Bread and Circuses

Photo from geograph.org

A few years ago, I took exception to an article in an Infrastructure Cult publication that, essentially, called Americans cheap and selfish for being unwilling to throw more money at our current system of transportation. From that article:

"As long as the commode works when you flush it, people aren't worried about spending money on infrastructure," says Bill Fendley, P.E., F.NSPE, who chairs NSPE's Legislative and Government Affairs committee.

"It's just not visible," he continues. "We're spoiled in this country. You're used to being able to turn on the faucet and getting water, getting on the road and going and not having to worry about congestion, potholes, et cetera. It's just people assume…that all that should come naturally.

I have a deep disgust for these people and the self-serving echo chamber they live in. One of the principles we have here at Strong Towns is that a transportation system is a means to creating prosperity, not an end unto itself. When I hear members of the Infrastructure Cult promoting more transportation spending regardless of any other criteria -- actual need, return on investment, skin in the game, etc... -- I hear the soft corruption of a profession in decline.

I'm a licensed professional engineer. This saddens me.

In my book, A World Class Transportation System, I outline seven operating principles for a new transportation funding paradigm. They are:

1. A financial mechanism that balances supply and demand is an essential component of any transportation funding approach.
2. Risk belongs primarily in the private sector. We should not gamble with communal resources.
3. Where public investments are made, they must follow, and be proportionate to, productive private investments.
4. Communal wealth must not be appropriated for individual gain.
5. The more complex and nuanced the impact of a transportation project, the more localized the funding mechanisms and design decisions must be.
6. Where communal funds are used to fund transportation investments, there must be intensive and ongoing accounting to monitor the financial return-on-investment.
7. In the absence of sufficient communal revenue to meet all communal obligations, priority must be given to transportation projects that provide the greatest economic benefit.

The bi-partisan approach to transportation funding that Congress and the President have approved over the past two years is a stark contrast to these principles, but it is wholly consistent with the Infrastructure Cult belief that more is better, regardless of how it is paid for.

Pension Smoothing

American companies made huge pension promises to workers in decades past as a way to avoid salary increases. This tradeoff -- less today for more tomorrow -- seemed like a good deal in an era of optimism over continual growth, but economic realities have resulted in a corporate pension deficit as of last August of nearly $470 billion (20% unfunded).

Photo by Kimberlee Hewitt

Of course, those pensions are insured by a federal insurance fund called the Pension Benefit Guaranty Corporation. Much like Fannie Mae and Freddie Mac -- the federal mortgage brokers -- the PBGC is not officially backed by the federal government and thus (unlike Fannie and Freddie) are not supposed to be bailed out by taxpayers. This is a good thing since the PBGC ran a $64 billion deficit in 2014 and, just this month, the head of the Laborers' International Union of North America said it is "doomed". 

What does this have to do with transportation funding?

What would you say to an approach that allowed corporations to underfund their pension obligations, thus increasing their profits? These increased profits would then be taxed and that tax revenue could be used to fund highways, transit systems and local trails. Who would come up with and, more importantly, who would possibly approve of such an idea?

Well, if you were a member of Congress or the President, you would. From the August 14, 2014 edition of the Wall Street Journal:

A government accounting maneuver to pay for road repairs, subways and buses will allow many U.S. businesses to delay billions of dollars in pension contributions for retirees.

President Barack Obama on Friday signed a $10.8 billion transportation bill that extends a "pension-smoothing" provision for another 10 months. In short: companies can delay making mandatory pension contributions, but because those payments are tax-deductible some businesses will pay slightly higher tax bills, which will help pay for the legislation.

Bank Reserves

Pension smoothing set a pretty low bar. The five year transportation bill approved December 1 of last year may have cleared it, although not by much.

Back when the Federal Reserve system was created over a hundred years ago, the Fed needed money to have on reserve. The enabling legislation required member banks to keep a percent of their reserves at the Fed. To entice banks to join the system, the Fed paid interest on these reserves. For banks, instead of keeping money in reserve where they would earn nothing, the Fed was providing them with what amounted to a risk free profit on those funds. I believe all banks -- with maybe a few odd exceptions -- are part of the Federal Reserve System.

The great thing about this for banks is that, especially today with very low interest rates, the Fed rate is pretty high. If you are like me and are getting 0.4% interest on your savings account, knowing that member banks are getting 6.5% risk free returns on that money might make you a little cranky.

The new highway bill will lower -- for now -- the rate of interest paid to that of the 10-year treasury yield (currently 2%) with the balance going to fund transportation. 

Of course, if interest rates on the 10-year should happen to rise above 6.5%, there won't be any balance to fund transportation but, then again, if this were to happen, the larger problem of paying 6.5% interest on the $18 trillion national debt would pretty much dwarf every other fiscal problem.

Fed Reserves

Remember all those toxic mortgages the Fed bought? And corporate debt? Junk bonds? European debt? All of that stuff pays dividends each year and, since the Federal Reserve does not mark-to-market and can theoretically pretend forever that non-performing assets will someday pay out (they are in for the long game), the Fed actually makes a paper profit each year.

Add this to the capital that banks provide the Fed (see above), and the Fed has money sloshing around. By what was essentially a handshake agreement, profits above capital requirements are transferred to the US Treasury on a weekly basis.

Now it's not like the Federal Reserve has been doing anything super risky with its capital (it has) and that it might therefore benefit from having more reserves than in normal times (it would), so the fact that it has a big chunk of money just sitting there looks pretty enticing.

The new transportation bill just takes $19 billion of this reserve and, if the Fed builds that reserve account above $10 billion again, that excess money goes to transportation too.

By the way, if you want a good read on why this severely limits the Fed's ability to do it's job -- which you may or may not care about more than your local transportation project -- this is a pretty good article, especially the last section.

Oil Stockpile

So we have this thing called the Strategic Petroleum Reserve, an emergency store of oil kept by the US Department of Energy. Since we're energy independent now -- or so they say -- we really don't need all this reserve sitting around. It's not like oil prices are going to crater and drive US shale producers into bankruptcy. It's also not like there's much risk of social unrest in major oil producing countries like Saudi Arabia, Russia or Venezuela. 

So, the logical thing to do here (not) is to sell some of this oil and use that to pay for transportation. In total, 66 million barrels are expected to be sold (no word on what price the bill assumed would be had for such a sale).

Summary

Regardless of how you view current events, it's clear we're in unprecedented times economically. The Federal Reserve's quantitative easing program is called -- by the Fed itself -- "extraordinary measures". We're just exiting -- although perhaps only briefly -- more than a decade without an interest rate hike and an unprecedented period of time at zero interest rates. Where's the playbook here? There isn't one.

“So why are we spending our reserves on transportation? Why are we willing to underfund a pension system that is dramatically underfunded just to pay for transportation?”

So why are we spending our reserves on transportation? Why are we willing to underfund a pension system that is dramatically underfunded just to pay for transportation? This is crazy stuff.

Now don't get all partisan on me. Each side in our political debate has a narrative for blaming the other for this. If not for the other side, we would do something responsible. I don't buy it. There's no sign that is the case. If you believe that narrative, I have a newly built bridge funded by deferred pension payments and some spare barrels of oil to sell you.

The truth is, both sides trumpeted this deal. All the advocacy organizations in the Infrastructure Cult cheered this legislation. Sure, as an afterthought they all expressed qualms over the way it was funded, but they made sure and let everyone know they got their piece of the action.

Last year, during the debate over this legislation, I wrote a piece on the gas tax. I can't improve on what I wrote then:

We may have a funding problem, but that’s not what is going to take us down. Our real problem is that we have not had to think about what we are doing for a long, long time. We’ve been so wealthy and affluent that funding the most bizarre transportation arrangement on earth became akin to the American way of life. Congestion-free roadways and ample parking are to the United States what bread and circuses were to Rome. Get out your fiddle, that smoke is real.

Time to start thinking.

#NoNewRoads

(Top photo by Ken Ohyama)

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