DISCUSSION PAPER 2011-03 | FEBRUARY 2011 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Matthew E. Kahn and David M. Levinson MISSION STATEMENT The Hamilton Project seeks to advance America’s promise of opportunity, prosperity, and growth. The Project’s economic strategy reflects a judgment that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments. We believe that today’s increasingly competitive global economy requires public policy ideas commensurate with the challenges of the 21st century. Our strategy calls for combining increased public investments in key growth-enhancing areas, a secure social safety net, and fiscal discipline. In that framework, the Project puts forward innovative proposals from leading economic thinkers — based on credible evidence and experience, not ideology or doctrine — to introduce new and effective policy options into the national debate. The Project is named after Alexander Hamilton, the nation’s first treasury secretary, who laid the foundation for the modern American economy. Consistent with the guiding principles of the Project, Hamilton stood for sound fiscal policy, believed that broad-based opportunity for advancement would drive American economic growth, and recognized that “prudent aids and encouragements on the part of government” are necessary to enhance and guide market forces. Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Matthew E. Kahn University of California at Los Angeles David M. Levinson University of Minnesota FEBRUARY 2011 NOTE: This discussion paper is a proposal from the authors. As emphasized in The Hamilton Project’s original strategy paper, the Project was designed in part to provide a forum for leading thinkers across the nation to put forward innovative and potentially important economic policy ideas that share the Project’s broad goals of promoting economic growth, broad-based participation in growth, and economic security. The authors are invited to express their own ideas in discussion papers, whether or not the Project’s staff or advisory council agrees with the specific proposals. This discussion paper is offered in that spirit. The Hamilton Project • Brookings 1 Abstract The roads and bridges that make up our nation’s highway infrastructure are in disrepair as a result of insufficient maintenance—a maintenance deficit that increases travel times, damages vehicles, and can lead to accidents that cause injuries or even fatalities. This deficit is in part due to a prioritization of new projects over care for existing infrastructure and contributes to a higher-cost, lower-return system of investment. This paper proposes a reorganization of our national highway infrastructure priorities to “Fix It First, Expand It Second, and Reward It Third.” First, all revenues from the existing federal gasoline tax would be devoted to repair, maintain, rehabilitate, reconstruct, and enhance existing roads and bridges on the National Highway System. Second, funding for states to build new and expand existing roads would come from a newly created Federal Highway Bank, which would require benefit-cost analysis to demonstrate the efficacy of a new build. Third, new and expanded transportation infrastructure that meets or exceeds projected benefits would receive an interest rate subsidy from a Highway Performance Fund to be financed by net revenues from the Federal Highway Bank. 2 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Table of Contents ABSTRACT 2 INTRODUCTION 5 CHAPTER 1: FIX IT FIRST: NEW PRIORITIES FOR THE HIGHWAY TRUST FUND 8 CHAPTER 2: EXPAND IT SECOND: INTRODUCING THE FEDERAL HIGHWAY BANK 16 CHAPTER 3: REWARD IT THIRD: PERFORMANCE STANDARDS AND INTEREST RATE SUBSIDIES 19 CHAPTER 4: PROJECTING BENEFITS AND COSTS 21 QUESTIONS AND CONCERNS 23 CONCLUSION 26 APPENDIX 1: METRICS FOR JUDGING EXISTING ROAD INFRASTRUCTURE QUALITY 27 AUTHORS AND ACKNOWLEDGMENTS 29 ENDNOTES 30 REFERENCES 31 The Hamilton Project • Brookings 3 4 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Introduction ore than five decades ago, the federal government To continue to enjoy the level of network performance that built an excellent interstate highway network that we often take for granted, maintenance, repair, rehabilitation, connects all large metropolitan areas, ports, and reconstruction and enhancement of this existing system is Mairports within the contiguous United States. This network that urgently needed. Based on previous studies, we estimate that connects places is foremost a network that connects people: it an annual expenditure of $145 billion is needed to maintain allows people (and firms) to interact, creating opportunities highways and bridges at current performance levels.1 Other for trade and economic activity. Places that have the greatest studies have much higher estimates, up to $194 billion.2 accessibility, that enable more people to interact in less time, produce the greatest wealth (Glaeser 1998). Workers face less In addition to the threat of losing the benefits we have from risk of unemployment in cities where they can easily commute previous investments because of lack of maintenance, we are to many possible employment centers. These economies of getting less value from our system because we are using it agglomeration drive the formation of cities and regions, and inefficiently. Time is our scarcest asset. In cities, though, the require transportation of all kinds: passenger and freight; high population density that facilitates the economic benefits local and intercity; highway and transit; and rail, air, and of living and working in close proximity also imposes costly water. Transportation infrastructure is crucial for facilitating delays from congestion. trade within, between, and across states. In addition, this According to the 2010 Texas Transportation Institute (TTI) infrastructure is a crucial determinant of quality-of-life issues, Urban Mobility Report, in 1982 each commuter lost 14.4 including the length of our commutes, the quality of our air, hours in congestion, while in 2009 each commuter lost 34 and the livability of our neighborhoods. hours (or 4.8 billion hours lost in traffic nationwide) (TTI 2010, Exhibit 2, National Congestion Measures, 1982 to Unfortunately, we fail to realize the full benefit of our system 2009). For the five most congested metropolitan areas for auto of infrastructure and risk losing what we have because we are commuters (Chicago, Houston, Los Angeles, San Francisco not investing enough to maintain aging bridges and highways and Washington, DC) the annual monetary cost of time and because we do not use the system as efficiently as we lost per commuter varied between $1,110 and $1,738. Recent could. The existing transportation network represents long- total congestion costs for urban areas are approximately $120 lived capital: highways, bridges, and tunnels last for decades. billion a year (TTI 2010). At least as important as recurring Moreover, much of our existing highway network was built (and predictable) delay, is the unreliability of travel times, many years ago. For example, the average age of a bridge on the which leads travelers to leave early to guarantee being on time. U.S. Interstate Highway system is more than forty-five years old; most bridges were designed for a lifespan of forty to fifty The fundamental causes of these problems—underinvestment years. Over time, infrastructure deteriorates. Most of the time in existing infrastructure and the inefficient use of this deterioration is unheeded, but salient disasters remind us infrastructure that contributes to congestion—are misaligned of the importance of updating aging infrastructure. The fatal incentives in our process for investing in infrastructure and a collapse of the I-35W Mississippi River Bridge in Minneapolis mispricing of use. brought needed attention to the question of the state of repair of America’s bridges. Roads have similar, though not nearly Our system of federal grants matched to state funds puts as dramatic, issues: poor roads impose wear and tear costs on no value on benefit-cost analysis. As a result, new, often vehicles, can lead to accidents, and require further costs in inefficient, infrastructure investments are preferred by packaging to avoid damaged freight. policymakers at the expense of more mundane repair and maintenance of existing infrastructure that may have higher The Hamilton Project • Brookings 5 returns. There is an odd juxtaposition with respect to our • Fix It First. All revenues from the existing federal gasoline investments in improving existing transport infrastructure tax would be redirected away from new construction and versus building new highways. Many of the transportation instead used primarily to repair, maintain, rehabilitate, infrastructure projects in the news have nothing to do with reconstruct, and enhance existing roads and bridges. maintenance and repair. Earmarks such as the proposed (and ultimately canceled) Gravina Island Bridge in Alaska (the • Expand It Second. Funding for states to build new and infamous “Bridge to Nowhere”), while a small share of the expand existing roads would come from a newly created federal transportation budget, garner outsized attention. At Federal