Transportation Investments in Response to Economic Downturns (2014)

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1 Introduction The recession of 2007 to 2009 brought severe losses in jobs and eco- nomic output, and employment remained depressed in 2012. The scope and magnitude of the federal government’s interventions to reduce the costs of the recession were unprecedented. Actions by Congress included a package of temporary tax cuts in 2008, the Troubled Asset Relief Program enacted in 2008, $831 billion in spending and tax relief provided in the American Recovery and Reinvestment Act of 2009 (ARRA), and temporary reductions in the Social Security payroll tax in 2011 and 2012. During the same period, the Federal Reserve took actions to maintain the functioning of financial markets and to reduce short- and long-term interest rates to encourage borrowing, business spending, and consumption. One of the federal stimulus actions was a program of extraordinary grants, direct spending, and credit assistance to support transportation capital expenditures. ARRA provided $48.1 billion for programs to be administered by the U.S. Department of Transportation (U.S. DOT), mainly through grants to state and local governments, for roads, transit, airports, and intercity passenger rail. The act also provided aid for water projects, including navigation projects, and for other nontransporta- tion state and local government infrastructure, and additional support to state and local government transportation projects through a bond subsidy program. The experience of the ARRA transportation program provides an opportunity to learn how to structure and manage a program of federal government infrastructure grants and expenditures intended as fiscal stimulus. The volume of spending was substantial, and the act imposed special rules (including spending deadlines and a maintenance-of-effort 9 

10 Transportation Investments in Response to Economic Downturns requirement) intended to enhance the stimulus effect. The act required record keeping on the uses of funds and impacts of the spending, and the U.S. DOT and the Government Accountability Office (GAO) docu- mented its implementation. Lessons from this experience may be rel- evant not only in deciding on the federal response to future recessions but also in considering actions to speed recovery from the aftereffects of the 2007–2009 recession. The Transportation Research Board formed the Committee on Eco- nomic and Employment Benefits of Transportation Investments in Response to Economic Downturns to conduct a study to aid state and federal officials who may in the future plan a transportation spending program intended as economic stimulus during a recession. The com- mittee was to provide guidance on how to design an effective program and evaluate the results and on the choice between transportation spend- ing and other forms of stimulus during economic downturns. In this introductory chapter, the first section below describes the origin and objectives of the study and the committee’s interpretation of its charge. The second section describes the federal government’s use of transporta- tion and other public works spending as one element of its response to the 2007–2009 recession and to earlier recessions and evaluations of the earlier programs. The third section outlines federal and state transportation finance arrangements in general, because most transportation stimulus spending has flowed through the established programs and its impact is affected by their structure. The final section identifies the information sources the committee used in examining the effectiveness of transpor- tation stimulus spending. STUDY ORIGIN AND OBJECTIVES This report responds to the charge to the study committee defined in the task statement approved by the National Research Council (Box 1-1). It is addressed to state and federal transportation program administrators who may be asked to propose a transportation spending program as an economic stimulus; administrators responsible for managing such a program; and Congress, which decides how to allocate the funds in a stimulus program among transportation and other uses. 

Introduction 11 BOX 1-1 Statement of Task The purpose of this project is to provide information useful to state and federal transportation administrators, as well as to Congress and administration officials, who are planning an eco- nomic stimulus program in response to an economic downturn that may include spending for transportation and other uses. The project will have three components. The first will describe experience with stimulus spending in general (theory of how a fiscal stimulus program is intended to work, methods of evaluat- ing stimulus impacts, and past estimates of impact). The second will review best practices for evaluating transportation invest- ments and the relevance of job creation as a project selection criterion. The third will examine methods of planning and man- aging a transportation spending stimulus package. To the extent that the available evidence will allow, this component will: • Describe methods and data requirements to project the stim- ulus impact of a proposed transportation spending package and to evaluate the impact of the spending retrospectively; • Examine how a transportation spending package could be designed so as to optimize its stimulus impact; and • Assess the desirability of modifying administrative or finan- cial practices of federal and state transportation programs in order to make them more effective instruments for stimulus. The study was sponsored by the state departments of transporta- tion through the National Cooperative Highway Research Program and by the Transportation Research Board. Most transportation funding provided in ARRA was in the form of grants to state and local govern- ments, who build and operate nearly all highways, transit systems, and airports. The state transportation departments are responsible for secur- ing federal transportation grants for their states and for managing the 

12 Transportation Investments in Response to Economic Downturns funds received and have been advocates for including transportation in federal stimulus spending. The states also have an interest in ensuring that the management of any program such as the ARRA transportation com- ponent allows the aid to make the greatest contribution to the two objec- tives of immediate job creation and improvements in transportation. A fiscal stimulus program is understood to be a package of extraordi- nary federal government expenditures or tax concessions, funded by bor- rowing, with the goals of reducing the rate of unemployment, increasing employment, and speeding economic recovery from a recession. Most of the ARRA transportation provisions and earlier federal countercycli- cal public works programs fit this description: they were intended to spur spending for infrastructure construction and maintenance at the time of a recession. For ARRA, the accepted criteria for expenditures to be included were that they be timely, targeted, and temporary (Sperling 2007). Although the recession ended with the resumption of economic growth in 2009, actions since 2009—for example, the 2011 and 2012 Social Security payroll tax reductions—as well as proposals such as that of the administration for additional special transportation aid (White House 2011) and other proposals for continued extraordinary federal spending as long as unemployment remains elevated (e.g., Stiglitz 2012) also fit this definition of stimulus because their objective is to reduce unemployment quickly. The committee understood its charge to concern primarily the kind of short-term stimulus spending typified by ARRA. Consistent with the task statement, the committee’s conclusions and recommendations con- cern the proper role of transportation spending within a fiscal stimu- lus program, under the assumption that Congress has decided, at some future time, to enact such a program. It also is assumed that the future stimulus program as a whole is not evidently poorly conceived (e.g., that it is enacted early enough that spending can commence while employ- ment and output remain depressed). The committee was asked also to consider how the transportation spending included in a future stimulus program should be structured and managed so as to optimize its stimulus impact and whether practices of the established federal and state transportation programs should be modified to make transportation spending more useful as an instrument 

Introduction 13 for counteracting economic downturns. In considering administrative arrangements, the committee assumed that at the time of the future stimulus program, the historical structure of federal participation in transportation funding remains in place. Stimulus spending for trans- portation would present more challenging problems if a prior federal– state relationship were absent. The committee did not attempt to assess quantitatively the appropri- ate share of transportation spending in a stimulus program. Once Con- gress has determined the scale of such a program, deciding on the shares to be allocated to various forms of spending (which may include, for example, direct federal spending, grants to states for specified purposes like transportation or education, payments to individuals, or tax breaks for individuals or businesses) will require determining the likely benefits of each alternative (including the stimulus benefit—increased employ- ment and output—as well as other forms of benefit such as the mobility benefit of transportation infrastructure) and then selecting the spend- ing package that will provide the greatest total benefit. The committee identified potential advantages, disadvantages, and obstacles to the use of transportation spending as stimulus that a decision on the transporta- tion share of a program would need to take into account, but it did not examine the benefits of the alternative forms of spending. The impact of transportation spending on jobs or income frequently is discussed in other contexts. In debates over individual transporta- tion projects, regional jobs gains are almost always among the benefits cited by proponents. The nature of the linkages between transportation investment and growth has been central to debates over long-term gov- ernment transportation policy, for example, questions concerning the role of the federal government, the structure of federal-aid programs, and how transportation should be funded. In the aftermath of the 2007–2009 recession, infrastructure advocates argued that a commit- ment to a sustained increase in public-sector infrastructure investment was a necessary component of a long-term plan for escaping chronic high un­ mployment and slow growth (e.g., Rendell and Smith 2011; e Skidelsky and Martin 2011). The committee did not assess the effect of transportation expenditures on employment or growth in the long run (that is, over several business 

14 Transportation Investments in Response to Economic Downturns cycles). This relationship is distinct from the question of the effective- ness of transportation spending as fiscal stimulus during a recession. The primary long-term contribution of transportation investment to growth of income is derived from the benefits in the form of increased mobility that it produces for users of transportation facilities. This benefit can be evaluated through benefit–cost analysis of transportation projects. Any stimulus effect from adjusting the timing of transportation spending to be countercyclical may be a worthwhile benefit but should not greatly influence the level of spending or project selection in the long run. Of course, the potential for long-term benefits from transportation spending is not unrelated to the study topic. One of the potential attrac- tions of using transportation spending as stimulus is that it may produce both kinds of benefit: reduced unemployment in the short run during recovery from a recession and mobility benefits in future years. Evaluation of transportation stimulus spending is complicated by uncertainties about the overall effectiveness of fiscal policy and about the value of transportation investments. Estimates of the effects of stimulus spending in general vary widely and have been a topic of controversy. Few estimates that compare the stimulus effects of alternative kinds of govern- ment purchases (e.g., public works spending versus defense spending) are available. Congress included transportation and other infrastructure spending in ARRA and in past stimulus programs with the aim of obtain- ing long-term benefits in addition to the stimulus impact. However, the benefits of public investments in transportation are not measured sys- tematically, and long-term benefits cannot be assured unless individual projects are objectively evaluated. USE OF TRANSPORTATION SPENDING AS STIMULUS: ARRA AND PAST RECESSIONS The experiences of the transportation programs in ARRA were the pri- mary evidence available to the committee on the functioning of a trans- portation stimulus program. The subsections below describe the ARRA transportation programs in the context of the overall federal response to the recent recession and the use of transportation spending as stimulus in earlier recessions. Chapter 3 describes the provisions and management of ARRA transportation programs in more detail. 

Introduction 15 Recession of 2007–2009 and the Federal Government Response The economic distress of the 2007–2009 recession was more severe and more persistent even after the resumption of economic growth than for any of the 11 preceding recessions since 1945: • Real gross domestic product declined by 5.1 percent from its peak in the fourth quarter of 2007 to the second quarter of 2009 and regained the fourth quarter 2007 level only in the third quarter of 2011 (BEA 2012). • Unemployment peaked at 10.0 percent in October 2009, from a low of 4.4 percent in May 2007, and remained at 8.2 percent in March 2012 (BLS 2012b). • Nonfarm payroll employment declined by 8.8 million jobs (6.4 per- cent) from its peak in January 2008 to the trough in February 2010, and in March 2012 it remained 5.2 million below the peak (BLS 2012a). • The net worth of U.S. households declined by 24 percent peak to trough, from the second quarter of 2007 to the first quarter of 2009, and remained 9 percent below the peak in the fourth quarter of 2011 (Federal Reserve Board 2008–2012). The federal government responded to the crisis with an array of mea- sures intended to stimulate employment and growth. Prominent federal measures are listed in Table 1-1, but various other actions since 2008 to reduce taxes or increase spending have been justified, at least in part, as stimulus. The special measures were in addition to the increased govern- ment outlays for unemployment compensation and other payments to individuals and the reductions in tax collections that occur automati- cally during recessions and contribute to maintaining demand. ARRA made appropriations to support a program of direct federal spending, grants to state and local governments for various specified pur- poses, transfers to individuals, and temporary tax relief. The act includes a statement of purposes [Public Law 111-5, Section 3(a)]: 1. To preserve and create jobs and promote economic recovery. 2. To assist those most impacted by the recession. 3. To provide investments needed to increase economic efficiency by spurring technological advances in science and health. 

16 Transportation Investments in Response to Economic Downturns TABLE 1-1  Selected Federal Responses to the 2007–2009 Recession Program Description Magnitude ($ billions) Fiscal Stimulus Economic Stimulus Act of 2008, Tax rebates for individuals and $168 February 2008 business tax breaks intended Lost federal tax revenue in to promote investment 2008 and 2009 (JCT 2008) ARRA, February 2009 Program of direct federal $831 spending, grants to state Federal budgetary cost (increase and local governments, in federal deficits) between transfers to individuals, and 2009 and 2019, as estimated tax relief in 2012 (CBO 2012b) TIGER II discretionary grants, Extended TIGER program of $0.5 authorized November 2011 ARRA: grants for road, tran- sit, rail, and port projects Extension of Bush administra- 2-year extension of temporary $690 tion tax cuts (TRUIRJCA, tax cuts enacted in 2001 and Estimated revenue loss in Public Law 111-312) 2003 that were scheduled 2011–2020 from tax relief to expire in 2011; other mis­ provisions other than Social cellaneous tax relief Security tax reduction (JCT 2010) 2010 temporary extension of 13-month extension of federal $57 unemployment insurance unemployment benefits Estimated budgetary cost (TRUIRJCA 2010) 2011–2020 (JCT 2010) Social Security payroll tax Employee Social Security tax $112 reductions of 2011 and 2012 rate for 2011 and 2012 Estimated revenue loss from reduced from 6.2 to 2011 reduction (JCT 2010) 4.2 percent $97 Estimated revenue loss from 2012 reduction (CBO 2012a) Jobs tax credit (Hiring Incen- Employer payroll tax credit for $13 tives to Restore Employment hiring the unemployed Revenue loss in 2010–2012; Act of 2010, Public Law no net effect on deficit 111-147) 2010–2020 (CBO 2010) Federal Medical Assistance Extended for 6 months the $16 percentage rate increase increase provided by ARRA (Mitchell and Baumrucker extension, August 2010 in the share of state Medic- 2013, 8) aid expenditures reimbursed by the federal government Education Jobs Fund, Grants to states to pay educa- $10 August 2010 tion employee salaries, to (Public Law 111-226, Sec. 101) allow hiring or retention of employees in 2010–2011 (extending similar ARRA aid) 

Introduction 17 TABLE 1-1 (continued)  Selected Federal Responses to the 2007–2009 Recession Program Description Magnitude ($ billions) Other Actions Federal Reserve interventions, Purchases of Treasury securi- — 2008–2012 ties and mortgage-backed securities, loans to banks, and other actions to support financial sector and reduce interest rates Troubled Asset Relief Program Treasury aid to financial firms — in Emergency Economic and the automobile industry Stabilization Act, October through purchases of stock, 2008 loans, and lines of credit Note: TIGER = Transportation Investment Generating Economic Recovery; TRUIRJCA = Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010; — = magnitude may be measured in terms of quantities of assets purchased or of credit extended but is not shown because these measures do not correspond to the federal budgetary costs shown for the fiscal stimulus actions. 4. To invest in transportation, environmental protection, and other infra- structure that will provide long-term economic benefits. 5. To stabilize State and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases. The bulk of the funds was to be expended quickly, within 2 years of enact- ment (Table 1-2), to slow the continuing contraction of the economy. At the time of enactment, the estimated cost of ARRA to the federal budget (increase in deficits between 2009 and 2019) was $787 billion. The Congressional Budget Office’s February 2012 estimate of the amount is $831 billion (CBO 2012b, 1). As of February 2013, the budgetary impact realized from tax benefits, contracts, grants, loans, and entitlement pay- ments, was $785 billion (Recovery Board 2013). ARRA provided $48.1 billion for programs to be administered by the U.S. DOT, including $27.4 billion for highways, $9.3 billion for inter- city passenger rail, and $8.4 billion for public transit (GAO 2011, 4). The act also provided $4.6 billion to the U.S. Army Corps of Engineers civil works program, including construction and maintenance of navi­ gation facilities, and funding for other nontransportation infrastructure, 

18 Transportation Investments in Response to Economic Downturns TABLE 1-2  Components of ARRA and Projected Disbursement Rates at Time of Enactment Total Share Disbursed by End Amount of Fiscal Year (percent) Component ($ billions) 2009 2010 2011 2012 Discretionary spending (highways, mass transit, 308 11  47  72  84 energy efficiency, broadband, education, state aid) Entitlements (food stamps, unemployment 267 32  73  91  94 compensation, health information technology, Medicaid matching rate, refundable tax credits) Revenues (personal tax credits; business, energy, 212 31 116 120 115 infrastructure tax concessions) All ARRA spending and tax relief 787 23  74  91  96 Note: The categorizations of spending and revenue are those used in the sources. Discretionary spending is federal spending controlled by Congress in the normal budget process through annual appropriations acts. Entitlements are programs that are categorized in the normal budget process as direct or mandatory spending (i.e., controlled by permanent laws that authorize payments for spe- cific purposes). The revenues category consists of tax reductions. The projected shares of tax reduc- tions disbursed by the end of 2010, 2011, and 2012 exceed 100 percent because some tax provisions defer collections, which will be made up in later years. Source: Elmendorf 2009a, 2009b. including military facilities, water and sewer projects, broadband Internet access, education buildings, and federal buildings. Expenditures through June 2012 for contracts, grants, and loans in programs iden­ ified by the t Recovery Board as transportation or infrastructure were $68.5 billion: $38.2 billion in U.S. DOT programs; and $30.3 billion in 61 non–U.S. DOT infrastructure programs (Recovery Board 2013). These totals do not include construction supported through tax incentives or construction funded by grants that recipients could use for construction or other purposes (such as the Department of Education grants under the State Fiscal Stabilization Fund). In addition to transportation aid provided by the programs adminis- tered by the U.S. DOT, ARRA created a new kind of federally subsidized government bond, the Build America Bond. State and local governments could issue Build America Bonds to finance transportation projects and other kinds of public works. The federal government reimburses the issuers of the bonds for 35 percent of the interest paid to bondholders 

Introduction 19 (which is taxable). State and local governments issued $181 billion of Build America Bonds before the program expired at the end of 2010 (U.S. Department of the Treasury 2011), of which 26 percent ($48 bil- lion) was for transportation projects (FHWA 2011a), including highway, transit, and port projects. The Treasury Department has estimated that Build America Bonds saved issuers $20 billion in present value of bor- rowing costs, compared with borrowing costs if the projects had been funded with traditional tax-exempt bonds (U.S. Department of the Trea- sury 2011); therefore, the contribution to transportation projects was about $5.4 billion. Transportation and other physical infrastructure spending therefore constituted roughly 10 percent of federal outlays under ARRA and a much smaller share of the total federal intervention in response to the recession. However, the public prominence of this category of spending has been disproportionate to its share of dollars. Congress chose to high- light infrastructure in the act’s statement of purposes, cited above, and infrastructure is a component of the “reinvestment” to which the act’s title refers. Opinion polls indicated that spending on roads and other public works was far more popular as a stimulus than aid to home- owners, banks, or the automobile industry [supported by 77 percent of respondents in a March 2009 poll, versus minorities of respondents supporting the other forms of aid (Pew Research Center 2009, 11)] and that highway construction was a relatively high-visibility element of federal stimulus efforts [43 percent of respondents in a July 2010 poll reported that the stimulus had improved roads in their area (Pew Research Center 2010)]. Moreover, the magnitude of ARRA transportation aid was significant for the public transportation industry. ARRA’s $35.9 billion in special highway and transit aid equals 77 percent of the amount of regular fed- eral highway and transit aid distributed in 2008. The federal funding came at a time when the states were confronting a decline in their own revenues dedicated to transportation and uncertainty over the future of federal support for transportation. Congress failed to reenact the regu- lar multiyear federal highway and transit aid programs that expired in 2009, instead continuing the programs through a series of temporary extensions. 

20 Transportation Investments in Response to Economic Downturns Public Works Spending in Earlier Recessions The federal government had undertaken programs of extraordinary expenditure on public works as part of the federal response to recessions on four occasions since World War II before the ARRA (Levine 2009, 2–3): • The Public Works Acceleration Act of 1962, after the 1960–1961 reces- sion, provided $852 million for local projects, including roads and water and sewer systems, administered by the Department of Commerce. • Legislation in 1976 and 1977, after the 1973–1975 recession, provided $6 billion for the Local Public Works Program under the Economic Development Administration (EDA). • The Emergency Jobs Appropriation Act of 1983, after the 1981–1982 recession, provided $9.0 billion in stimulus spending. Of this amount, $7.8 billion was for public works, including $900 million for programs administered by the U.S. DOT (GAO 1986, 15). • The Supplemental Appropriations Act of 1993 (Public Law 103-50) provided a small amount of special funding for federal, state, and local public works (about $100 million in a package that included funding for public service jobs) to aid recovery from the 1990–1991 recession. All of these programs were small in comparison with the public works spending in ARRA. (Transportation and other infrastructure appropria- tions in ARRA were on the order of 0.6 percent of annual gross domestic product in the year of enactment; the ratio was 0.3 percent or less in the earlier programs.) None of the earlier programs devoted as large a share of public works spending to transportation as did ARRA. Each was enacted after the recession that apparently motivated it had ended [according to the business cycle definitions of the National Bureau of Economic Research (NBER n.d.)]. The rationale for these expenditures always has been that they directly provide employment on the construction projects and in the supplier industries and that during times of high unemployment, construction and supply industry workers spending their wages will induce further hiring. Supporters of infrastructure spending as stimulus have argued that the investment will yield a high return from the improved public services, offsetting the initial cost, and that much of the spending rep- resents an acceleration of expenditures that would have taken place at a 

Introduction 21 later time rather than net new spending, mitigating the impact on the public debt. The stimulus benefit of public works spending is muted in times of full employment because the directly employed workers, materials, and equip- ment are largely diverted from other applications. Even during a recession, if the extra government spending were to be funded by increased taxation, decreased consumption by taxpayers would offset the stimulus of the pub- lic spending, and if the extra spending were funded by borrowing, then higher interest rates, along with public expectation of future tax increases to pay the debt, could dampen the stimulus. The stimulus effect of public works spending is thus expected to be greatest when monetary policy of the central bank is maintaining low interest rates during a recession, help- ing to limit crowding out of private borrowing. The past public works stimulus programs were controversial. Skeptics argued that local governments substituted the federal funds for their own funds, reducing the net increase in spending, and that the time required to enact legislation and commence construction meant that spending was too late to achieve the needed stimulus (Levine 2009, 1–2). President Nixon cited these deficiencies in vetoing a $2 billion public works bill in 1971. The veto message also argued that “because the accelerated public works program has been conceived of as an emergency measure, with an implied promise of quick approvals and a broad scattering of the benefits, insistent demands could be expected for marginal, hurriedly planned, environmentally damaging and uncoordinated projects” and furthermore that “the previous [1962] Accelerated Public Works program resulted in applications for nearly double the amount of funds available. . . . On the basis of these expectations, communities deferred locally funded projects. Therefore, the net economic impact in many communities was, actually, a delay in needed public works projects” (Nixon 1971). In 1993, Congress rejected most parts of a Clinton administration proposal for a $19.5 bil- lion stimulus package that would have included $6 billion for transporta- tion and other infrastructure (Clymer 1993), enacting only an extension of unemployment benefits and the small amounts of extra spending in the 1993 Supplemental Appropriations Act cited above. EDA commissioned an evaluation of the public works and public service jobs programs enacted in 1976 and 1977, and GAO evaluated 

22 Transportation Investments in Response to Economic Downturns the 1983 program. The authors of the EDA study observed that post- war countercyclical public works programs had been small compared with total federal countercyclical outlays and in relation to total public works spending during the programs’ lifetimes. The report evaluated the programs according to the criteria of job creation; speed of job cre- ation; distribution of benefits among regions, industries, occupations, and socioeconomic groups; the value of the public services produced (that is, the services of the facilities constructed); and effect on labor and materials demand and prices. The conclusions were as follows (Vernez and Vaughan 1978, i–xiv): • The available estimates of job creation were not reliable because the extent to which federal grants replaced state and local government expenditures was uncertain. The study cites estimates of substitution of “as high as 60 percent in the short run and 80 to 100 percent after one year.” The federal spending could still have stimulus effect, but the magnitude of the effect would depend on how state and local govern- ments adjusted their spending and taxation in response to the aid rather than on the characteristics of the construction projects that were the direct recipients of aid. The report concluded that a “sig- nificant portion . . . appear[s] to be used for local fiscal relief and to rebuild local surpluses” and therefore that “job creation may not be greater than that achieved by an equivalent federal personal income tax cut” (Vernez and Vaughan 1978, viii, xi). • The time required to enact legislation was a more important source of delay than delays in implementation. After enactment, public works programs were slower than public service jobs programs in creating jobs. • With regard to the targeting of spending, jobs created directly and indirectly (i.e., in supplier industries) by public works projects are concentrated in construction and durable goods manufacturing, industries that experience relatively large cyclical variation in employ- ment and output. These industries are also intensive employers of laborers, craftsmen, and operatives, which are vulnerable occupa- tions in recessions. • Two-thirds of employees on federally supported countercyclical public works projects were found to have been employed on the day before they started work on the projects. Only a small proportion was previously 

Introduction 23 receiving welfare or unemployment benefits. This observation was used in support of the report’s conclusion that public works grants are an ineffective means of targeting aid to the chronically unemployed or to workers most vulnerable to recessions. • No evidence was available on the value of the output of the public works projects completed (i.e., the value of the services produced by the public facilities constructed). However, any projects that state and local governments would not have completed in the absence of the federal grants presumably would have been relatively low-priority projects, and therefore their value would be less than the average value of all public works investment. • The severity and timing of business cycles in the construction industry vary regionally, and the cycle is not necessarily synchronous with the national business cycle. Therefore, some countercyclical public works spending probably was poorly timed and located, bidding up con- struction wages in a region rather than increasing total employment. To allow public works spending to be timelier, the EDA report pro- posed that consideration be given to enacting standby authority that would allow the executive to distribute funds when economic indicators met specified criteria. It also proposed that future programs favor direct federal spending on previously authorized projects and projects that are of short duration and labor intensive in their early phases. Finally, it proposed that allocation favor regions with relatively large losses in employment in the recession rather than regions with a relatively high level of unemployment, and regions where employment is continuing to decline. A second evaluation of the 1977 federal stimulus program, based on a simulation model relating changes in state and local government expen- ditures, taxes, and budget balances to changes in federal grants and in economic and demographic variables, concluded that states responded to the federal stimulus grants initially by reducing spending of their own funds and allowing surpluses to grow and eventually by a combination of tax reductions and spending increases, but only after a delay. The eval- uation found some empirical support for President Nixon’s argument that anticipation that federal grant funds would be available reduced total state and local public works spending (Gramlich 1979, 182–184). 

24 Transportation Investments in Response to Economic Downturns In its evaluation of the Emergency Jobs Appropriation Act of 1983, GAO examined the timing of spending, the effect on employment, efforts in the programs funded to employ the unemployed, and benefits of the spending other than employment. The overall conclusion was that “implementation of the act was not effective and timely in relieving the high unemployment caused by the recession. Funds were spent slowly, and relatively few jobs were created when most needed in the economy” (GAO 1986, 3). Findings included the following (GAO 1986, 2–5): • By June 1984, when the unemployment rate had returned to the pre- recession level, only a third of the act’s funds had been spent. Public works funds were spent more slowly than funds provided for other purposes in the act. The act passed in March 1983, 4 months after the end of the 1981–1982 recession. • The peak employment attributable to the act, according to an econo- metric model GAO used, was 35,000 in June 1984. GAO also esti- mated that if all funds had been spent in the first year of the act, the peak effect would have been 131,000 jobs. It noted in comparison that during the rapid recovery that followed the recession, total employ- ment had increased by 5.8 million by the second quarter of 1984. • In a sample of projects, only a minority of persons directly employed had been unemployed previously. GAO did not attempt to evaluate the projects and services produced beyond asking recipients of a sample of grants their opinions on the long-term benefits of the projects (GAO 1986, 57). To improve performance, GAO recommended that future stimulus spending legislation • Favor activities that have projects available for immediate implemen- tation, • Provide deadlines for obligating and spending funds, and • Require federal agencies administering programs to maintain infor- mation on expenditures and employment. These recommendations are similar to provisions in ARRA and may have influenced them. The Office of Management and Budget (OMB), com- menting on the draft of the GAO report, argued that spending deadlines 

Introduction 25 would lead to wasteful spending and that special record-keeping and reporting requirements would burden the administrative agencies and slow the rate of spending (GAO 1986, 136–137). OMB’s concerns parallel some of the criticisms of the implementation of ARRA, as Chapter 3 will describe. When federal responses to the 2007–2009 recession were under debate, it was argued that some of the past objections to public works stimulus spending did not apply because the recession was expected to be severe and protracted, and therefore lags in spending and hiring would not be fatal drawbacks; because spending for construction, an industry par- ticularly hard hit by the recession, would be well targeted; and because a backlog of projects stalled by the recession existed that could be started quickly (Summers 2008). STATUS OF FEDERAL AND STATE TRANSPORTATION FUNDING Most federal spending for transportation, including most of the transpor- tation funding in ARRA, is in the form of grants to state and local govern- ments rather than direct federal spending, and federal aid accounts for a minority of expenditures for highways and transit (Table 1-3). Therefore, the effect of federal transportation stimulus spending on total transporta- tion spending, the projects selected for funding, and the speed of spend- ing, although influenced by the rules of federal grants, depend ultimately on actions and decisions of the state and local governments. Federal highway and transit aid to state and local governments nor- mally has been provided in multiyear authorizing acts, which also estab- lish federal motor fuel taxes and other taxes on highway users and dedicate the revenue of these taxes to highways and transit. Federal highway and transit aid in the 2000s equaled about 40 percent of total state and local government capital spending for highways and transit. The established administrative and finance arrangements of highway and transit systems in the United States are outlined in Box 1-2. These arrangements pro- vided the framework for the distribution and spending of most ARRA transportation aid and affect the possibilities for state and local govern- ments to substitute federal aid for state and local spending, the speed at 

26 Transportation Investments in Response to Economic Downturns TABLE 1-3  Government Expenditures for Highways and Transit, 2007 and 2010 Expenditure ($ billions) Item 2007 2010 Highwaysa   Federal 2.3 3.6   State 95.4 112.0   Local 58.6 67.6    Total, all units of government 156.3 183.2     Capital 81.1 100.2     Maintenance and operations 75.2 83.0 Intergovernmental transfers for highways    Federal payments to states 33.3 42.1    Federal payments to local governments 0.9 1.4    Net state payments to local governments 11.6 20.3 Transit, all units of governmenta 48.4 55.6   Capital 14.5 17.8    Maintenance and operations 33.9 37.8 Federal payments to state and local governments for transit 8.5 11.0 aExcluding intergovernmental transfers, interest on debt, and bond retirements. Source: FHWA 2012, Table HF-10; FHWA 2009, Table HF-10; APTA 2012. which federal aid can be spent, and the kinds of projects that can receive federal aid. When ARRA grants were being awarded, the states were facing major uncertainties about future transportation funding. The federal surface transportation aid authorization enacted in 2005 expired in 2009, and the federal-aid program was being supported by a series of short-term extensions. At the same time, dedicated revenue from federal and state fuel taxes and other user taxes and fees, the largest source of funds, was declining, from a peak of $124 billion in 2007 to a low of $119 billion in 2009. As Chapter 3 describes, the environment of declining revenue and uncertain future funding affected the capacity of the states to use ARRA funds effectively for their intended purposes. Increases in federal grants and in proceeds from bond issues allowed the states to avoid reducing transportation spending in 2008–2010 while user tax revenue and contributions from the states’ general funds were declining. The increased federal aid included not only the ARRA 

Introduction 27 BOX 1-2 Highway and Transit Administrative and Finance Arrangements Highways The main features of the finance arrangements for U.S. highways are as follows: 1. Imposition of special taxes and fees on highway users: federal and state excise taxes on motor fuels; fees for permits, regis- tration, and licenses; and tolls. Receipts from these sources were $119 billion in 2009 (FHWA 2011b, Table HF-10). 2. Dedication by law of most of this revenue to transportation (mainly to highways, but also to transit). 3. A division of responsibilities among the federal, state, and local governments for raising revenue and for highway spend- ing. The federal government collects 30 percent of user tax and fee revenue, nearly all of which is distributed to state and local governments. State governments collect most of the remainder. States performed 63 percent of spending in 2009, nearly all covered by state user tax and fee revenue and federal aid. Local governments collect little in user taxes. Local gov- ernment spending, 36 percent of the total in 2009, is funded from local government general revenue, dedicated broad- based local taxes, and state and federal aid. 4. Provision of federal aid through authorizations in multiyear surface transportation assistance acts. Historically, authoriza- tions were limited by the balance in the federal Highway Trust Fund (into which are deposited the revenues of the federal highway user taxes) and the projected deposits from user tax revenues over the term of each act. Contrary to this prece- dent, Congress transferred $8 billion to the trust fund from the general fund in 2008, and the $27.5 billion appropriated for highways in ARRA was from the general fund. (continued on next page) 

28 Transportation Investments in Response to Economic Downturns BOX 1-2 (continued) Highway and Transit Administrative and Finance Arrangements Federal highway aid is apportioned to the states by formula and may be used only for capital expenditures on projects that meet various federal requirements. Normally, funds apportioned to a state are available to it for 4 years. Congress appropriates funds annually to reimburse the states for the federal share of their expenditures (80 or 90 percent) on qualifying projects. No state match was required on ARRA highway projects. Transit Most local public transit services in the United States are oper- ated by public special-purpose authorities. Sources of funds are passenger fares; special local or state sales taxes or other broad- based taxes dedicated to transit; shares of highway user tax rev- enue; and other federal, state, and local government aid. Federal aid equaled 17 percent of expenditures in 2008 and 19 percent in 2009 (APTA 2012). Most federal aid historically has depended on revenue from the federal highway motor fuel tax. Congress historically has authorized transit aid together with highway aid in the same multiyear surface transportation legisla- tion. Federal assistance includes formula grants for capital and operating expenditures and discretionary capital grants awarded to specific projects. The normal state and local matching share of 20 percent was waived for ARRA grants. Source: TRB 2009, 91–93. appropriations but also extraordinary contributions to the federal High- way Trust Fund from the federal general fund totaling $29.6 billion in 2008–2010. As a result of declining revenue, the added federal aid, and increased state bonding, the ratio of user tax and fee revenue to current disbursements for highways fell from 76 percent in 2006 to 62 percent in 2010. 

Introduction 29 The federal transportation funding measures from 2008 until 2012 were recognized as temporary. The surface transportation aid program was reauthorized in 2012, but the new program was for 2 years only and continued dependence on contributions from the general fund to make up the gap between dedicated user tax revenue and authorized spending. Therefore, the continued stability of the federal-aid program, which the states had relied on since the 1950s, was not yet assured. SOURCES OF INFORMATION The committee’s study relied on information in two areas: (a) the expe- riences of federal and state government agencies in managing the ARRA transportation spending programs and earlier countercyclical public works programs and (b) the economic research literature on the effec- tiveness of fiscal policy alternatives. ARRA imposed reporting requirements on grant recipients and moni- toring and evaluation requirements on federal oversight agencies. The requirements were intended to ensure that the funds provided were being used to good effect. The act required GAO to review periodically state and local government uses of stimulus funds and to comment on the job creation estimates reported by recipients. GAO published a review of the ARRA programs administered by the U.S. DOT. The review was based on the reported data and documentation of these programs, inter- views with U.S. DOT officials, and visits to six states (California, Indiana, Massachusetts, Texas, Virginia, and Washington) (GAO 2011). ARRA also required the Congressional Budget Office to issue quarterly comments on the reports of grant recipients on numbers of jobs supported by ARRA funds (CBO 2011; CBO 2012b). Grant recipients were required to sub- mit periodic reports on “jobs created or sustained by the Federal funds provided” [ARRA Section 1201(c)] and on funds obligated and expended and numbers of projects begun and completed. Most of these data are summarized on a federal government website, Recovery.gov. To supplement the government sources on ARRA, the committee com- missioned a resource paper on lessons learned from ARRA on design and implementation of a transportation component in a stimulus pro- gram (Meyer 2012). The author was asked to examine how the structure and rules of federal transportation grants authorized in ARRA affected 

30 Transportation Investments in Response to Economic Downturns outcomes and whether altering ARRA rules could have resulted in a mix of projects with greater stimulus benefits or greater long-term transpor- tation benefits. The paper is based on interviews with transportation officials in 10 states. The committee commissioned a second paper on the suitability of trans- portation spending as an instrument of fiscal policy (Leduc and Wilson 2012). That paper includes a survey of research that compares the stimulus value of alternative forms of government spending and assesses whether such estimates can provide guidance for designing a stimulus program. In the remainder of this report, Chapter 2 describes the purpose and means of federal stimulus programs in response to recessions and con- siders the role of transportation spending in a stimulus program. Chap- ter 3 examines the experience of the ARRA transportation programs, and Chapter 4 presents the committee’s conclusions and recommendations. REFERENCES Abbreviations APTA American Public Transportation Association BEA Bureau of Economic Analysis BLS Bureau of Labor Statistics CBO Congressional Budget Office FHWA Federal Highway Administration GAO General Accounting Office or Government Accountability Office JCT Joint Committee on Taxation, United States Congress NBER National Bureau of Economic Research TRB Transportation Research Board APTA. 2012. 2012 Public Transportation Fact Book Appendix A: Historical Tables. March. BEA. 2012. Current-Dollar and “Real” Gross Domestic Product. March 29. http://bea.gov/ national/index.htm#gdp. BLS. 2012a. Data Retrieval: Employment, Hours, and Earnings (CES). Accessed April 19, 2012. http://www.bls.gov/webapps/legacy/cesbtab1.htm. BLS. 2012b. Labor Force Statistics from the Current Population Survey. Accessed April 20, 2012. http://data.bls.gov/cgi-bin/surveymost?ln. CBO. 2010. Pay-as-You-Go Estimate for the Amendment to the Senate Amendment to the House Amendment to the Senate Amendment to H.R. 2847. March 4. 

Introduction 31 CBO. 2011. Estimated Impact of the American Recovery and Reinvestment Act on Employ- ment and Economic Output from April 2011 Through June 2011. Aug. CBO. 2012a. Budgetary Effects of the Conference Agreement for H.R. 3630, the Middle Class Tax Relief and Job Creation Act of 2012, as Posted on the Web Site of the House Committee on Rules on February 16, 2012. Feb. 16. CBO. 2012b. Estimated Impact of the American Recovery and Reinvestment Act on Employ- ment and Economic Output from October 2011 Through December 2011. Feb. Clymer, A. 1993. G.O.P. Senators Prevail, Sinking Clinton’s Economic Stimulus Bill. New York Times, April 22. Elmendorf, D. 2009a. Implementation Lags of Fiscal Policy. Congressional Budget Office, June 2. Elmendorf, D. 2009b. Table 2. Estimated Cost of the American Recovery and Reinvest- ment Act of 2009 (Public Law 111-5). In letter to the Honorable Charles E. Grassley, United States Senate, March 2. Federal Reserve Board. 2008–2012. Flow of Funds Accounts of the United States (quarterly). March 2008–March 2012. http://www.federalreserve.gov/releases/z1/. FHWA. 2009. Highway Statistics 2007. FHWA. 2011a. Build America Bonds. FHWA. 2011b. Highway Statistics 2009. FHWA. 2012. Highway Statistics 2010. http://www.fhwa.dot.gov/policyinformation/ statistics/2010/. GAO. 1986. Emergency Jobs Act of 1983: Funds Spent Slowly, Few Jobs Created. Dec. GAO. 2011. Recovery Act: Funding Used for Transportation Infrastructure Projects, but Some Requirements Proved Challenging. June. Gramlich, E. 1979. Stimulating the Macro Economy Through State and Local Govern- ments. American Economic Review, Vol. 69, No. 2, May, pp. 180–185. JCT. 2008. Estimated Budget Effects of the “Economic Stimulus Act of 2008,” as Passed by the House of Representatives and the Senate on February 7, 2008: Fiscal Years 2008–2018. Feb. 8. JCT. 2010. Estimated Budget Effects of the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” Scheduled for Consideration by the United States Senate. Dec. 10. Leduc, S., and D. Wilson. 2012. Should Transportation Spending Be Included in a Stimu- lus Program? A Review of the Literature. Paper commissioned by the committee, draft, Sept. 24. Levine, L. 2009. Countercyclical Job Creation Programs. Congressional Research Service, Jan. 15. 

32 Transportation Investments in Response to Economic Downturns Meyer, M. D. 2012. Impact of Program Implementation on the Effectiveness of the American Recovery and Reinvestment Act: The Case of Transportation. Paper com- missioned by the committee. Mitchell, A., and E. Baumrucker. 2013. Medicaid’s Federal Medical Assistance Percentage (FMAP), FY2014. Congressional Research Service, Jan. 30. NBER. n.d. U.S. Business Cycle Expansions and Contractions. http://www.nber.org/ cycles.html. Accessed May 1, 2012. Nixon, R. 1971. Veto of the Accelerated Public Works Bill. June 29. In The American Presidency Project (J. Woolley and G. Peters, 2012). http://www.presidency.ucsb.edu/ws/?pid=3060. Pew Research Center. 2009. News Release: GOP Congressional Leaders’ Ratings Hit New Low—28%. Obama’s Approval Rating Slips Amid Division over Economic Proposals. March 16. Pew Research Center. 2010. Gov’t Economic Policies Seen as Boon for Banks and Big Business, Not Middle Class or Poor. July 19. http://www.people-press.org/2010/07/19/ govt-economic-policies-seen-as-boon-for-banks-and-big-business-not-middle- class-or-poor/. Recovery Board. 2013. Track the Money. http://www.recovery.gov/. Rendell, E., and S. Smith. 2011. Transportation Spending Is the Right Stimulus. Wall Street Journal, Aug. 11, p. A13. Skidelsky, R., and F. Martin. 2011. For a National Investment Bank. New York Review of Books, April 28, pp. 26–29. Sperling, G. 2007. Ways to Get Economic Stimulus Right This Time. Bloomberg.com, Dec. 17. Stiglitz, J. 2012. Stimulating the Economy in an Era of Debt and Deficit. The Economist’s Voice, March. Summers, L. 2008. Investing in America’s Infrastructure: From Bridges to Broadband. Conference remarks. Brookings Institution, Washington, D.C., July 25. TRB. 2009. Special Report 297: Funding Options for Freight Transportation Projects. National Academies, Washington, D.C. U.S. Department of the Treasury. 2011. Treasury Analysis of Build America Bonds Issuance and Savings. May 16. Vernez, G., and R. Vaughan. 1978. Assessment of Countercyclical Public Works and Public Service Employment Programs. Rand Corporation, Sept. White House. 2011. Fact Sheet: The American Jobs Act. Sept. 8. http://www.whitehouse. gov/the-press-office/2011/09/08/fact-sheet-american-jobs-act.