A U.S. National Infrastructure Bank And Long Term Economic Sustainablility

Today’s fiscally constrained environment demands a new approach to infrastructure policy, allowing us to upgrade our existing infrastructure, expand choices in moving people and goods (and ideas), ease the burden on household budgets, and help us attain energy independence.

Spending must produce real gains in productivity, inclusion, and environmental sustainability—the foundation of short- and long-term prosperity.

In this time of limited resources, improving the federal investment process should be prioritized over finding ways to merely increase the amount infrastructure spending.

This brief examines the current federal investment process and the extent to which a federal capital budget or a national infrastructure bank (NIB) would improve it. It finds that creating a federal capital budget would provide little improvement for the federal decision making process on infrastructure financing.

However, while the more modest NIB is no silver bullet, if appropriately designed and with sufficient political autonomy, it could improve both the efficiency and effectiveness of future federal infrastructure projects of national significance.

From time to time, collapsed bridges, failed dams, and ruptured water pipes remind us of the need for increased investment in the maintenance of U.S. infrastructure. Overall, we know that infrastructure quality is generally declining, especially in metropolitan areas. And many are concerned that our extant infrastructure is woefully obsolete, geared more toward prior generations than for the challenges of the 21st century.

This is especially true for surface transportation (roads, rails, transit), where two national commissions, major congressional committees, and numerous interested parties have maintained a steady drumbeat for greater federal engagement—mostly through increased spending. Today, with U.S. unemployment at 10 percent, calls for increased funding, this time in order to create and retain jobs, have
only gotten louder.

However, while most of the attention has been on increasing funding for infrastructure projects, there are also renewed pleas for ways to improve the federal government’s investment process. In this context, two ideas that have come up over the years are the creation of a federal capital budget and a new federal entity for funding and financing infrastructure projects of national or metropolitan
significance.

In its most basic form, a federal capital budget would separate federal expenditures into outlays for current operations and capital expenses. In this way, the federal government could separately finance and manage capital investment according to its long-term nature. Plus, the public would be able to see exactly how much the federal government is investing in the long-term growth of the national
economy.

For more than half a century, a federal capital budget has been proposed as a solution to the woes of the federal investment process. While bold and transformative, the idea is opposed by the budgeting community and has difficulty mustering political support from Congress or the administration.

A national infrastructure bank (NIB) is a more modest yet still potentially important reform for new federal investment. While it may take different forms, it generally refers to an entity able to select and finance multi-modal, multi-jurisdictional, and multi-sectoral infrastructure projects on a merit basis. This paper examines the major questions surrounding the federal investment process and the extent
to which a federal capital budget or a national infrastructure bank would improve it.

In the end our analysis shows that the federal capital budget would provide little improvement for the federal decision-making process on infrastructure financing. While an NIB is not a panacea, if appropriately designed and with sufficient political autonomy, it could improve both the efficiency and effectiveness of future federal infrastructure projects of national significance.

Background: How Does the Federal Government Budget forInfrastructure Today?

Budgeting terms and definitions can be rather arcane and ambiguous. Nevertheless, they are critical for any discussion of federal spending. The Office of Management and Budget’s (OMB) annual analysis of the federal budget has included a chapter on “federal investment” for almost sixty years. OMB defines federal investment as federal outlays that produce long-term benefits to the national economy. The spending is split into three major categories: major public physical capital investment, investment in research and development, and investment in education and training.

In each of these categories, the analysis differentiates between defense and non-defense spending and between direct federal spending and grants to state and local governments. The analysis shows actual values for the previous fiscal year and estimates for the current and following fiscal years.

It is important to note that the categorization of federal investment from current spending is a matter of discretionary judgment. In fact, it is a political choice, depending on the priorities of different administrations. The Reagan administration equated federal investment with defense expenditures. The first Bush administration included non-defense expenditures on R&D, infrastructure, child immunization, drugs, the environment and energy, and programs aimed at preserving America’s heritage (such as those for the arts, humanities, and museums).

Even prior to the recent federal spending as part of the American Recovery and Reinvestment Act, federal investment has been growing for the last ten years (despite registering a small decline in 2007). Defense investment has grown almost 7 percent annually over the same period, double the rate of the non-defense category. In addition, non-defense investment has been declining in the last two years, with a 9 percent reduction between fiscal years 2006 and 2007.

However, as a share of gross domestic product (GDP), federal investment has been on a general downward trend since 1962 and has stagnated at 3.2 percent since fiscal year 2003, partly due to the expansion of mandatory programs such as Medicare and Social Security. Over the last thirty years, defense investment represented a greater share than non-defense investment between fiscal years 1983 to 1992. However, the difference between non-defense and defense investment has narrowed tremendously over the last two years.

It is also important to discuss the difference between discretionary and mandatory spending as articulated by the Budget Enforcement Act (BEA) of 1990.

Mandatory spending is that part of the federal ledger set in authorizing laws and not open to yearly modification. Overall, about 60 percent of annual federal spending is mandatory spending currently ($1.85 trillion in 2008) mostly in the form of social expenditures such as Medicare and Social Security. The net interest of the federal debt is also included in mandatory spending.

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Topics: economic development, economic growth, economic sustainability, Economy, energy independence, environmental sustainability, federal capital budget, Governance, household budgets, inclusion, infrastructure, infrastructure policy, national infrastructure bank, NIB, political autonomy, politics, productivity, U.S., United States

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