The Federal Government Doesn't Own Infrastructure

Image (with edits) via Flickr.

Sometimes I fail to appreciate how much our audience is growing and just how many new people we reach each week. This year, it is likely that a million people who have never logged into the Strong Towns site before will wind up reading something we have written. That means I can’t take for granted that all of you know the basics we’ve been talking about here for years, especially when we do a big series like the one we ran last week about the president’s infrastructure plan.

A common critique of Strong Towns, particularly from those who are economically liberal in their orientation, is a de-facto rejection of the idea that public investments need to have a positive financial return, the notion that local wealth creation has any value, and, now with Modern Monetary Theory growing in popularity, that there is any real constraint on the government doing what needs to be done when it comes to infrastructure.

Here are a couple of comments from last week along those lines (mildly edited to make more readable):

For the life of me, I can't actually figure out what the author thinks is bad in the infrastructure plan. They just provide non-specific condemnation and jump into ranting about investments having to produce enough productivity to "pay" for themselves.

On that one, news flash, government invests in things where the payoffs are hard to measure…..

As to this article, there’s a bit of a weird emphasis on “paying us back”. Like every investment has to make X economic returns. I find that preposterous.

In these conversations, I find it best to not argue over the federal government or federal spending and to just spot the person their insight. There certainly are theories that allow the federal government to spend as much money as they want, print as much money as they want, and not have to worry about the financial returns on any of that spending. Even though I find those theories to be deeply flawed, there are some really smart, thoughtful, and well-reasoned people who believe otherwise. I’m willing to acknowledge that I could be wrong and, in terms of the last two decades of macroeconomic policy, I’ve been mostly wrong, at least in how it’s played out over the near-term.

So, okay, when we’re talking about the federal government, we can start with the notion that infrastructure investments must strictly pay for themselves as non-operative. 

If I can give you that, can you give me this? — The federal government doesn’t own any infrastructure.

There might be a federal park road here or there, but the hundreds of thousands of miles of roadway in this country, the tens of thousands of bridges, the thousands of miles of transit lines, the pipes carrying drinking water, sewage, and stormwater runoff, and the water treatment plants and sewage treatment facilities are all owned by state, regional, or local governments, or some derivation of those local entities. None of this is owned by the federal government.

So, when the federal government builds new infrastructure, they are paying for infrastructure for some other government to own, operate, and maintain. 

Flip this around now and look at it from the perspective of the local government. Yes, the upfront costs are being paid for by the federal government, but now you are assuming the responsibility for this infrastructure. Forever. 

And even more than that, the people who come to depend on that piece of infrastructure will be your neighbors. They will be your friends and family. This is not a small responsibility—their futures are tied to your ability to keep the promise that all of this will be taken care of.

By accepting this infrastructure investment, you are promising that you will keep it in good operating condition and fix or even replace it as needed. That is the covenant you have with your people, the residents of your community.

In accomplishing this, you can’t print your own money. You can’t deficit spend without consequence. There is no theory of economics that imagines local governments being able to operate like the sovereign federal government. Local governments are much more like a family or a business in their need to balance their budget, live within their means, and make tough choices about allocating resources.

To keep the commitment to your neighbors on this new infrastructure, your city will rely on taxing the wealth of those in your community. That might involve property taxes, sales taxes, income taxes, user fees, or other revenue streams you can generate locally. This is where local wealth creation comes into the equation. 

No wealth creation, no money for maintenance. No return on investment, no money for replacement. Insufficient financial productivity on these infrastructure investments will make them a financial millstone around the community’s neck, the terrible obligation made by a prior generation that is robbing you of resources today while you raise taxes, cut services, and are slowly ground into a cycle of decline.

That’s why there has to be a payoff.

Maybe the federal government doesn’t care about that. I don’t know any economists that do—they seem to only focus on economic growth while projecting an unfounded belief that these investments are all fine and will work themselves out. And certainly we can appreciate that politicians and lobbyists and others could, even with good intentions, slip into short-term thinking and spend money today, despite the long-term ramifications.

This graph shows the value generated from a particular infrastructure investment. In the first several years of the the life of the investment, it generates positive value and that value accumulates. But when, in year 25, the infrastructure needs maintenance—the "maintenance echo"—suddenly the picture changes dramatically and the value generated from the investment isn't even enough to cover its maintenance.

Local leaders don’t have the option of not caring about the long-term. They can’t ignore the return on investment. If they add another lane to a street, that additional lane better grow their tax base and capacity or that new ongoing expense is eventually going to be met by raising local taxes or cutting local services. There are no other options.

That pain might not come for a generation or more, and it can be put off with debt or with rapid growth, especially from federal investments that give the gift of new infrastructure and growth today, with those liabilities coming due long in the future. Eventually, though, the bills do come due.

That is a core Strong Towns insight, and if you get stuck focusing on just the federal budget and debating the constraints of macroeconomic policy, you miss this fundamental truth.

Now, granted, you might believe that the federal government should own and should take care of every road, street, cul-de-sac, sewer extension, water service pipe, drainage ditch, valve, meter, pump, etc….and, okay, we all have our beliefs, but that is not the system we have. 

In the real world, the world we live in, cities need to worry about the return on their infrastructure investments and their overall financial productivity. They not only need to worry about them, they need to obsess over them. 

They generally don’t. That’s why we have a huge backlog of infrastructure maintenance. That’s why our economy is struggling and we’re seeing widespread decline, especially in places in that second and third life cycle of suburbanization. That’s why our cities are functionally insolvent, unable to pay for their own critical infrastructure needs. And that’s why a federal infrastructure spending bill that adds more obligations without addressing the underlying problem is a disaster for our cities, towns, and neighborhoods.

Nobody is going to fix this for us. We need to do that on our own. We need to start now.

This is why Strong Towns exists. If you want to help us, tell someone about Strong Towns, join our movement by becoming a member, and then get out and do something to make your place a little bit stronger.

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