America debates how investment in
transportation affects the economy
By Tony Favro, USA Editor*

22 January 2013: Highways and private motor vehicles are iconic features of American culture - the open road, the fast lane, the drive-in and drive through, the independent trucker, the soccer mom, the teen’s first car, and so on. The cultural icons are linked to the economic benefits that highways can bring. It takes a job to be able to afford a car, and businesses and jobs seem to follow the highways. Ninety-eight per cent of US mayors point to investment in affordable, reliable surface transportation as an important part of their cities’ economic growth, according to a 2012 survey by the US Conference of Mayors.

• Planning and policymaking
• Transportation and the economy
• Future directions

The US federal government is authorized to spend $105 billion this year on surface transportation projects, mostly roads. This represents 26 per cent of total non-discretionary spending for non-security items. The federal government spends more each year on highways than it does for public education, housing, human services, or scientific research.

Transportation represents the largest, most successful, and most enduring public/private partnership in American history: government provides the roads and people and businesses buy the vehicles from private manufacturers. Transportation is ingrained in American culture and an overall driver of the American economy, yet transportation research in the United States has fundamental gaps. What are the economic impacts of specific highway projects? Who pays and who benefits? How can we best measure performance? What kinds of public-private partnerships are most effective? Often, these questions are not asked at a meaningful scale, or the answer is “we don’t know”, making transportation planning, policymaking, and investment less effective than they could be. These are the findings of recent studies by the Rand Corporation and the Transportation Research Board. The implications are far-reaching, for transportation competes for funding against other infrastructure needs—water, sewers, telecommunications—and wise investments cannot be assured without accurate information.

Even though important questions about the economic benefits of investments in transportation infrastructure remain inadequately answered, the new federal transportation bill sets up a structure for planning that begins to consider these questions.

Planning and policymaking
There is no formal national transportation policy in the United States. The closest relative is an omnibus surface transportation spending bill - Moving Ahead for Progress in the 21st Century, or MAP-21—which President Obama signed into law in July 2012 and which went into effect in October 2012. The bill authorizes federal transportation programs for two years. These programs are the result of a long series of federal legislative actions.

Federal legislation is supplemented by a much more extensive array of state legislation. State and local governments own and operate the public roads in the United States, even interstate highways. The federal government provides grants and loans for building and improving roadways to states, which must follow specified design, safety, and planning standards and procedures to be eligible for those funds. The states then share federal funding with local governments. Since the passage of the first federal highway transportation spending bill in 1956, the federal portion of total spending on roads in the US has consistently ranged from 25-30 per cent.

In the 1960s, the federal government began requiring all urbanized areas of the country with a population of 50,000 or more to create Metropolitan Planning Organizations, or MPOs, to conduct transportation planning at the regional level. States, in association with MPOs, plan and decide where roads should go and how big they should be, and then operate and manage them.

Most federal transportation money is disbursed to the states according to complicated funding formulas. Historically, transportation policymaking has meant creating numerous programs using different formulas to balance competing interests. Not surprisingly, “good” decision making often is defined as prowess in navigating the funding mechanisms rather than adherence to regional transportation plans.

MAP-21 eliminates or consolidates 60 programs into five core programs: highway performance, mobility, safety, congestion management and air quality and freight. The objective is to provide more flexibility to the state governments who own most of the roads and receive most federal funds. It is also a recognition that most regions need a mix of maintenance, public transit and highway investments. States are required to establish specific performance goals, which must support the first-ever national performance goals that are articulated in MAP-21. Similarly, Metropolitan Planning Organizations must set regional targets and estimate the anticipated impact of proposed projects on reaching those targets. The federal and state governments will identify projects of national and regional significance according to a new “national strategic plan”.

MAP-21 streamlines the process for distributing federal transportation funds and aligns investments with goals, yet it is but a first step on a clear path to determining accurately the economic impact of specific transportation projects. Part of one of the federal goals is to “support regional economic development”, which makes data collection and analysis at the local level especially important.

To get a sense of what kind of analysis will be needed, it is helpful to review the relationship between transportation and the economy.

Transportation and the economy
Many costs, especially labor, are directly related to the time it takes to move people and things. When containers are simply lifted off ships and mounted on trucks for transport to their final destinations, for example, consumers nationwide may enjoy lower product prices, but most local dockside labor is eliminated, a tradeoff made particularly evident by the recent dockworkers’ strikes in Los Angeles and Long Beach, California.

Perhaps the biggest impact of diminishing transportation costs and times has been its influence on specialization. As transportation costs diminish, exchange increases, and businesses shift production more exclusively to those products or services in which they enjoy some cost advantage over producers elsewhere. Specialization produces an increasing cornucopia of goods at decreasing real costs. People in particular places develop their particular capacities, refine them, and seek out and exploit the advantages that their respective localities enjoy. Consequently, our breakfast may have consisted of coffee from Kenya, orange juice from Brazil, bacon from Iowa, bread made locally from grain grown in Kansas and marmalade from Canada.
 
But at the same time, the geographic division of labor that emerges in this way also means that people are increasingly dependent on others. Any disruption along the metaphoric pipeline that connects one specialized producer with another - harvest failure, strike, civil unrest, war, new mineral discoveries anywhere in the world, threats to oil supplies, changes in government policies, the condition of firms’ order books, water shortages, and so on - can put economies in other regions and nations at risk.

Reducing the time and cost of transportation alters local, regional, and national economies by expanding the geographies of commodity circulation.  Markets for products are limited only by how many buyers can be accessed from a particular location. Thus, there are pressures to expand the market, and one of the ways of doing that is by buying more distant raw materials and selling to geographically larger markets, possible as long as the transportation cost advantages outweigh expenses. Like other firms, businesses specializing in transportation are subject to the logic of cost-minimization. The firm with the best rates gets the business. Historically, such competition has spurred the development of new, cheaper modes of transportation: the railroad rather than the stagecoach, for example, or the canal compared with the packhorse. And, of course, transportation firms have been keen to obtain the patronage of private consumers, car buyers especially, as well as business clients, often with government help.

The drive to decrease transportation costs goes hand-in-hand with the imperative of reducing travel times. The faster commodities get to their destination, the faster a business gets its money back, and the faster it can expand by investing the proceeds. The faster people can get to work, the farther they can move from their place of work to take advantage of cheaper housing costs. Clearly, there is a tradeoff between the two. Businesses, for example, do not transport coal by cargo jet, and people will balance commuting times and mortgage costs when purchasing a home.

Balancing tradeoffs is what makes unraveling the connection between transportation and the economy difficult to unravel. The Rand Corporation study found a positive and significant relationship between investments in transportation infrastructure and economic outcomes at the national and state levels. The view from 10,000 feet is that transportation infrastructure serves as an input to economic production and also makes other types of inputs more productive. However, at the regional and local levels, according to Rand, highway infrastructure tends to reallocate economic activity and not necessarily increase it. At smaller geographic levels, the net economic effect of a roadway could be positive, zero, or negative. In other words, the spillovers of transportation infrastructure may be quite significant and far-reaching, but experienced differently at various geographic scales. The interstate highway system is an obvious example: clearly a national economic asset, but also a contributor to the depopulation of central cities, the ability of many businesses to be more “footloose” and free to move to other locations, and the heightened competition among regions.

The ability to calculate whether the potential benefits of a transportation infrastructure investment outweigh the costs of making it is at the core of true fiscal responsibility. Going forward, state and regional transportation planners will likely have to incorporate the analytical methods of economic developers and real estate marketers into their transportation planning processes: understanding business and consumer behavior and the adaptability of markets.

Spurred by the implications of the goal-setting mandated by MAP-21, private and academic researchers are moving in this direction. The nonprofit, nonpartisan Urban Institute, for example, recently launched an Infrastructure Initiative to develop tools for analyzing the risks and rewards of alternative investments, the effectiveness of private/public partnerships, and the validity and reliability of performance measurements.  

Future directions
It is common wisdom among policymakers in the United States that roadways generate prosperity for people and businesses. “Building and modernizing our surface transportation network creates jobs and acts as a tailwind for economic growth,” said Connecticut Governor Daniel Malloy in a prepared statement supporting the new federal transportation bill. Unsurprisingly, people have strong opinions about the best locations for transportation investments. Atlanta Mayor Kasim Reed, for instance, promotes a regional strategy. “The long-term productivity of transportation infrastructure spending is greater when it is invested where economic growth will occur, which is in the metropolitan areas,” asserts Reed. But the impacts of transportation spending may be spread unevenly within the same metro area. Former Milwaukee, Wisconsin, Mayor John Norquist called a regional freeway in his city a “blighting influence” and replaced portions of it with a boulevard, a process replicated in other American communities, such as the small suburban town of Irondequoit, New York.

The economic effects of transportation investments look different from different perspectives. Developing transportation investment policies that support positive economic outcomes at all levels can be expected to become central to transportation planning activities in the United States in coming years.

Selected References:
• H. Shatz, K. Kitchens, S. Rosenbloom, M. Wachs, Highway Infrastructure and the Economy: Implications for Federal Policy, Rand Corporation, 2011.
• S. Fitzroy, G. Weisbrod, Interactions Between Transportation Capacity, Economic Systems, and Land Use, Transportation Research Board, 2012.