Real Clear Markets

Highway Construction As Stimulus? Not So Fast

Why more stimulus spending won't keep the American economy out of recession

President Obama is sending strong signals that he wants more stimulus spending to keep the American economy out of recession, even if the White House is not saying it explicitly. The president's "the private sector is fine" moment clearly emphasized a perceived need for state, local, and federal governments to increase spending to pick up the slack in an anemic economy.That means more stimulus money for public works projects like building new firehouses, hiring more cops, and reviving the idea for an infrastructure bank. But let's look at some hard sobering facts before we jump on the public spending bandwagon.

Transportation infrastructure is a case on point. The Interstate Highway System is justly lauded as one of the greatest engineering and political achievements of the 20th century. President Obama regularly invokes the nearly three-decade initiative when talking about public works projects that could get the economy back on track. Unfortunately, the simplified story about the Highway System misses the fact that billions of dollars were likely wasted because we built a system too large to serve its core purposes, and we failed to ensure the investments were in the right place at the right time.

As it is, the Interstate Highway System was wildly over budget. The U.S. Department of Transportation reports that initial estimates put total construction costs at about $27 billion. By the time the system was completed in the 1980s, the federal government had spent more than $114 billion and the total cost accumulated to $129 billion.

Changing design standards, environmental review, and inflation all contributed to escalating costs, but another critical factor was also in play: No incentives existed to prevent overbuilding. This overbuilding may have resulted in tens of billions of dollars in excess federal and state government spending even though many economists suggest that the economic benefits of the system outweighed the costs of its construction. After all, the result of the project was a 46,876 mile long system that knitted together all major U.S. metropolitan areas, and economists have shown that the interstate system was a boon to business as intercity trucking became more efficient and less costly and urban congestion fell dramatically.

Nevertheless, billions of dollars were likely wasted because the users - commercial truckers as well as passenger cars - were never required to directly consider the costs and benefits of using these roads with a true user fee such as a toll. In the 1950s, Congress decided to eschew tolls altogether, opting instead for the politically expedient and administratively efficient (at the time) gas tax. The end result was a system where many roads were built to nowhere, or at the wrong time, and transportation subsidies became endemic. A price sensitive private sector, in contrast, might have otherwise built roads elsewhere and for even more productive purposes.

It is this reality of overbuilding that should sober ideas about infrastructure spending "paying for itself" or "filling a need," particularly in an advanced and mature economy such as the one within th United States. Certain parts of the Highway System certainly showed positive economic gains, but many other segments were unnecessary - or at least not necessary at the time the government built them. While spending federal dollars on road development is not the only arrow in the quiver of the pro-stimulus argument, a more sophisticated look at our experience with the Interstate Highway System at least suggests that Washington should be careful about simply dropping billions more dollars on the economy without considering the potential inefficiencies they create.

A critique of this argument might be that we're just knit picking on price. However, new research out of China of all places suggests that the waste may well have amounted to more than 20 percent of the total cost.

China is a particularly intriguing case study because its economy is going through many of the same challenges, fits, and starts as the U.S. economy in the early and mid-twentieth century. Roads, rails, bridges, ports, and airports have emerged as critical infrastructure for nurturing a burgeoning manufacturing economy, and facilitating national mobility.

China, however, didn't have the economic tax base to support a sprawling national highway system. While provinces were responsible for building the roads and expressways, they couldn't levy taxes to finance them. So, they relied on private capital to build their expressways and later established government-controlled toll authorities to fund many more.

The model worked reasonably well except that the primary purpose was to collect money to pay off the debt, not optimize the efficiency of the highway network. Tollroads were established based on whether the agencies could float bonds to finance them, not economic analysis of travel demand and willingness to pay.

The result? Expressway overbuilding.

Economists at the Institute for Regional and Transportation Economy at Chang'an University studied highway investments and toll rates in four provinces - Jiangsu, Hebei, Shaanxi, Jilin - and found that the expressways were overbuilt by about 20 percent. They concluded that road pricing that takes into account travel demand as well as the debt incurred to build the highways would substantially reduce the size of the highway network. In short, by making the true costs of building highways transparent to users through properly calibrated tolls, the expressway network would have been smaller and less expensive.

The implications for U.S. transportation policy and highway finance are important, particularly given the current gridlock over long-term transportation spending in Congress and the intransigence of some Congressman toward public private partnerships.

If China managed to overbuild its tolled expressways by 20 percent, the inefficiencies and overbuilding in the unpriced U.S. highway system are likely much larger. At the very least, this makes a strong case for expanding the scope of private involvement in American highways. And it should provide a non-ideological pushback on the idea that stimulus spending on infrastructure is a good idea.

Samuel R. Staley, Ph.D., is a senior research fellow at Reason Foundation, and Managing Director at the DeVoe L. Moore Center at Florida State University where he teaches urban economics, land use, and urban planning.