Transportation Investments in Response to Economic Downturns (2014)

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Summary After the U.S. economy entered a severe recession in 2007, the federal government forcefully intervened to reduce the costs of the recession and speed recovery. Congress enacted spending programs and tax relief, and the Federal Reserve acted to sustain financial markets and reduce interest rates. Among these measures, the American Recovery and Rein- vestment Act of 2009 (ARRA) provided $831 billion in new spending and tax relief. ARRA appropriated $48.1 billion to be administered by the U.S. Department of Transportation (U.S. DOT), mainly for grants to state and local governments for capital expenditures for roads, transit, airports, and passenger rail. The act also funded other state and local government infrastructure and supported public infrastructure projects through a bond subsidy program. The rationale for public infrastructure spending as stimulus (that is, to aid recovery from a recession) is (a) that it directly provides employ- ment on construction projects and in supplier industries and (b) that during times of high unemployment, construction and supply indus- try workers spending their wages will induce further hiring. The stimulus benefit of infrastructure spending (i.e., the resulting increase in economy- wide employment) weakens as the economy moves toward full employ- ment because the directly employed workers and equipment are largely diverted from other applications. Separately from stimulus effects, infra- structure investment, during a recession as during normal times, can pro- duce benefits over many years in the form of improved public services and increased productivity. The experience of the ARRA transportation program provides an opportunity to learn how to structure a program of government pur- chases intended as fiscal stimulus. To take advantage of this, the National 1 

2 Transportation Investments in Response to Economic Downturns Cooperative Highway Research Program and the Transportation Research Board sponsored the study described in this report. The committee respon- sible for the study was asked to provide guidance on three related policy questions. First, if the federal government undertakes a future fiscal stimulus program, should transportation spending be part of the package? Second, if transportation is a part of a future stimulus package, how should the spending be structured and managed so as to optimize its stimu- lus impact? Finally, should practices of the established federal and state transportation programs be modified to make transportation spending more useful as an instrument for counteracting economic downturns (without compromising these programs’ primary long-term objective of improving mobility and productivity)? The committee’s conclusions concern the effectiveness of stimulus spending, the role of transportation in a stimulus program, and man- agement of a transportation spending stimulus program. Recommenda- tions propose changes in established transportation programs, design features for any future transportation stimulus program, and methods for evaluating projects in a transportation stimulus program. CONCLUSIONS Effectiveness of Stimulus Spending The correct share of transportation spending within a stimulus program like ARRA depends on the overall effectiveness of stimulus spending in aiding recovery from a recession, because allocating the available funds within a stimulus package will involve trade-offs between short-term (stimulus) and long-term benefits (e.g., mobility benefits and improved productivity over the lifetime of a transportation facility), which differ according to the type of spending. Estimates of the magnitude of the effects of stimulus spending vary over a wide range. However, the preponderance of studies supports the conclusion that federal stimulus spending, during a recession or period of high unemployment and when monetary policy is maintaining low interest rates, leads to an increase in gross domestic product (GDP) and in employment, at least in the short term (within one or two years after the spending). 

Summary 3 The estimates of output multipliers (the ratio of change in GDP to the amount of the stimulus spending) that the Congressional Budget Office (CBO) used in its reports on the effects of ARRA are indicative of the uncertainty in empirical findings. The low and high CBO estimates are 0.4 and 2.2 for federal transfers to state and local governments for infrastructure, and they are similar for federal purchases and for pay- ments to individuals. Research based on experience since 2008 tends to support values of the multiplier above 1 as applicable when unemploy- ment is severe and interest rates are being held near zero. Value of Transportation Spending in a Fiscal Stimulus Program The following considerations provide strong support for including trans- portation capital expenditures as a component of a federal fiscal stimulus program, once the decision has been made to undertake such a program: • If projects are selected with proper consideration of the value of the transportation services they will provide, the long-term benefits will offset the initial cost, so the expenditure is justified regardless of the magnitude of the stimulus benefit. • Stimulus that consists of accelerating planned expenditures (for exam- ple, planned road construction) adds less to public debt than expen- ditures that would not have been made in the absence of the need for stimulus. If the stimulus program changes only the timing of spend- ing over the business cycle but not the total of spending, the long- term benefits and costs of the transportation system are little affected. The public gains the stimulus benefit of accelerated spending in a recession for a small cost (the cost of deviating from the schedule of expenditures that the transportation agency otherwise would have determined to be optimal). • A diversified package, with infrastructure as one component, is a rea- sonable strategy because the relative sizes of the multipliers for differ- ent forms of stimulus are not well known. • Transportation infrastructure improvement, by adding to the pro- ductive capacity of the economy, may raise consumers’ and investors’ expectations for economic growth, providing an immediate stimulus effect beyond that produced by equal expenditures for nonproductive purposes. 

4 Transportation Investments in Response to Economic Downturns • Construction prices are likely to be lower during a recession, allowing transportation agencies to buy more with the funds available. • In recessions in which the construction industry is strongly affected, as it was from 2007 to 2009, infrastructure spending may be well-targeted as stimulus. • Although few estimates of multipliers for specific categories of gov- ernment spending are available, the research indicates that infrastruc- ture spending can be at least as effective as other categories of stimulus spending in terms of short-term jobs and income impact. The objections raised historically to use of infrastructure grants as stimulus are that (a) the time required to enact legislation and begin construction will delay spending beyond the time when the stimulus is needed; (b) local governments will substitute federal funds for their own funds, reducing the net increase in spending; and (c) the acceleration of spending increases the risk of poor project selection decisions. The significance of these objections depends on economic circum- stances and on the administrative structure of the stimulus program. For the ARRA transportation grants and 2009 economic conditions, the objections were not as relevant as they may have been for earlier infra- structure stimulus programs. ARRA was enacted while the recession was under way and recovery has been protracted; consequently, nearly all ARRA funds will have been spent during a period of high unemployment. Although the evidence is incomplete, fiscal substitution probably was con- strained by the ARRA requirement that transportation grant recipients certify that they were maintaining planned rates of spending and because most state transportation spending depends on dedicated tax revenue that is not readily diverted to other purposes. (Moreover, if some diver- sion occurred, the extra funds available to the states may have reduced spending cuts or tax increases that would have negative impacts during a recession.) The risk of poor project selection was reduced because most ARRA transportation spending was for projects that already were in state and local government plans. In summary, once the federal government has decided to undertake stimulus spending, transportation grants are appropriate as a component of a diversified program, especially if the economic downturn is expected 

Summary 5 to be prolonged. The magnitude of the stimulus impact will depend on economic conditions and monetary policy. Design of a Transportation Stimulus Program Once a decision has been made to include transportation, the planners of the program must determine the share of the total stimulus package to be devoted to transportation, the allocation of funding among recipi- ents, and details of eligibility rules and administration. • Transportation share of the overall program: Practical limits exist on the amount of funding for transportation that can be used effectively in a stimulus program. The limits arise from state, local, and federal agencies’ capacities to manage a surge in funding; construction indus- try capacity; and the availability of worthwhile projects. • Allocation of funding within the transportation program: ARRA allo- cated funds among highways, transit, passenger rail, and other purposes mostly according to established formulas and procedures, which are based on transportation priorities rather than relative stimulus impact. This choice probably helped to speed enactment of the program and spending of the funds. There is little basis for judging whether the stim- ulus impact of the spending differed by mode. • Administrative rules: Rules in ARRA on maintenance of effort, time- liness, and record keeping and reporting were intended to ensure the effectiveness of the spending as stimulus and to maintain account- ability. These design objectives are essential for a stimulus spending program. ARRA rules influenced the selection of projects receiving funds and therefore the stimulus impact and long-term transporta- tion benefit of the spending. Some of the rules were objects of recipi- ent complaints that they added administrative costs and hindered effective use of the funds. Rules of questionable value, as implemented in ARRA, were the recipient jobs reporting requirement, which pro- duced data of limited applicability for evaluating ARRA; require- ments for recipients to report separately to multiple federal entities; and the requirement for giving priority to projects in distressed sub- state areas, which may not be an effective mechanism for targeting the unemployed. 

6 Transportation Investments in Response to Economic Downturns RECOMMENDATIONS The committee’s recommendations propose changes in transportation funding programs that would sustain spending during economic down- turns, administrative features of any future transportation stimulus pro- gram, and methods for evaluation of transportation stimulus spending. 1.  Expand Transportation Agency and Construction Industry Capacity to Absorb Stimulus Spending Congress and the states should consider adopting finance and adminis- trative practices that would allow transportation programs to maintain or increase spending in recessions and to absorb any future temporary fed- eral assistance efficiently. Actions for this purpose would have benefits for the economy (by mitigating recessions) and for the transportation system (by avoiding disruption of construction schedules and taking advantage of lower construction prices). Such actions could include the following: • Providing stability in the established federal transportation funding programs; • Maintaining a larger backlog of projects with completed designs and environmental reviews; • Building balances in the transportation trust funds to sustain spend- ing during recessions or, alternatively, borrowing from future user tax revenue to maintain spending when revenue slows; • Implementing reforms to speed project delivery in the regular federal- aid transportation programs; and • Providing standby authority to the executive to increase federal trans- portation aid through the established programs when specified eco- nomic conditions occur. A competitive federal transportation grant and credit assistance pro- gram could provide a supplementary mechanism for accelerating spend- ing during recessions. Congress should consider establishing a program that would coordinate the planning and funding of major infrastructure projects that are economically justified and require federal participation. The program would have the additional charge of increasing assistance quickly, when defined criteria were satisfied, to help sustain transpor- tation construction during economic downturns. It would maintain a 

Summary 7 backlog of projects ready to be advanced when needed. It would operate through partnership with state and local government agencies and could take the form of an extension of the charge of existing federal competitive grant and loan programs. 2.  Rationalize Design of Future Transportation Stimulus Spending Programs Advance Rulemaking Rules needed for the U.S. DOT to administer the ARRA transporta- tion program were not in place at the time of enactment. Uncertainty about rules was not conducive to timely spending. To minimize delays in any future stimulus program, Congress should authorize the U.S. DOT to publish rules on maintenance of effort, project eligibility, and data reporting that would be available for future application. Allocation of Grants Any future transportation stimulus program should continue the ARRA practice of allocating most funds according to established formulas. This feature was critical to the timeliness of ARRA spending. Entirely new transportation programs, for which administrative procedures are not already in place, will be less effective as stimulus because of the time needed for start-up. If funds are added to an existing program, projects that can be accelerated are likely to be available and the necessary federal– state–private sector relationships are already in place. Maintenance of Effort The definition of maintenance of effort should be an objective standard in terms of the grant recipient’s planned spending in specified categories and should reflect the impact of declines in dedicated revenue on spend- ing capacity of state and local transportation programs. Timeliness Requirements The ARRA transportation grants’ obligation and spending deadlines were intended to balance the need for immediate stimulus with the practical requirements of transportation construction. State officials reported to the committee their belief that they could have obtained greater long-term 

8 Transportation Investments in Response to Economic Downturns benefits from the ARRA funds by undertaking projects that would have spent the funds over longer periods, if deadlines had been longer. How- ever, extending deadlines might have reduced the stimulus impact. In any future transportation stimulus program, consideration should be given to alternative means of ensuring timeliness: providing multiple deadlines— for example, a short deadline applicable to a portion of the funding and deadlines equivalent to those in the regular federal-aid programs for the remainder—and allowing accelerated review and approval processes to speed construction. Record-Keeping and Reporting Requirements Data collecting and reporting requirements in the ARRA transportation programs that did not have demonstrated usefulness in managing or eval- uating the programs should not be imposed in future programs. The U.S. DOT should specify methods and data requirements for evaluat- ing transportation stimulus spending to provide a basis for future data requirements. Duplicative reporting requirements should be avoided. 3.  Measure the Effect of Federal-Aid Program Changes on Recipient Actions and Program Benefits The effect of the ARRA transportation grants on total state and local gov- ernment transportation spending and spending priorities has not been definitively assessed. The U.S. DOT should conduct research on how changes in the level of federal aid provided and in the rules of the federal- aid programs (e.g., with regard to matching shares and project eligibility) affect the spending decisions of grant recipients. 4.  Define a Method for Balancing the Recovery and Reinvestment Goals of Transportation Stimulus Spending Most decisions in designing or managing a transportation stimulus spend- ing program depend on balancing trade-offs between immediate stimulus benefit and long-term benefits of transportation services provided by the facilities constructed. The U.S. DOT should define a method for evaluat- ing the combined transportation and stimulus benefits of projects in a unified framework.