BERKELEY – In the United States today, with partisan polarization at record levels, there is still at least one policy goal on which there is broad consensus, not only among Republicans and Democrats, but also among business and labor leaders, states and cities, and ordinary citizens: infrastructure.
The US has been short-changing infrastructure for years. Historically, federal, state, and local governments have together invested about 2.5% of GDP in non-defense infrastructure assets. But, over the last 35 years, federal investment as a share of GDP has dropped by more than half.
For a long time, state and local governments were able to cover the shortfall, increasing their contribution to three quarters of total spending. But when the Great Recession hit, states and cities were forced to slash their budgets. As a result, in the second quarter of this year, total public expenditure on infrastructure fell to an estimated 1.4% of GDP, the lowest share on record.
This is all the more worrying, given the already-poor state of US infrastructure, which earned a grade of D+ from the American Society of Civil Engineers in its 2017 quadrennial report. Almost 20% of US highways are in disrepair. The costs and consequences of deferred maintenance are apparent everywhere, and almost every city and state has its horror stories: dysfunctional subways in New York City, lead-contaminated drinking water in Flint, Michigan, the near-collapse of a major dam in Oroville, California.
The report estimates that restoring US infrastructure to “a state of good repair” would cost $4.6 trillion between 2016 and 2025. That is $2.1 trillion more than has been committed so far. Developing new funding sources for infrastructure investment is therefore critical.
An innovative strategy under discussion in Washington, DC, is linked to corporate-tax reform – a priority for President Donald Trump and congressional Republicans. Under the current tax system, US multinationals can defer tax payments on their foreign earnings until the earnings are repatriated. With foreign earnings growing and foreign corporate-tax rates falling, deferral has become increasingly attractive. As a result, US companies are holding an estimated $2.6 trillion in foreign earnings abroad, rather than repatriating it and paying taxes that could be used to finance, say, domestic infrastructure investment.
Since 2013, the US Congress has floated several reform proposals to increase revenues collected on the stock of foreign earnings. Two recent bipartisan bills – which seem to have the support of Speaker of the House Paul Ryan, among others – link such reforms directly to federal infrastructure funding.
But Trump seems eager for state and local governments, which are in the strongest position to assess the needs of their communities, to shoulder much of the burden. Federal funding, he has signaled, would be limited to “high priority,” “transformative” national projects and used as leverage to encourage public-private partnerships (PPPs).
Private investors have long been eager to invest in public infrastructure – such as transportation or energy – in exchange for a share of those projects’ future revenues. Of course, private investors are generally not interested in projects that don’t generate revenue – such as, say, school libraries, urban “greenways,” or low-income housing – despite the importance of those projects for the economy and society.
In some areas, however, PPPs can offer substantial value. Though private finance may be more expensive than tax-advantaged public finance, over a project’s entire life, a PPP can benefit its government partner in numerous ways: through innovation; reduced design, construction, and lifetime maintenance costs; and risk mitigation.
To date, PPPs have played only a minor role in infrastructure development in the US. Trump seems convinced that the problem is a lack of available private capital, and thus has proposed a tax plan that includes generous credits to encourage private investment in infrastructure.
That is the wrong approach. What is really limiting private infrastructure investment is, to some extent, public opposition to the private ownership of public assets and, mainly, impediments to matching private capital with infrastructure opportunities. While 37 states have some form of enabling legislation and regulatory framework for infrastructure PPPs, there are wide disparities among states. Moreover, many states and localities lack the capacity to evaluate the costs and benefits of PPPs – a problem that President Barack Obama proposed solving with a new federal PPP knowledge center.
Ultimately, restoring America’s failing infrastructure will require what we call “progressive federalism”: harnessing the strengths of each level of government and working with the private sector to address pressing social and economic challenges.
The federal government must promote national-level goals; impose tough criteria for project selection and rigorous performance metrics in construction and maintenance; and push state and local governments to eliminate bureaucratic red tape and costly internecine squabbles. From a financial perspective, it should provide adequate funding for projects of national and regional significance, and use its financial leverage to overcome obstacles and enforce best practices.
State governors and city mayors, for their part, must take the lead in setting state and local priorities, with each deciding whether to opt into national projects. And private investors can provide risk capital, innovation, and management expertise, both as contractors on publicly funded projects and as partners in revenue-generating projects.
To support such a process, we urge Congress to establish a “Commission on Twenty-First-Century Infrastructure,” co-chaired by teams from the National Governors Association (perhaps led by Republican Governor John Kasich of Ohio) and the Conference of Mayors (perhaps led by Democratic Mayor Eric Garcetti of Los Angeles). The Commission should include business leaders and cabinet-level representatives of the Trump administration, like Secretary of Transportation Elaine Chao and National Economic Council Director Gary Cohn.
At a time when Americans seem to agree on little else, almost everyone agrees that it is time to rebuild the country’s infrastructure. The task now is to turn consensus into action.
Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, and a senior adviser at the Rock Creek Group. Lenny Mendonca, Senior Fellow at the Presidio Institute, is a former director of McKinsey & Company.
By Laura Tyson and Lenny Mendonca