contractors and other benefits.   

More details are available here.

Reason recommends transportation solutions at the state and local level. Other recent state focused reports include: 

Examining 20 Years of U.S. Highway and Bridge Performance Trends

XpressWest Train Likely to Fail, Costing Taxpayers Up to $6.5 Billion

Reducing Traffic Congestion and Increasing Mobility in Chicago

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Latest Articles on Reason Foundation

Air Traffic Control Consolidation Would Save Billions

A new study, just released by the Reason Foundation, estimates that large-scale consolidation of Terminal Radar Approach Control Facilities (TRACONs) and Centers in the continental United States could yield one-time savings of $1.7 billion and ongoing savings of about a billion dollars per year. “Air Traffic Control from Anywhere to Anywhere: The Case for ATC Facility Consolidation,” was researched and written by Michael Harrison, Ira Gershkoff, and Gary Church of Aviation Management Associates. It is available online here.

The study relies on two underlying premises.The first is that the new paradigm of air traffic management, under way via NextGen, makes it possible to control air traffic anywhere in the country from any location, thus severing the link between air traffic control facility location and the geographical boundaries of airspace. Hence, instead of rebuilding the 187 mostly aging and obsolescing Centers and TRACONs, they could be replaced by a much smaller number of new, high-tech facilities in less-costly geographic locations.

The second underlying premise is economies of scale. The project team quantified this using FAA data to calculate the productivity of each of its Centers and TRACONs. New York Center is the most productive, averaging over 9,400 annual operations per controller; Denver Center is least productive, at just over 5,400 operations per controller. A similarly large variation in productivity was found among TRACONs.

The research team then used these data to estimate the potential savings from facility consolidation. For Center staffing they created a regression equation which posits that the number of controllers at a Center equals a constant plus a variable term based on the number of air carrier operations, air taxi operations, general aviation operations, and military operations. Using FAA data for those variables from each of the 20 Centers, the regression equation found that the constant term is 84.6. That means if you have a Center at all, it needs a minimum of 85 people, with the rest determined by the various amounts of traffic handled. A similar equation for TRACONs had a constant term of 8.56, with the rest being variable based on types and amounts of traffic.

Hence when two Centers are combined, the workloads measured by the variable terms (based on traffic) are added together, but you now have only the one constant of 85 baseline people. The authors developed a large-scale consolidation plan to even out workloads among facilities, aiming for higher overall productivity. The plan they came up with replaces the 20 existing Centers with 5 high-altitude en-route facilities and 8 “Integrated Control Facilities” that combine en-route and terminal airspace in the largest metro areas. Smaller TRACONs would be consolidated regionally, ending up with 38 such facilities. Overall then, the plan reduces 187 existing en-route and terminal facilities to 51—just over one-quarter as many.

Because compensation practices call for higher pay in higher-activity facilities, the savings in operating costs are not as great as might be expected, and many controllers would end up with increased compensation. But some, needless to say, would be phased out or transferred to other FAA positions. The authors estimate that consolidation would save $314 million a year due to the lower staffing made possible by combining facilities. In addition, productivity gains due to NextGen technology and procedures might add between $540 and $680 million per year. And with another $109 million in maintenance savings due to fewer buildings, and total annual savings could be in the $1 billion range. (This analysis does not address possible productivity gains with control towers, such as expanding the use of contract services and/or implementing remote towers.)

But the savings don’t stop there. Since a large fraction of the existing 187 Centers and TRACONs are nearing the end of their useful lives, the FAA is rapidly approaching the point at which it must either engage in large-scale rehabilitation of these facilities where they are today or replace them with a smaller number of consolidated facilities. Selling the land, buildings, and equipment associated with facilities recommended for closure would yield $1.7 billion toward the cost of the new facilities, based on analysis of data in two FAA property databases.
The Center consolidation approach outlined here is similar to the initial concept the FAA’s Air Traffic Organization (ATO) developed several years ago, when it began facing up to the need to replace aging facilities and the potential changes NextGen would make possible. Unfortunately, last year the agency changed focus. Instead of developing an overall consolidation plan, with a schedule and cost estimates, it will proceed one project at a time. For now it is focusing all its efforts on an initial Integrated Control Facility for the airspace in the Northeast.

That approach is high-risk since state and national elected officials in the affected areas are already mobilizing to fight the loss of jobs in their jurisdictions. In the view of the Reason study’s authors, a far wiser approach would be to follow the kind of comprehensive approach that has been used several times for large-scale military base closures and consolidations. An overall nationwide plan is drawn up, and Congress has a choice of either accepting it as a whole or rejecting it. This makes the battle one between winners (those gaining new or expanded facilities) and losers, rather than just between potential losers and everyone else who is not affected.

And if that approach seems too difficult for Congress to work out, the report suggests an alternative: separate the ATO from the FAA and from the federal budget process, by making it a self-supporting ANSP. That way, as shown in facility consolidations carried out successfully by such ANSPs in Australia, Canada, Germany, and the U.K., these decisions can be made as business decisions, rather than political decisions. That would allow Congress to avoid a decade or more of fighting over facility consolidations, as well as easing the ATO’s looming budget problems.

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President Obama Shouldn’t View Infrastructure Spending as a Jobs Program

At PortMiami Friday, President Barack Obama proposed ways to include private investment in his "Rebuild America Partnership," which seeks to spend $40 billion in public money repairing roads and bridges.

The president suggested allowing states and local government to issue more bonds for a wider variety of projects, exempting foreign pension funds that invest in infrastructure and real-estate from taxes, giving $4 billion in loans and grants to public-works projects and a National Infrastructure Bank.

On the National Infrastructure Bank, which made another comeback Friday, Reason’s Robert Poole has written

Proponents of a National Infrastructure Bank (NIB) present it as a solution to two major problems: insufficient investment in transportation (and other) infrastructure and poorly targeted (read politicized) infrastructure spending. It is plausible that some version of an infrastructure bank could help address both problems.

Today, America pays for most public sector transportation infrastructure (e.g., highways) out of current cash flow. Shifting to a model that finances that investment would be a way to do a large one-time catch-up, even if there was no significant increase in the ongoing cash flow. But if the investment was in major projects that generated net new revenues (e.g., from tolls or other new user fees), then total investment would increase, in addition to being front-loaded.

Second, if the NIB were set up as a genuine bank, operated on commercial principles, it would fund only projects that met pretty rigorous investment criteria, including well-documented revenues that would repay the bank’s investment. That way the NIB would be a going concern, like state revolving loan funds for infrastructure. As a national entity, the bank should be chartered to concentrate on projects too large to be readily funded by a state department of transportation, projects involving multi-state corridors, etc. So this whole set of factors would target the investments to projects with high ratios of benefits to costs.

These ideas come as part of Obama’s “Rebuild America Partnership,” a program that aims to spend $40 billion in public money repairing roads and bridges, which the president featured in his State of the Union address. President Obama claimed the infrastructure spending would boost the economy and create jobs, although the White House cannot provide an estimate on how many.

However, as a Reason paper, Ensuring Productive Investment in Transportation Infrastructure stated: “Research shows that this kind of ‘job creation’ seldom involves real economic growth; it simply redistributes resources from one use or location to another use or location.” 

More importantly, infrastructure funding should be focused on improving the mobility of people and goods. Road, port and aviation projects should be selected for funding based on how much they’ll improve mobility, not on how many jobs they’ll create. As Poole recently wrote about the president’s “Fix-it-First” plan to repair roads and bridges, all road repairs aren’t created equal and transportation spending needs to increasingly focus on cost-benefit analysis:

…the Federal Highway Administration runs an array of capital investment strategies through its detailed models to identify investments whose benefits exceed their costs. Were fix-it-first a sensible national policy, these models should identify most or all justified highway and bridge investment as “rehabilitation,” rather than as “capacity expansion and enhancement.” But the actual results of this analysis are strikingly different...A national policy of fix-it-first would misallocate resources very significantly, even if there were a federal funding source available for it.

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Photo by Auggie.Wren

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