Infrastructure

Engineers have been browbeating U.S. policymakers about the dire state of the country’s infrastructure for years. This year is no different. Last week the American Society of Civil Engineers gave U.S. infrastructure a barely passing grade of D+ and warned that “it’s time to stop duct-taping this problem.” Much of the problem has to do with how the country pays for its infrastructure, which does not raise enough revenue to keep up with the costs of needed repairs and improvements. But the engineers may finally have the ear of policymakers in one state, Virginia, who are making real changes about how the state funds its highways and roads. The arithmetic is clear: the United States  should be spending more on its roads and highways. As the Renewing America Progress Report on transportation infrastructure lays out, the country’s roads and highways are nearing the end of their useful life. Needed repairs would cost about 60 percent more than what is already spent each year. Building new roads and improvements to keep pace with population growth would cost twice as much. But even as the price tag goes up, revenue is falling off. Blame the gas tax. The federal government and states have traditionally relied on a gas tax, usually a set cents-per-gallon amount instead of a percentage of the gas price, to raise revenue for roads, highways, and bridges. This “user fee” model seemed a fair way to tax drivers who were responsible for causing the wear and tear on the roads. But the gas tax is not working as well as it used to. The federal gas tax and most state gas taxes are not pegged to inflation, and the federal gas tax of 18.4 cents per gallon has not changed since 1993. Americans are also driving more fuel efficient cars and generally driving less. Attempts at raising gas taxes almost always fail. All this adds up to less gas tax revenue. The Federal Highway Trust Fund has been running deficits for several years on the order of many billions of dollars. Virginia’s experience with gas tax politics and revenue shortfalls is among the worst. Its gas tax has been 17.5 cents since 1987, and its transportation construction fund is set to go broke by 2017. It comes as no small irony that Virginia is now setting a new national precedent in how to fund transportation systems. A bill passed by the legislature in February will make it the first state to do away with the fixed cents-per-gallon gas tax entirely. In its place will be a new percentage-based wholesale tax on gas as well as a new dedicated transportation revenue stream created from an increase in the general sales tax. The changes, along with higher car registration fees and some regional tax hikes, will generate an extra $3.5 billion of funding over the next five years. Most of that extra money will come from the general sales tax, which has only an indirect connection to transportation use. Virginia is moving away from the long-sacred principle of “you use, you pay” transportation funding model. Not all transportation experts are pleased. There are other ways to improve a user fee-based system, critics argue, and they usually point to a “Vehicle Miles Traveled,” or VMT tax, where cars are taxed not based on the fuel they consume but the distance they travel. Three bipartisan commissions have recommended transitioning at some point to a VMT system. The technology already exists to make it work. The system would more fairly share the costs of road wear across all cars, regardless of their fuel economy. European countries are experimenting with VMT taxes for trucks. Oregon has funded a big pilot study to explore the option. But as appealing as a VMT tax is in theory, the country is years if not decades away from such a system. Privacy concerns have made the VMT tax dangerous political ground. After simply suggesting the possibility of a VMT tax early in his tenure, Secretary of Transportation Ray LaHood was instructed by the White House to retract his statement. Viriginia’s diversification strategy seems the next-best-possible option. There is already an international precedent. According to the Eno Center for Transportation, no other country relies on a user-pay system as the main way to fund its transportation system. Europeans and Japanese pay astronomically high gas taxes compared to Americans, but the gas tax revenues go into general funds and are not dedicated back to transportation. Other states, including Massachusetts and Pennsylvania, are exploring using the general sales tax to fund transportation projects. But whatever the method, Virginia should be lauded for making the political compromises necessary to raise revenue to pay for long-term investments in transportation.

This summer, a billion-dollar project will begin to raise the road deck of the Bayonne Bridge that links Staten Island to Jersey City, and provides access to Manhattan via the Holland Tunnel. The project is not being undertaken because of safety concerns about the current bridge, but rather to allow larger container ships to pass underneath it and reach the Port of New York and New Jersey. It’s just one of several port projects in anticipation of the widening of the Panama Canal. By early 2015, the Panama Canal is scheduled to complete a $5.25 billion expansion project that began in 2007 to widen and deepen existing navigational channels to allow larger ships to traverse the isthmus, and construct new sets of locks to increase capacity. The scale of global trade has increased remarkably since Theodore Roosevelt championed the U.S. effort to build the canal. From 1915 to 2012, tonnage to cross the 48-mile link increased from 5 million to 334 million. Today, the largest ships that can cross the isthmus are the so-called panamax vessels that can carry 4,500 shipping containers. The expansion project—the largest undertaken since the canal opened in 1914—will allow post-panamax vessels carrying nearly three times that cargo to make that journey. It’s an important development for global commerce. Post-panamax ships have lower shipping costs; per container costs are more than 50 percent less than a panamax ship. While post-panamax vessels account for only 16 percent of the global container fleet, they already carry 45 percent of cargo, with those shares projected to respectively grow to 27 and 62 percent by 2013. Analysts say the canal's expansion will be a particular boon to the shipment of liquefied natural gas (LNG). LNG tankers are too large to pass through today’s Panama Canal. With the Sabine Pass LNG export terminal expected to open in Louisiana in 2015, and other terminals proposed, the expansion project is well-timed to aid the flow of natural gas from shale fields in the United States to Asian energy markets where the price for this resource is several times higher. Some experts estimate the canal expansion could reduce shipping costs on this route by $1 per million BTU. CFR Senior Fellow Michael Levi explained the benefits of a wider Panama Canal to LNG trade in a study published last year with the Brooking Institution’s Hamilton Project: “LNG tankers departing the Gulf of Mexico or the East Coast of the United States currently need to travel all the way around South America to reach Asia, adding considerable cost to their trips and eroding potential gains from trade.” The project has also prompted intranational competition. Los Angeles/Long Beach (LA/LB) is the nation’s largest port, handling 40 percent of U.S. cargo traffic. But with the canal expansion, eastern ports could potentially take up to a quarter of LA/LB’s business, so the port authority has planned $6 billion of upgrades, part of the $46 billion in upgrades to U.S. ports funded by public or private sources over the next five years. Today, just four U.S. ports are ready for post-panamax ships: Norfolk in the east and LA/LB, Oakland, and Seattle in the west. Colliers predicts another four will be post-panamax ready by 2015: Baltimore, New York, Miami, and Houston. The infrastructure investments at these ports and others such as Charleston, Savannah, and New Orleans, range from dredging waterways and adding cranes, to preparing intermodal support networks, including railways modifications for the increased height of double stacked containers. The raising of the Bayonne Bridge is one of seven port projects the Obama administration announced it would help expedite last summer, the first set of more than 40 infrastructure projects to be fast-tracked for review by executive order. The president said the "commitment to move these port projects forward faster will help drive job growth and strengthen the economy." Still, Robert Puentes, a transportation expert at the Brookings Institution stressed the need for greater federal leadership on this issue, perhaps in developing a comprehensive freight policy like many other nations. “I can’t see the federal government picking winners and losers” he said in a New York Times interview, but “they could provide a little more guidance — where right now they are providing none.”

For communities looking to attract the coveted highly-skilled, highly-paid workforce, there is often little substitute for a locale's livability. Job opportunities, no matter how plum, may fail to lure workers if a city is determined to be undesirable by potential emigrants. In describing what motivates the so-called Creative Class to relocate, urban theorist Richard Florida notes that "quality-of-place”—a city's built and natural environment, its population diversity and vibrancy—is the deciding factor. Perhaps no U.S. city has proved more effective at recognizing their quality-of-life shortcomings and making a drastic effort to turn things around than Oklahoma City. The impetus for action, as is often the case, was a crisis. "It was a really destitute place to live," said Roy H. Williams, president and CEO of Oklahoma City's Chamber of Commerce, referring to the state capital in the late 1980's and early 1990's. After booming on a ten-fold increase in the going rate for Oklahoma crude between 1972 and 1981, plummeting energy prices in subsequent years decimated OKC's industry, financial institutions, real estate values and, of course, city coffers. But the final straw didn't come until 1991, when the city lost out to Indianapolis in a heated competition to woo United Airlines into building a local maintenance hub—a move that would have brought more than a thousand jobs. In the end, the company told city officials that the deciding factor was Indianapolis' higher quality-of-life. As OKC's leaders licked their wounds in the aftermath, the Chamber of Commerce convened for a major strategy session. "We knew we had to do something out-of-the-box," Williams told me, "We had to build a better product." Enter the Metropolitan Area Projects Series or MAPS, as it's commonly known. Hashed out by OKC's business and policy community, the public-private initiative, passed in December 1993, laid out a series of major capital projects for construction, including a new sports arena, ballpark, library, trolley transit system, music hall, convention center, and the renovation of a downtown historic district known as Bricktown. This first program, or MAPS 1, was funded by $309 million in entirely local funds, without the issuance of debt, through a 1 percent sales tax increase that would sunset after 5.5 years. Indeed, MAPS 1 was so successful the city has pushed forward with two more iterations. MAPS 2, also known as "MAPS for Kids," focused on OKC's crumbling education infrastructure, investing close to $500 million in construction for local public schools. MAPS 3, which passed in December 2009 and has projects expected to run through 2017, will provide nearly $800 million in taxpayer funds for a 70-acre grand central park, over 50 miles of new biking and walking trails, and other recreational upgrades. Those involved in the process say MAPS has worked so well for so long (across multiple administrations) because of the close partnership between the public and private sectors, the fact that each initiative has been targeted and limited in scope, and that there has been such a strong track record of the city delivering on its promises. Indeed, a Chamber of Commerce report states that the total value of new investment related to MAPS from the mid-1990s through 2008 totaled about $3.1 billion, with an additional $1.9 billion announced. But perhaps the most dramatic symbol of the city's revitalization came in 2008, when the Seattle Supersonics moved to Oklahoma City and, in a matter of four years, made the NBA finals and was deemed the number one sports franchise in America, an ESPN ranking based on an analysis of finances and fan surveys. "It’s more than just a basketball team: it’s the culmination of 20 years of civic reinvention, and the promise of more to come," writes Sam Anderson for New York Times Magazine on the exceptional rise of the Thunder. "After all of that sacrifice — the grind of municipal meetings and penny taxes and planning boards, the dust and noise and uncertainty of construction, the horror of 1995 — the little city in the middle of No Man’s Land has finally arrived on the world stage."

NEW YORK, NY – The hurricane on America’s eastern seaboard last week (which I experienced in lower Manhattan) adds to a growing collection of extreme weather events from which lessons should be drawn. Climate experts have long argued that the frequency and magnitude of such events are increasing, and evidence of this should certainly influence precautionary steps – and cause us to review such measures regularly. There are two distinct and crucial components of disaster preparedness. The one that understandably gets the most attention is the capacity to mount a rapid and effective response. Such a capacity will always be necessary, and few doubt its importance. When it is absent or deficient, the loss of life and livelihoods can be horrific – witness Hurricane Katrina, which ravaged Haiti and New Orleans in 2005. The second component comprises investments that minimize the expected damage to the economy. This aspect of preparedness typically receives far less attention. Indeed, in the United States, lessons from the Katrina experience appear to have strengthened response capacity, as shown by the rapid and effective intervention following Hurricane Sandy. But investments designed to control the extent of damage seem to be persistently neglected. Redressing this imbalance requires a focus on key infrastructure. Of course, one cannot at reasonable cost prevent all possible damage from calamities, which strike randomly and in locations that cannot always be predicted. But certain kinds of damage have large multiplier effects. This includes damage to critical systems like the electricity grid and the information, communication, and transport networks that constitute the platform on which modern economies run. Relatively modest investments in the resilience, redundancy, and integrity of these systems pay high dividends, albeit at random intervals. Redundancy is the key. The case of New York City is instructive. The southern part of Manhattan was without power for almost a full workweek, apparently because a major substation hub in the electrical grid, located beside the East River, was knocked out in a fiery display when Hurricane Sandy and a tidal surge caused it to flood. There was no pre-built workaround to deliver power by an alternate route. The cost of this power failure, though difficult to calculate, is surely huge. Unlike the economic boost that may occur from recovery spending to restore damaged physical assets, this is a deadweight loss. Local power outages may be unavoidable, but one can create grids that are less vulnerable – and less prone to bringing large parts of the economy to a halt – by building in redundancy. Similar lessons were learned with respect to global supply chains, following the earthquake and tsunami that hit northeast Japan in 2011. Global supply chains are now becoming more resilient, owing to the duplication of singular bottlenecks that can bring much larger systems down. Cyber security experts rightly worry about the possibility of bringing an entire economy to a halt by attacking and disabling the control systems in its electrical, communication, and transportation networks. Admittedly, the impact of natural disasters is less systemic; but if a calamity takes out key components of networks that lack redundancy and backup, the effects are similar. Even rapid response is more effective if key networks and systems – particularly the electricity grid – are resilient. Why do we tend to underinvest in the resilience of our economies’ key systems? One argument is that redundancy looks like waste in normal times, with cost-benefit calculations ruling out higher investment. That seems clearly wrong: Numerous expert estimates indicate that built-in redundancy pays off unless one assigns unrealistically low probabilities to disruptive events. That leads to a second and more plausible explanation, which is psychological and behavioral in character. We have a tendency to underestimate both the probabilities and consequences of what in the investment world are called “left-tailed events.” Compounding this pattern are poor incentives. Principals, be they investors or voters, determine the incentives of agents, be they asset managers or elected officials and policymakers. If principals misunderstand systemic risk, their agents, even if they do understand it, may not be able to respond without losing support, whether in the form of votes or assets under management. Another line of reasoning is that businesses that depend heavily on continuity – for example, hospitals, outsourcing firms in India, and stock exchanges – will invest in their own backup systems. In fact, they do. But that ignores a host of issues concerning the mobility, safety, and housing of employees. A broad pattern of self-insurance caused by underinvestment in resilient infrastructure is an inefficient and distinctly inferior option. Underinvestment in infrastructure (including deferred maintenance) is widespread where the consequences are uncertain and/or not immediate. In reality, underinvestment and investment with debt financing are equivalent in one crucial respect: they both transfer costs to a future cohort. But even debt financing would be better than no investment at all, given the deadweight losses. Cities and countries that aspire to be hubs or critical components in national or global financial and economic systems need to be predictable, reliable, and resilient. That implies a transparent rule of law, and competent, conservative, and countercyclical macroeconomic management. But it also includes physical resilience and the ability to withstand shocks. Hubs that lack resilience create cascades of collateral damage when they fail. Over time, they will be bypassed and replaced by more resilient alternatives. This article originally appeared on www.project-syndicate.org.

On October 15, the Renewing America initiative hosted the BBC's The World Tonight radio program at CFR in Washington for a special event, "American Decline or Economic Renewal?," which was broadcast as part of The World Tonight's program, "Rebuilding America." Panel members discussed issues highlighted by CFR's Renewing America initiative including education, innovation, and the state of U.S. infrastructure, as well as the ability of the U.S. political system to address these challenges. The World Tonight's Robin Lustig presided, and panelists included CFR's Edward Alden; Douglas Holtz-Eakin, president of the American Action Forum and formerly the chief economic advisor to Senator John McCain during his 2008 presidential run; Andrew Stern, the Ronald O. Perelman Senior Fellow at the Richman Center at Columbia University and the former president of the Service Employees International Union; and Jennifer Hillman, a Transatlantic fellow at the German Marshall Fund and former member of the WTO Appellate Body. Check out the audio, transcript, or the watch the video below: http://youtu.be/IeLkxxdtlUY

In the wake of the recent economic crisis, many state and local governments confront significant fiscal stress that could have national ramifications. The flow of federal stimulus funding is drying up before tax revenues fully recover and forcing many statehouse and city halls to consider tax hikes and/or spending cuts that could slow recovery and, in some cases, undermine long-term growth and global competitiveness. In particular, funding for infrastructure and education—of which states and cities are by far the primary sources—are under the budget knife. This Backgrounder examines the fiscal woes at the sub-national level and some of the troublesome budget cuts being made. In addition, it explores some innovative initiatives states and cities are taking to do more with less.

I will be traveling to Detroit this week to speak on a panel at the Techonomy conference, which is an annual event normally held in Arizona. It's a gutsy decision by the organizers to shine the spotlight on a city that Techonomy founder David Kirkpatrick noted is usually considered "a gritty, depressed, financially troubled city that seems well past its glory." The conference will highlight the transformative economic potential of modern technologies, and as Kirkpatrick writes: "If technology is the key ingredient to rejuvenating the American economy, it has to work where the problems are biggest and the task the hardest." The post below, which looks at what governments should be doing to facilitate this transformation, first appeared on the Techonomy web site. Here’s a chicken and egg problem. Are companies failing to invest in the United States because of its decaying infrastructure, schools that don’t produce enough skilled workers, and a byzantine immigration system? Or has the reluctance of companies to invest in the United States led to decaying infrastructure, failing education, and growing political fights over immigration? The question is one with enormous implications for governments at all levels looking to create conditions for stronger growth. Should they invest more heavily in education and infrastructure and hope for future payoffs (build it and they will come)? Or should they hold down spending, keep taxes low, and hope that companies will invest, creating a faster growing economy that generates new revenues for education and infrastructure? The United States clearly has an investment problem, and it’s not just a cyclical one caused by weak consumer demand coming out of the Great Recession. The U.S. share of global foreign direct investment stock, for instance, fell from over 40 percent a decade ago to less than 20 percent today. U.S. headquartered multinational companies, which created more than 4 million jobs in the United States in the 1990s, cut more than one million in the 2000s even as they continued to expand rapidly overseas. The Harvard Business School earlier this year released an important survey of its alumni working in multinational companies, asking whether their companies were moving operations overseas, and if so why. Discouragingly, far more companies were still thinking about expanding abroad than adding jobs in the United States. And nearly half of those decisions involved research, development, and engineering activities, which are critical to maintaining the U.S. lead in innovation. Many of the respondents cited lower wages as a big incentive to move abroad, but other reasons included better access to skilled labor, fewer or less expensive regulations, and lower tax rates. The most popular recommendations for making the United States a better place to invest included a simpler tax code, immigration reform, strengthening education and training, and streamlining regulations. One obvious response, and one I generally support, is to try to address these concerns and make the United States a more attractive location to invest. Bolstering the skills of the workforce seems like a no-brainer, for example, but there’s no gain in training young people for jobs that aren’t available.  There are already too many college grads working at Starbucks. Immigration reform to attract more educated and skilled workers again seems obvious, but not quite so obvious in an economy where even U.S. college graduates are struggling to find good work. Infrastructure spending makes sense, especially when long-term borrowing costs are so low. But West Virginia has spent billions building roads, and total federal, state, and local spending accounts for more than half the state’s economy, the highest percentage in the country. And yet West Virginia is still among the poorest states. Roads alone do not make an economy. So what should governments be doing? For one, they should be competing aggressively for investment. While other governments court multinational companies, the United States has long taken a hands-off approach, though states often take this on themselves. In the Council on Foreign Relations Task Force on U.S. Trade and Investment Policy, released last year, we call for a National Investment Initiative that would set a target for increasing investment in the United States, both by domestically headquartered multinationals and by foreign multinationals. We urged action on a variety of fronts including “education, development of infrastructure, encouragement of high-skilled immigration, expanded government support for R&D, and other initiatives that enhance the United States as a primary destination for the location of higher wage employment.” And the task force recommended an overhaul of the corporate tax system to encourage the location of business in the United States. The idea for a National Investment Initiative was endorsed by President Obama’s Council on Jobs and Competitiveness. At the state and local level, Roland Stephen of SRI International, in a working paper for the Renewing America initiative at the Council on Foreign Relations, looked at the experience of North Carolina. The state has rebounded quite strongly from the devastating collapse of manufacturing employment over the past two decades, which was even worse there than in Michigan and Ohio. The state’s Research Triangle is a national success story. While there was no silver bullet, Stephen argues that long-term funding of education and infrastructure “are the foundation on which other policy initiatives rest.” He calls for more targeted investments as well, particularly in building regional partnerships, technology centers, and other institutions focused on economic development. But he cautions: “Success demands patience. Economies grow slowly and payoffs come slowly. The powerful and appropriate impulse to keep score on public spending should be weighed against the need for investments of an uncertain duration with hard-to-measure payoffs.” That’s a hard one to sell to the public in a time of fiscal constraint and diminished expectations. But if the United States doesn’t build for the future, it will pass us by.

The following is a guest post by Scott Thomasson, the president of NewBuild Strategies LLC, an energy and infrastructure consulting firm in Washington, DC. When voters in Atlanta went to the polls at the end of July for a major transportation funding referendum, transportation watchers turned their eyes to Georgia with hopes of a positive story of local leadership after a long, frustrating year for federal transportation funding. Metro Atlanta voters were asked to increase their sales tax by a penny for ten years, with most of the revenues dedicated to an itemized list of $6 billion in road and transit improvement projects. The “T-SPLOST” referendum was billed as a critical step forward for the city’s economy, and a chance to break the funding drought for transit expansion in a city that has spent decades pushing the limits of new road capacity. The news from Atlanta was not good. Despite endorsements from leaders in both parties, a massive public relations campaign by the Atlanta Chamber of Commerce, and support from environmental groups, the proposal was decisively rejected. It’s a stinging defeat for local officials, and a setback for the city’s image as a rock star of the modern Sun Belt economy. The damage to its reputation was soon confirmed, when credit rating agency Moody’s declared a “credit negative” for Atlanta and downgraded a bond rating for MARTA, the city’s strained transit authority. Moody’s message was pretty straightforward: “The Atlanta region needs major upgrades to its dated and limited transit system and congested roadways to maintain its long-term position as an influential economic center.” It’s an ominous warning for other areas of the country facing similar investment challenges. There is a very real national interest in the success of large, transformative infrastructure projects in our major cities. No city is an island--Atlanta is an international transportation hub and an important engine of commerce for the U.S. economy as a whole. Atlanta’s epic infrastructure failure hurts us all. We should do what we can to see that it’s not repeated. As Atlanta decides how best to move forward, there are lessons it can take from other cities like Los Angeles, Denver, and Phoenix that succeeded in passing similar infrastructure referenda. Denver’s ambitious FasTracks program is a particularly good example. It relies on incremental sales tax revenue to fund a massive expansion of its transit system with projects in multiple cities and counties in Denver’s metro area. And like Atlanta, Denver failed by a wide margin in its first referendum attempt—a 1999 initiative dubbed “Guide the Ride.” It took five more years before voters agreed to fund a redesigned and rebranded “FasTracks” proposal. During that time, the FasTracks campaign retained a political consulting firm and proactively engaged the public and local businesses in the planning process. Denver used another creative approach that has helped assure voters their money is being spent effectively: it partnered with the federal government to leverage available funding with a low-interest loan from the Department of Transportation’s Transportation Infrastructure Finance and Innovation Act (TIFIA) program, which it will repay in part from dedicated sales tax revenues. Like Denver, Los Angeles passed its own “Measure R” tax referendum, and Mayor Villaraigosa has since campaigned tirelessly for a “30/10 Initiative” that will use a TIFIA loan to accelerate thirty years worth of planned projects to be completed in ten years. The Mayor has enlisted support from Senator Barbara Boxer, who chairs the committee that determines TIFIA’s funding, and Transportation Secretary Ray LaHood, who has spoken favorably of the 30/10 approach. Atlanta could benefit from studying both of these projects. Not every city has the advantage of a powerful committee chair who can encourage federal cooperation for local transit projects. But the growing popularity and expanded funding for TIFIA is an opportunity to reconsider the federal role in helping cities with early-stage planning and project selection for large initiatives like T-SPLOST. More cities should have early access to the advice and counsel of federal agencies and their expert staff, so local planners can prioritize suitable projects for federal financing and signal their intent to voters before a referendum vote, not after. Just contemplating a competitive application can add value for local taxpayers, because it forces an implicit market test of projects to decide which are most worthy of funding. I’m betting not a lot of Atlanta’s 157 projects would make the cut. TIFIA is already receiving more interest than it can handle, so the immediate priority is ensuring the evaluation process for fully developed project applications. With competition for TIFIA loans growing fierce, that means cities like Los Angeles and Denver that already have a dedicated funding source approved will have much better chances than a city like Atlanta that’s still trying to get its act together. But the Department of Transportation has recently signaled that a more inclusive and interactive approach may be in the works. Department of Transportation officials recently held online webinars to answer questions about TIFIA financing and the application process. Hundreds of people from around the country participated. The Department of Transportation has also made vague announcements that it is developing a new “Project Finance Center” to expand its expert financial staff and offer support services to project sponsors. Hopefully expanding outreach and technical support services for local planners will become a priority for the Department over time, because cities like Atlanta are going to need all the help they can get.

DAVIS, WV -- Can American small towns be revived? And is this something governments should even try to be doing? I’ve been pondering these questions on a brief working escape from this year’s especially oppressive summer heat in Washington, DC. The decline of small towns has been an inexorable, century-long trend. The mechanization of agriculture emptied out most of the small towns in the Midwest. The exhaustion of natural resources like timber, minerals, and coal spelled the death of others in the west and the Appalachians. The small manufacturing towns of the Northeast declined as factory jobs first moved south and later overseas. And big box retailers like Wal-Mart and Costco have often put out of business what little remained of the old downtown retail cores. The remaining options for these towns are few. Davis, whose population peaked at over 3,000 during the West Virginia lumber boom in the early 1900s, now has a population of 648, according to the latest Census data, down from about 800 two decades ago (though with an interesting uptick from fewer than 600 since the outbreak of the recession in 2008). The town, which sits on the beautiful Canaan Valley plateau, has tried to remake itself as a winter ski and summer outdoor destination for visitors from Washington, Pittsburgh, and other nearby cities. It has been a modest winter success, though ski seasons have been growing shorter with warming weather; and sadly, despite magnificent hiking and biking trails, the summer tourist traffic is small. Thanks largely to the late Senator Robert Byrd, the long-time Senate Appropriations Committee chairman, the state is close to completing a long-planned four-lane highway that will connect the town and others in West Virginia with Highway 81 in Virginia, cutting perhaps an hour off travel time from the DC metro region. I am generally skeptical of the advisability of governments trying to change the location of economic activity. Location subsidies of different sorts rarely work, and even if they do relocate some businesses, they bring no aggregate benefits for the country. In Canada, for instance, billions of dollars and decades of federal economic development initiatives in the Maritime provinces had little impact reducing the inexorable population decline that followed the collapse of the fishing industry. The modern history of West Virginia shows the same. Despite government spending at federal, state, and local levels that totals more than half the entire economy, West Virginia remains among the poorest states in the country. So what can these towns do? In some cases, probably nothing. In his superb Renewing America working paper on North Carolina, Roland Stephen argues that, while every community is eager for help, “growth more often comes from bolstering already successful initiatives, even at the cost of increasing inequality among different regions.” Governments, he argues, should invest in “open-ended initiatives” such as education and infrastructure, while local regions need to leverage local assets in tourism or natural resources. Attracting immigrants may be a winning strategy as well; Canada’s Maritime provinces have begun to grow recently largely because of immigrant inflows. And the same technological innovation that killed some small towns may, in theory, offer some hope for their revival. The commercial possibilities of the internet and modern communications mean that many jobs, particularly in business services, can be done remotely. In all likelihood, companies have only begun to experiment with the cost savings that could come from allowing more employees to work from home or at cheaper satellite offices. New, small-scale manufacturing technologies using 3-D printing could also begin to decentralize manufacturing. With high housing prices and traffic congestion plaguing many cities, an escape back to small town living would seem to be attractive to some – as long as there is a way to make a living. Connectivity is key to any of this happening. This is the theory behind the Obama administration’s National Broadband Plan. The 2009 American Recovery and Reinvestment Act, more commonly known as the stimulus, allocated $7.2 billion to expand broadband capability in rural America. The evidence to date is mixed.  While internet connections may create some local jobs, they could also eliminate others – when, for instance, residents begin to shop online rather than in local stores. But on balance, as a recent study from the Public Policy Institute of California showed, there appear to be modest gains in employment for towns and regions that are better connected. Broadband is the sort of open-ended infrastructure that makes sense for government investment in regions where the private sector lacks the incentive to build it out, though in practice it is often difficult to distinguish exactly where public investment is necessary. Broadband offers the possibility, though not the guarantee, of connecting remote regions of the country in a new way to the national and global economy, much as rural electrification did in the 1930s. Will this be enough to reverse the decline of America’s small towns? Probably not. As Jane Jacobs argued so elegantly, cities are powerful economic engines, and the opportunities of urban life continued to draw in people. But it is at least possible that technological innovation, which for so long has favored cities, could begin to tip the scales in the other direction.

In this Policy Initiative Spotlight, Renewing America contributor Steven J. Markovich looks at the implementation of driverless cars in subways, a trend that has seen growing  popularity in recent years. He highlights the costs and benefits of this alternative, and argues that the United States could gain long-term by implementing this system that has been keeping subway costs and wait times down around world for decades. On October 31, 2011, Algerian President Abdelaziz Bouteflika cut the ribbon on Algeria’s new subway system. German industrial giant Siemens led the project and supplied much of the technology for the project. In addition to major items such as the operations center, trackworks, and ticket systems, Siemens also supplied a technology that was new to Africa and is still unused in the United States--automated trains. Siemens’ driverless trains are controlled by its Trainguard MT CBTC system. CBTC stands for communication based train control, and solutions sold by Siemens and other such as Thales, have become potent tools to cut costs and improve service on metropolitan rail systems across the globe, from São Paulo to Singapore. Labor is the major operating cost for running a mass transit system; according to the budget of New York’s Metropolitan Transport Authority (MTA), labor costs were over 64 percent of total operating costs in 2011, exceeding revenues. Automated train systems allow a range of labor reductions. Trains can be remotely controlled without human presence—if needed, a worker can walk around the train to assist passengers but he/she does not need to be present in the control cab. While reducing workers can trim operating costs, that benefit comes at the cost of good jobs. According to the Bureau of Labor Statistics, the average annual wage of a subway or streetcar operator was $63,820 in 2011. With total national employment at 5,920, cumulative earnings are almost $378 million. Simply reducing workers is not the only way automated trains cut operating costs. Transit systems with human drivers have to balance the break needs and work schedules of their workers while managing the flow of passengers. This juggling act is often additionally complicated by arcane work rules from union negotiations or laws, and often results in substantial inefficiencies. Reducing the labor requirement can also increase the quality of service. During off-peak travel times—late nights and weekends—the lower number of passengers cannot justify the same level of service, so fewer trains run, leading to much longer waits at stations. Automated trains allow systems to deliver similar levels of service off peak at a feasible cost. For instance, riders on Vancouver’s automated Expo and Millennium lines can expect a 2-3 minute wait during peak times, but only a 4-5 minute wait during late night. Contrast that with New York’s MTA, which not only runs fewer trains at night, but drops service to enough stations that it publishes a separate late night subway map. While the United States today does not employ automated trains beyond small systems such as people movers in airports and the Las Vegas monorail, there is growing interest. In the spring of 2011, the MTA began improvements to the “7-line” which include a CBTC system; the project is scheduled for completion in late 2016. In March 2012, Thales and Siemens were both awarded with four-year projects with the MTA for a CBTC test track project off the “F-line.” These developments are not cheap; from 2010-2014, MTA has budgeted $2.1 billion for improvements to signal system moderation, of which CBTC is a large component. That is about 16 percent of the total capital investments planned for New York’s subway system. The capital investment required to install CBTC is the major impediment to further adoption of driverless trains. Though the upfront cost is high, the foreign cities that have chosen to make this infrastructure investment have lowered their operating costs for decades and improved the commuting lives of urbanites and travelers.

There’s nothing like six days without electricity in the middle of a record heat wave to leave one with the feeling that somebody must be doing something wrong. I shouldn’t really complain too much. Some of our neighbors had trees crash through their houses during the storm, and others went more than a week without power afterwards. And when the utility trucks rolled up our street at 10 pm last Thursday night, it was obvious that the crews – brought in from all over the northeast, including Canada -- were working as hard as possible in extremely difficult conditions. So who should we blame? My former CFR colleague Stephen Flynn, now at the Northeastern University, has a pretty good set of answers in a report titled Powering America’s Energy Resilience, which was released in May by the Center for National Policy. Vulnerability to the kind of lengthy power outage we just experienced, the report argues, is a failure of collective responsibility; the United States has simply not made it a priority to sustain and improve the infrastructure that is vital to our daily lives. Former Secretary of Energy Bill Richardson once described the United States as “a superpower with a third-world grid.” Anyone who tried to sleep without air conditioning after days of triple digit heat can readily appreciate the report’s call to action. “As a stepping-off-point for undertaking this vital task,” the authors write, “the American populous would do well to recalibrate its thinking about the role that infrastructure plays in supporting our way of life.” Indeed. My family coped because there were still plenty of places – restaurants, malls, ice skating rinks – that had power restored quickly, but I can’t imagine the scenario if there had been a widespread power outage that closed these places as well. And worse is certainly possible. Along with extreme weather, there are increasingly frequent mechanical failures among electrical systems that are half a century or more old. The huge August 2003 blackout that affected some 50 million people in the Northeast and Midwest United States and in Canada, was cause by a cascading series of mechanical failures, compounded by human error. Pepco, which supplies power to the Maryland suburbs, usually blames bad weather and tall trees, but in fact nearly half of all power outages in its service area are caused by mechanical failures, twice as many as are caused by downed trees and limbs. As electrical systems are increasingly automated, they are also more vulnerable to cyber attacks that could leave vast areas of the country without power. The study quotes cyber expert James Lewis of the Center for Strategic and International Studies, who says that the electrical grid is the most likely target for cyber-terrorism. The report is full of sensible recommendations, not just for electricity but for other forms of energy: reducing demand through smarter technologies, increasing domestic supply, upgrading the electrical grid. None of this is especially cheap; the report suggests that just meeting electricity demand over the next two decades will require $300 billion in transmission investments. Smart grid upgrades to improve efficiency and reliability would add another $90 billion. But it became very clear to me after several days in the sweltering dark that the alternative is a whole lot worse.

In just a matter of days, New York City will officially become the most recent U.S. metropolis—joining the likes of Washington, DC (Capital Bikeshare), Denver (Denver B-cycle),  Boston (Hubway), and Minneapolis (Nice Ride Minnesota), among others—to unveil a large-scale bikesharing program. Citi Bike, as it's known, will add yet another mode to the city's diverse suite of public transportation, with a planned fleet of 10,000 bikes and some 600 docking stations scattered about the boroughs of Manhattan, Brooklyn, and Queens. It will be the largest such program in the country, marking what some supporters have touted as a "watershed moment" in the city's transportation history (NYT). Notably, Citi Bike will not impact the Big Apple's taxpayers and, therefore, may serve as a test case for those fiscally challenged cities with bikesharing dreams. The program is privately sponsored by Citigroup ($41 million), which will stamp its brand on each bike, and MasterCard ($6.5 million), which will help finance the docking stations. The program will also be privately operated (Alta Bicycle), although the company will share revenue in its partnership with the city. In contrast, DC's Capital Bikeshare (US News), while partnered with the same company, funded its capital expenses ($ 7 million thus far) with federal dollars. The program has also doled out more in operating expenses ($2.54 million) than it has taken in ($2.47 million) as of April, although it is now considering putting ads on its bikes. Similarly, Minneapolis' program used federal dollars to fund 2/3 of its capital investment, and does not expect "to ever get to the point" where it operates in the black, according to officials. However, even if they don't turn a profit, city leaders hope bikesharing programs, which are also due to hit Chicago this summer, Portland next spring, and Los Angeles within the next couple of years, will increase the mobility of their residents in a sustainable, cost-effective manner. For a reasonable membership fee ($95 annual in NYC), bikeshares enable commuters to make short trips, typically under 30 minutes (without additional charges), to another dock that may be their final destination or connect them to the next leg of a longer transit trip. Bikeshares therefore can help many riders solve the "first-and-last mile" problem in accessing the subway, bus, or train. Proponents also argue that, in keeping many cars off the road, bikeshares reduce traffic congestion, cut pollution, save fuel, and decrease public expenditures on auto-related infrastructure. In addition to the immediate transport efficiencies, supporters also say that riders benefit from improved health (exercise) and a generally enhanced quality of life. An opinion piece from David Byrne in the New York Times crystallizes this notion: "For me, and lots of other people, the answer to the question 'What would improve the quality of our urban life?' involves simple things like ... um ... bicycles, which make getting around — and being in — the city easier, more pleasant and more affordable. New York is one of many cities that are creating all kinds of new green spaces, riverside parks and bike programs, all of which are symptomatic of our desire to make our cities into our homes." The need for efficient urban transportation will also increase as more Americans choose to migrate or remain in big cities as part of what some analysts describe as an "urban renaissance" (LAT). According to census data, the country's 51 metro areas (> 1 million pop.) grew faster from 2010-2011 than their suburban counterparts, a dramatic shift from the prior decade when suburb population growth rates tripled that of cities.

The Renewing America initiative is publishing today the first of what will be an ongoing series, the Renewing America Progress Report and accompanying Infographic Scorecard. The series is intended to highlight – in both a visually compelling fashion and in a more detailed narrative – the challenges the United States faces in rebuilding the foundations of its economic strength, and some of the initiatives that show the greatest promise. Our first installment, “Road to Nowhere,” says it all in the title. Transportation infrastructure is one of the pillars of a modern competitive economy. It allows people to travel to and from work easily every day. It permits goods to move quickly from U.S. factories to international markets, or from coastal ports to American retail shops, boosting productivity. It lets us hop in the car, or on a train or plane to escape for the weekend or a longer holiday, improving our quality of life and making the United States a more attractive place to live. Americans understood this once upon a time, building the most impressive network of roads and airports in the world, as well as a solid freight rail system. But for far too long we have been living on that inheritance. Two data points from the Scorecard stand out: Since 1980, the number of highway miles traveled by American drivers has doubled, but the miles of road on which they’re driving have increased just 5 percent. It’s no mystery, as the report notes, why traffic congestion takes more than $700 out of the pocket of the average commuter each year. Two-thirds of Americans say that fully funding transportation infrastructure is either “extremely important” or “very important” to them. Yet solid majorities are opposed to any of the usual ways of funding new roads, including higher gas taxes or new tolls. It would be easy to point a finger at Congress, and we certainly do in the report. Reauthorization of the surface transportation bill, usually known as the highway bill, has always been contentious, but nevertheless it used to win approval routinely. But the last multi-year bill expired in 2009 and has been replaced by a series of short-term extensions that make rational construction planning all but impossible for state and local governments. The bill expires again June 30th, and congressional leaders again look unlikely to reach agreement and are predicting another short-term extension. It will be the 10th; as a Miami Herald editorial put it recently, this marks “a new low in congressional irresponsibility.” But congressional inaction in many ways reflects public ambivalence. Americans want uncluttered highways, efficient airports, and seamless mass transit systems, but they are either reluctant to pay for these things or doubt the ability of governments to deliver. The overdue backlash against pork barrel politics for favored projects, for instance, seems to have hardened into a deeper public cynicism about the ability of government to deliver any needed public works. Even proposals like using a federal seed money to create a National Infrastructure Bank that would funnel private investor (not taxpayer) money into new projects have been unable to get through Congress. There are encouraging signs from some state and local governments. Chicago is launching a $7 billion Infrastructure Trust that will rely primarily on private investor capital to finance city projects. New York state has created a new state infrastructure bank  intended to leverage $15 billion in investments into state projects. But most big projects, and all interstate projects, require some active federal role, and that is still missing. One of the more tragic aspects of the federal gridlock over infrastructure is that the United States is missing a golden opportunity that the rest of the world is handing us, and one that probably won’t last for long. The turmoil in Europe and the lack of developed capital markets in the rest of the world have led investors to continue buying up U.S. Treasuries at record low interest rates that are not even keeping pace with inflation. They are paying the U.S. government, in other words, to hold their money. And they are doing so despite big U.S. budget deficits that in more normal times would drive interest rates higher. The United States should use some of that free money -- along with the plentiful private capital that is searching for stable returns -- to invest in projects that promise long-term payoffs in improved productivity that will strengthen the U.S. economy, as well as provide a much-needed short-term boost in employment. As the Progress Report and Scorecard clearly demonstrate, the United States has a lot of catching up to do. Now is the time to start.  

Over the years, advanced and developing countries have experimented, sometimes deliberately and frequently inadvertently, with a variety of approaches to growth. Unfortunately, many of these strategies have turned out to have built-in limitations or decelerators – what one might call elements of unsustainability. And avoiding serious damage and difficult recoveries requires us to get a lot better at recognizing these self-limiting growth patterns early on. Here are some of the items in a growing library of decelerating growth models. In developing countries, import substitution as a way to jump-start economic diversification can work for a while; but, over time, as productivity growth lags and comparative advantage is over-ridden, growth grinds to a halt. Small, open economies are naturally somewhat specialized, which leaves them vulnerable to shocks and volatility. But, in terms of growth and living standards, the cost of economic diversification, when implemented by protecting domestic industries from foreign competition, eventually outweighs the benefits. It is better to allow specialization, and build effective social safety nets and support systems to protect people and families during economic transitions. Such “structural flexibility” is better adapted to enabling the broad changes that rapidly evolving technological and global economic forces require. Mismanagement of natural-resource wealth underpins an especially potent self-limiting pattern of growth and development. If invested in infrastructure, education, and external financial assets, natural-resource revenues can accelerate growth. But, too often, such revenues distort economic incentives, which come to favor rent-seeking and interfere with the diversification that is essential for growth. More recently, many advanced countries have discovered a “new” set of growth models with built-in structural limitations: excessive private or public consumption, or both, usually accompanied and enabled by rising debt and inflated asset prices, and a corresponding decline in investment. This approach appears to work until domestic aggregate demand can no longer sustain growth and employment, at which point it ends in either gradual stagnation or a violent financial and economic crisis. (In fact, many developing countries have learned this the hard way, but the lessons seem not to have crossed over to advanced countries.) But the opposite of the excessive-consumption model – excessive reliance on investment to generate aggregate demand – is also a self-limiting growth pattern. When the private and social returns of investment diminish too much, growth cannot be sustained indefinitely, even though rising investment rates can sustain aggregate demand for a while. Altering this growth pattern is a significant part of the challenge that China now faces. Rising inequality in either opportunity or outcomes (and often both) also poses threats to the sustainability of growth patterns. While people in a wide range of countries accept some degree of market-determined income variation, based on differential talents and personal preferences, there are limits. When they are breached, the typical result is a sense of unfairness, followed by resistance and, ultimately, political choices that address the inequality, though sometimes in counter-productive, growth-impeding ways. Perhaps the largest long-run sustainability issue concerns the adequacy of the global economy’s natural-resource base: output will more than triple over the coming two or three decades, as high-growth developing economies’ four billion people converge toward advanced-country income levels and consumption patterns. Existing economic-development strategies will require significant adaption to accommodate this kind of growth. Some adaptation will occur naturally, as rising energy and other commodity prices generate incentives to economize or seek alternatives. But the un-priced environmental externalities – global warming and water depletion, for example – will require serious attention, not myopic, reactive mindsets and approaches. All of these self-limiting growth patterns tend to have three things in common. First, in one or several dimensions, some part of the economy’s base of tangible, intangible, and natural-resource assets is being run down. I would include social cohesion as part of the asset base: it is the one that is depreciated by excessive inequality. Measurement issues play an important role here. It is easier to run down something that is partly invisible because it is not regularly or effectively measured. Expanded measurement of the dimensions of economic, social, and environmental performance is necessary to broaden awareness of sustainability issues. Second, unidentified self-limiting growth patterns produce very bad results. Expectations come to exceed reality, and resetting the system to a sustainable growth pattern is difficult. After all, past investment shortfalls have to be made up and future-oriented investments undertaken simultaneously – a double burden that must be borne by the current generation. An inability to resolve the distributional and fairness problem can produce gridlock, paralysis, and prolonged stagnation. Finally, many of these flawed growth patterns involve fiscal distress. Contrary to the prevailing wisdom nowadays, some degree of Keynesian demand management in the transition to a more sustainable growth pattern is not in conflict with restoring fiscal balance over a sensible time period. On the contrary, applied both individually and together, fiscal stimulus and consolidation are necessary parts of the adjustment process. But they are not sufficient. The crucial missing pieces are a shift in the structure of accessible aggregate demand and restoration of those parts of the economy’s asset base that have been run down, implying the need for structural change and investment. This article originally appeared at www.project-syndicate.org.