Macro Roundup

"...A different way to evaluate the adequacy of infrastructure is to look at the value of all public capital in place, adjusted for depreciation. That so-called capital stock has trended down as a share of GDP in most big countries, and particularly so in the U.S., according to the International Monetary Fund. That suggests annual capital spending is not keeping up with economic growth and normal wear and tear....Yet measuring the impact of public capital is no easy matter. The CBO believes that, on average, the return on federal investment is only about half that of private investment. Partly, that’s because some public works have purposes other than raising economic output: monuments boost national pride, medical research improves the quality of life and bike paths reduce pollution. But it’s also because some federal investments are poorly targeted, and in some cases reduce private, state or local investment...."

Write to Greg Ip at greg.ip@wsj.com

So for the foreseeable future, the U.S. will have to get by with constrained infrastructure budgets, badly targeted.

Both Republicans and Democrats have backed various infrastructure-bank proposals since 2007, but they haven’t gone anywhere. That’s because lawmakers’ political priority is to shore up the Highway Trust Fund, which is running out of money and about to expire unless reauthorized by Congress.

In the U.S., the equivalent idea is a “national infrastructure bank.” The federal government would seed the bank with capital, with which it would then extend loans or loan guarantees to state, local and private borrowers. A professional staff would choose projects based on economic and technical merits, the contribution to national and regional growth, job creation and environmental benefit.

There are ways around such constraints. In 2010, Britain drew up a national infrastructure plan that prioritizes projects that maximize economic value, for example because they complement a regional transport network or better utilize an existing asset. Canada has set up a government corporation to evaluate and fund “public-private partnerships.”

But no such system exists. The existing system tends to favor new projects even when a maturing economy with denser cities would favor rehabilitating existing infrastructure or using it more efficiently, such as with electronic tolls, congestion pricing and even apps that find free parking spots.

The ideal approach to federal investment would be to rank all possible projects by their return, both monetary, such as user fees, and nonmonetary, such as less time spent in traffic. Those with the highest return get funded first.

Yet measuring the impact of public capital is no easy matter. The CBO believes that, on average, the return on federal investment is only about half that of private investment. Partly, that’s because some public works have purposes other than raising economic output: monuments boost national pride, medical research improves the quality of life and bike paths reduce pollution. But it’s also because some federal investments are poorly targeted, and in some cases reduce private, state or local investment.

But that comes with a caveat: the investment has to be efficient.

Federal investment has been squeezed from all sides: caps on discretionary spending, competition from costly social-benefit programs, and reluctance to raise gasoline or other taxes. That leaves borrowing. With interest rates so low, the IMF thinks debt-financed investment could virtually pay for itself by boosting demand in the short run and productivity in the long run.

A different way to evaluate the adequacy of infrastructure is to look at the value of all public capital in place, adjusted for depreciation. That so-called capital stock has trended down as a share of GDP in most big countries, and particularly so in the U.S., according to the International Monetary Fund. That suggests annual capital spending is not keeping up with economic growth and normal wear and tear.

This doesn’t automatically indicate underfunding, since the country’s needs change over time. The Interstate highway system, for example, only needs to be built once.

On a number of criteria, infrastructure spending has slipped. State, local and federal investment in transportation and water infrastructure has gradually declined from close to 3% of GDP in the early 1960s to 2.4% in 2014, according to the Congressional Budget Office.

Such arbitrary constraints are endemic. Investment in Amtrak’s profitable Northeast Corridor line is compromised by the railway’s congressional mandate to also operate money-losing long-distance routes. New York’s LaGuardia and John F. Kennedy airports, despised by travelers as outdated, inconvenient and unpleasant, are profitable enough to have justified an overhaul years ago. But their owner, the Port Authority of New York and New Jersey, had to plow $8 billion into rebuilding the World Trade Center site.

The Hamilton Project, a think tank, notes that federal spending per 1,000 miles traveled per vehicle varies from $12 in Georgia to $98 in Alaska. A similar number of miles were driven in Tennessee and New Jersey, but Tennessee received 42% more federal funding.

For example, the federal government sends money to the states for highways based on a formula linked to the gasoline tax each state contributes to the Highway Trust Fund, which is not necessarily correlated with what roads get used most.

“Outside of a few very small new programs, it is nobody’s job in Washington to figure out which roads or bridges we should invest in,” says Aaron Klein of the Bipartisan Policy Center, a think tank. “It is a decentralized structure where state and local authorities are highly empowered.”

Federal infrastructure investment is not directed to the projects with the biggest payoff in productivity, safety or environmental protection. Inadequate funding, badly targeted, is a recipe for undermining the country’s long-term economic potential. Bridges raise productivity; bridges to nowhere don’t.

Lost in the debate over the quantity of federal investment, however, is an equally pressing problem: the quality of such spending.

Amtrak’s deadly derailment last week has again re-awakened concerns that the U.S. spends too little on highways, railroads and other public infrastructure.

Updated May 20, 2015 5:55 p.m. ET

By Greg Ip

Federal investment on infrastructure projects is poorly targeted to where it boosts productivity the most

Quality, Not Just Quantity, of Infrastructure Needs Attention

Ip, Greg, "Quality, Not Just Quantity, of Infrastructure Needs Attention,"The Wall Street Journal, May 20, 2015. Available at:http://www.wsj.com/articles/quality-not-just-quantity-of-infrastructure-needs-attention-1432138724

"...The researchers, led by Jae Song of the Social Security Administration had access to confidential Social Security earnings data, including companies' tax identification numbers. They were thus able to look at all earnings (not just those capped at some threshold) and they were able to examine whole firms rather than just establishments (with the difference being that a company may have multiple locations). What did they find?From 1978 to 2012, effectively all of the increase in wage inequality nationally has been due to increasing disparities from company to company. As the researchers note, “the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population.” The researchers also found, by the way, that the male-female wage gap within companies has shrunk noticeably...." Orszag, Peter, "What's Really Driving Income Inequality,"Bloomberg, May 26, 2015. Available at:http://www.bloombergview.com/articles/2015-05-26/what-s-really-driving-income-inequalityWhat's Really Driving Income Inequality May 26, 2015 11:27 AM EDT By Peter R. Orszag The most important recent research on income inequality is not, as news reports might suggest, Thomas Piketty's famous book. It is Research out this week from a team of economists explaining the role that companies play in wage differences. The popular conception that increasing inequality is explained mostly by widening gaps between top earners and lower earners within each company is, to put it gently, wrong. It's not that your manager is increasingly earning a lot more than you are; it’s that companies are becoming ever less similar to one another. Consider Apple and McDonald’s. The Piketty perspective is that inequality rises because the top executives at both companies get much bigger raises than the rank-and-file. But the other possibility is that the average pay at Apple rises a lot relative to the average pay at McDonald’s, even as the wage gaps within each firm stay about the same. That’s a different story, and it appears to be a more accurate one, as the Research confirms -- with the most definitive data so far. The researchers, led by Jae Song of the Social Security Administration had access to confidential Social Security earnings data, including companies' tax identification numbers. They were thus able to look at all earnings (not just those capped at some threshold) and they were able to examine whole firms rather than just establishments (with the difference being that a company may have multiple locations). What did they find? From 1978 to 2012, effectively all of the increase in wage inequality nationally has been due to increasing disparities from company to company. As the researchers note, “the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population.” The researchers also found, by the way, that the male-female wage gap within companies has shrunk noticeably. If we want to understand trends in inequality, we have to ask why some companies are outpacing others.