Homeland Security in Transition: Rebuilding Critical Infrastructure

Tuesday, January 27, 2009
Everett M. Ehrlich
President, ESC Company
Stephen E. Flynn
Ira A. Lipman Senior Fellow for Counterterrorism and National Seucurity Studies, Council on Foreign Relations
Frances Fragos Townsend
Senior Adviser to the President and CEO, U.S. Chamber of Commerce
Massimo F.T. Calabresi
Correspondent, Time Magazine

MASSIMO CALABRESI: Welcome, everybody. Thank you for braving the snow. Welcome to the Council on Foreign Relations, the glistening new building.

A couple of standard reminders, which I'm sure you're all familiar with, but I'll just put out there to make sure we're all complying. Please completely turn off, not only put on vibrate, your cells, BlackBerrys and any other wireless devices. This meeting is on the record, and as always, these meetings are recorded for the Council, and the phones, even if they are on mute, interfere with the recording. So please do make sure that they are off. And again, it's on the record, so please make your questions not embarrassing for you or for the Council.

We have with us today two of our three panelists. Our third should be arriving shortly, inclement weather providing some problems for Fran Townsend. But we'll start in without her. And let me introduce the two of the three who are here.

On my left, immediate left, is Ev Ehrlich, president of ESC Company, former undersecretary of economic affairs; and a man known to many of you, Steve Flynn, senior fellow for counterterrorism and national security studies here at the Council.

We would like to talk today not just about homeland security priorities for the new administration, but given the topic of the day in Washington, the stimulus package and the movement for new spending on infrastructure within that. And as a larger priority for the administration, we'd like to particularly focus on priorities for spending on infrastructure for the new administration.

So I'll approach that in a particular way. I think, to begin with, Steve, why don't we start by laying out what, in your mind, are, generally speaking, the priorities for Homeland Security and how critical infrastructure fits in and where it fits in in terms of a list of the most important things that the new administration faces in taking on Homeland Security from the outgoing administration.

STEPHEN E. FLYNN: A broader thesis I've had for some time is that we're in a world that 9/11 signaled that the new battle space is increasing the civil economic space, that one of the outgrowths of the sheer dominance of the U.S. in the conventional military realm is that any future adversary beyond al Qaeda, if you wanted to confront U.S. power, it turns out there's a soft underbelly. And the soft underbelly is essentially these networks, not just domestic, but global ones, that are essential to generating the wealth and providing the quality of life and the safety and well-being of our people.

It just seems to me a question of time that we will see more and more folks, when they find themselves wanting to confront U.S. power, gravitating to this area of vulnerability. And what they will find, of course, is that it's very brittle.

It's very brittle for three relatively straightforward reasons. About three generations ago, we stopped investing much in it. Secondly, we grew as a country. Literally the bridge we all know, the I-35W bridge that collapsed in Minneapolis, when it was opened up for business, the population of the United States was 200 million people. A couple of years ago we went over the 300 million people mark, and we've put a lot more cars and trucks.

So the second sort of variable is we've concentrated essentially more activity on the inherited infrastructure that we haven't been reinvesting in.

And then, finally, it's likely to be subjected increasingly to more strain, not just because of aging but because of external forces, related as we see exposed particularly in natural calamities.

All that suggests is that when these things go wrong, as they occasionally do, that this is a core vulnerability for the U.S. society. It's very costly, after things fall apart, to try to put them back together again. And so, as I would forecast more generally in the 21st century, infrastructure is going to be -- (audio break) -- appealing target.

Then what we have is real evidence, though, of course, not here in the U.S. thankfully, what we know is that the footprint of al Qaeda has turned out to be extremely small inside the United States. That's why we haven't seen basically an attack in the last seven years.

I don't ascribe, frankly, a lot of credit to the fact that we've done so good on the borders or we've done so good policing. As I've gone out to those front lines, I still see, if I was determined to get through these safeguards we've put in place, which certainly are better than what we had, I would overcome those safeguards. They're just not quite ready for prime time still today.

But what's very clear is that most of that effort and energy has been dedicated towards the away stuff. And then if you look at particularly in Iraq, a lot of the targeting there was at infrastructure -- pipelines, refineries, bridges. This is because this caused profound disruption to the U.S. strategy of trying to rebuild that strategy.

So within that broad context, I think what we are -- the knowledge that infrastructure is both critical and vulnerable is now, of course, becoming more apparent. The expertise to how to sabotage it is starting to grow. It's the kind of information that you used to have to get very specialized training to get. But now, if you shop around a bit on the Internet, you can find out more about it.

I don't want to overstate this, though. Just like learning how to tune a car for the first time, you can't do it from a manual. The reality is, most of our infrastructure is very sophisticated. It's not extremely -- you have to really know what you're doing to get things done right. But it is -- when you succeed, you can get mass disruption, and potentially mass destruction.

CALABRESI: There's a variety of things to go at there. I think the first thing I'd like to do, though, before I start trying to pick some of that apart, is ask Ev to say a couple of words generally about the state of the fragility of U.S. infrastructure.

Ev, as you may or may not know, was the executive director of the CSIS project looking at the state of American infrastructure, and so is one of our foremost experts on the state of it.

So tell us a little bit, if you would, about what you think the overall state of the infrastructure is and the extent to which that makes it more vulnerable to the kinds of things that Steve was talking about.

EVERETT EHRLICH: Well, it's old and obsolescent. And as to whether that makes it more vulnerable to terrorist attack is a judgment that most of you would be more apt to make than I. But the real underlying issue about the nexus between infrastructure and Homeland Security is less to me about the age of the facilities than about the process that generates them.

Right now we have a crazy quilt of responsibilities across a variety of modes that were established invariably between 40 and 60 years ago with the aim of building things quickly. Eisenhower looked up and realized, as a result first of his experiences -- many of you know, trying to get his own men from the East Coast to San Francisco when he was a young officer, and then more pressingly after seeing the Autobahn in Germany -- that the United States needed large roads for no other reason than to move troops expeditiously across broad quantities of space.

And so a program was set up, in essence, to pour money out through a new kind of grant-sharing federalism and get roads built as quickly as possible. And the same approach was taken to airports, to water treatment centers after the Clean Water Act; to a lesser extent to ports, because they had a longer history. But in all of these different modes, as the infrastructuralists call types, the point of programs was to put facilities on the ground; the hackneyed joke about the edifice complex. And as long as things were being built, policy was working.

We're now way past that point historically. As was seen in both New Orleans and Minnesota, the things that we were in a rush to build, we did not maintain; we did not design correctly. They are now, quote-unquote, old and obsolescent, although -- and we'll return to this -- I don't know, and I'm a complete (tyro ?) here -- whether or not a terrorist can take out a new bridge with marginally more effort than one that might fall down tomorrow simply under the press of traffic. That's a separate question.

But with regard to infrastructure, we're no longer at a point where building something is unambiguously the highest-return activity across all of these modes. We're now at a point where we need to manage their use, manage their yield through pricing, through non-structural alternatives, through life-cycle rehabilitation and replacement. And the programs we have, in some sense, are, as Bert Ely called, the savings and loans 30 years ago -- policy zombies that are technically dead and yet nonetheless given sustenance by trust funds, the worst-of-all budget practices, and therefore capable of locomoting and preying upon the living. (Laughter.)

Let me tie this up for now by talking for one moment about the CSIS commission, which I was executive director and which was chaired by Ambassador Rohatyn and Senator Rudman. Its recommendation was to fold together the modal programs, to get rid of the highway trust fund, the airport trust fund, the Corps of Engineers waterway funding program. The Corps of Engineers could still be a contract employee.

But the less money you let it allocate, the better off the country will be, and turn all of those funds into a single-financing facility that would take those programs with major federal dollar commitments and negotiate them on a case-by-case basis and allow the federal government either to subsidize directly or through sinking funds or credit subsidies or guarantees or underwritings or what have you, and pick the most appropriate way to lever federal resources.

And I mention that so that I can stop at this point of departure. Having a standardized, unified review of all major infrastructure projects in all modes at one checkpoint, as opposed to the bad word -- the good word is inanity; the bad word is corruption -- of water projects or what happens when state capitols get their paws on highway trust fund money and decide what gets built where. Witness suburban sprawl versus urban ring service mass transit.

Having that kind of single, unified, consistent valuation, where we assign the same values to the value of lifetime -- the cost of capital, the cost of delay, and so on and so forth -- would allow us to superimpose other policy concerns. And the two that you will hear regularly are homeland security and environmental amenity.

If there had been such a review, New Orleans would have been protected by preserved flood lands that would serve as a buffer to absorb rain water before it washed down miles of city streets and came up against as large a levee as they had ever built, but not as large as they needed. And that kind of review would allow -- let me say it this way -- you to determine what the best way to either harden, defend or plan around the terrorist issue in the provision of infrastructure was.

CALABRESI: Good. Just briefly, then, from both of you, and the last of the sort of introductory framing of these issues, where, for each of you, do you see the incoming administration on these sort of larger philosophical or strategic questions regarding critical infrastructure and homeland security? Are they essentially, as you imply, carrying out more of what exists from the Bush administration?

Do they have some -- Steve, I know you've been working with the transition at various points -- do you see a potential for a different approach, or do you see this very much as going along under its own inertial weight? And fairly briefly, so we can move on to some other issues.

FLYNN: I mean, as a sort of basic stepping-off point, homeland security was really a challenge for the previous administration, because by definition it involved 50 states with their localities, and critical infrastructure was largely in the private hands, when the abiding philosophy of government was the federal government should stay out of the marketplace and stay out of local and state matters.

So as soon as they bumped into the Homeland Security mission, they essentially did a sort of back-off almost kind of move. So we get a lot of best practices and trickle-down grants that were kind of a feeding frenzy. But there was no systemic approach that you can really identify to addressing this issue of critical infrastructure, and more broadly homeland security.

Clearly the Obama administration doesn't come in with those same perspectives. The issue of infrastructure has now, of course -- (audio break) -- around economic stimulus. Hopefully we'll flesh this out a little bit more. I'm concerned about that, if that's just a quick jerk band-aid -- "This is what we're going to do right now to put jobs, basically jobs." If that's all we're looking at infrastructure, we're going to have some problems.

But also, the administration has also recognized, the new administration, that this notion of baking in both the green and the homeland security components of critical infrastructure makes a lot of sense.

That being said, though, as you're standing up a new administration, we have the natural -- you inherit the natural division of labor. Economists look at "How quickly can I get projects out to generate jobs?" This security stuff, and even to some extent the green stuff, slows that train down. You have security folks who are just beginning to grasp this new sort of orientation away from the last part. So it's not going to be a natural act. It's going to take leadership at the top to kind of drive these teams together.

But I think the case I certainly try to make most inside the transition process is that this isn't a classic tradeoff issue. These are cases where we really get two-fers and three-fers if we are willing to think about this. The dominant factor should be, first and foremost, not the security imperative. It should be this stuff's just falling apart. You can't advance society if the foundations that made it advanced are essentially imploding underneath you. So security and environment, though, are opportunities to broaden the base of support for that effort and ideally discipline it a bit more than -- Ev was highlighting here -- than the process we've used to create it in the first place.

CALABRESI: Do you have an opinion, Ev, on the incoming administration?

EHRLICH: Well, I'm for them. (Laughter.)

CALABRESI: Whether or not they share your vision.

EHRLICH: Let me make this general comment, and I think it's responsive, and it certainly is what I want to say.

CALABRESI: (Laughs.)

EHRLICH: The administration is behind on this kind of process. And in a sense, it shouldn't be this far behind. It's hard to come in and be president on day one. You know, we only have one president at a time, although, as Barney Frank said, that might overcount. (Laughter.) But these are the commonalities you see in the stimulus.

The stimulus is an attempt to move federal spending towards investment, away from consumption, and a dopey tax cut. The tax cut is the political price of it, but the tax cut will be saved. In that sense, no harm, no foul. If it's saved, then it really doesn't add to the flow-of-funds concept of the deficit and it doesn't have the pernicious crowding-out effect that federal deficits do have when they're spent. So if we let folks hold on to the money for a while, that's okay.

But on the investment side, we've got money going out there and we're yet to think of what the larger plan is for investment. And let me quickly list these examples. Infrastructure is one; new money going out in the (sluice ?) for highway trust fund, but priorities and our concerns today and rationality concerns about the highway trust fund not been addressed; $9 billion for broadband, good.

Universal high-speed broadband access ought to be a pressing economic and social goal, but I can't fit it in the context of an administration plan to achieve that access through a variety of policy means that include spectrum and other kinds of tax cuts, and so on and so forth. We see a first glimmer of it in health care because of the computerization of records. Education, yes, but again, where's the larger plan within which to fit it? Energy conversion; at least fortunately that's dominantly a private-sector activity.

CALABRESI: Let me ask you, then, from what you're saying, it sounds as if there's something of a mismatch in what they're doing. But from what Steve is saying, there may not actually be a match at all. Let me ask, is stimulus really the place to try and do the kind of things you're talking about? Is there really -- are the projects you're talking about, the kind of shovel-ready instant stimulative project that should be included in the immediate spending that the administration is talking about, or does it need to be something, as you say, for the longer term?

FLYNN: I guess my best sort of guess at this is the sort of good news is that there are a lot of essentially shovel-ready projects simply in the works that were stalled out because, obviously, particularly state resources had imploded. And they're getting built. They've had the environmental impact statements, all the stuff that needs to be done, and doing them seems to make a lot of sense.

Most of those projects -- virtually all those projects, of course, weren't thought about necessarily with the greening perspective; certainly not a holistic -- (audio break) -- how we as a nation need to go forward on this. And I can guarantee you they weren't thinking about security. That's where we are.

My concern is where this could really cause a problem by talking about the infrastructure issue getting too much profile in the stimulus is if the short-term sort of throwing cash at this discredits the investment in infrastructure over the long term, which it clearly must be, because it all looks like bridges to nowhere or pork -- it exposes all the problems of the process -- then this becomes politically toxic to make the kind of sound investment we need down the pike.

So I think we really need to just think in phases. We're going to do probably some silly things, just like we did with the banks at the outset. With not a whole lot of (adult ?) supervision, we're going to throw stuff at it. Accept that as a reality. But we can't spend this much money and do that much in six months.

So we do have a window, and I think we should seize it, and hopefully the administration will, to say, "Okay, we've got to get a handle of how we do this, not as a one-year and even 18 months until the economy gets us back together. This really has got to be seen as a multi-year investment. We just can't push off any longer.

CALABRESI: Let me jump right on that. And in the spirit more of probing exactly how far you go with this or where it leads us, less than, say, undercutting the premise, what kind of money are we talking about here? Do you have a sense of how much needs to be spent to get somewhere down the road to what you're talking about with a revitalized and well-protected infrastructure, either of you? I've seen some of those numbers. But Ev, you've looked at that, right?

EHRLICH: Right now we're spending $60 (billion) to $70 billion, depending on what you put inside the perimeter. The administration proposes to add something like $20 (billion) to $30 (billion) to that, and that number would be fine, particularly if you were to spend it correctly.

FLYNN: First dude -- (laughter) -- a very coherent set of points. This bothered Ambassador Rohatyn and Senator Rudman that transportation or infrastructure becomes a synonym for earmarks and corruption. And it was an important, pressing reason to get these things out of the hands of the trust fund guys and the Corps and send them up to some kind of a domestic investment bank that would preserve that function.

Let me also say this. You can be too excited about spending money quickly. Peonage is 100 percent live labor on day one, and yet I don't think we should have tax credits for it.

CALABRESI: Just to check you on the number, $90 billion over -- annually.


CALABRESI: I'd push the envelope more, I guess. I mean, I think the numbers -- and, in fact, the American Society of Civil Engineers is going to come out with their quadrennial report tomorrow. If you look at the basic inventory of infrastructure we have today, we're in the range of about $1.5 trillion to get it basically --

FLYNN: Yeah, they want $300 (billion) a year, about.


FLYNN: But I think that if you put $90-$100 million -- billion -- which one is it? -- billion dollars of public money out there, you could get the other $200 (billion) from the private sector, but you'd have to do it intelligently. You just can't take the Triborough Bridge to the hock shop and hope that Goldman gives you a good price for it. That doesn't work. But there are ways to encourage their money to participate.

EHRLICH: And I think that's the overall sum, if we can get this right and we create a policy environment that supports both the private investment as well as the public resources.

CALABRESI: Let me ask time horizon on that as well; not just where you start, but where you end. Is this, then, necessary for the foreseeable future? Do you have a time span over which that money spent would -- how long do we keep spending that money, or do we --

EHRLICH: That's a great question --

CALABRESI: Oh, good. (Laughs.)

EHRLICH: -- because none of these programs ever look up and have a solution. When I was undersecretary, I used to feel this way about the inspector general or the GAO when they would come to see me. "When do I get well?" "Never. You know, this is wrong with you." "Well, will you now say that I'm fine?" "No." And it's the same thing, you know, with the trust funded highway system. Well, there must always be a need for more damn roads, because there's more money coming.

Having a bank would allow you to rate these projects by what their internal rate of return was, and you could look up and say, "Well, you know, we're running out of high-return projects." And therefore, in some sense, we can live on the capital asset stock that we have right now. It would be a daring new concept in public investment.

FLYNN: Let me just add that you can't overstate how badly broken so much of our infrastructure, particularly the invisible infrastructure, things like pipes under our streets that move water, the basic element of life. You know, we don't see it so we stop maintaining it, and certainly have not been upgrading it for demand.

But, that being said, Bob Ross, who's an old friend and colleague, was just saying, "You know, really the term of art we should be using is 'critical services assurance' versus 'critical infrastructure protection.'" The notion of infrastructure -- (inaudible) -- is one-time buy. They provide us services. You can't make New York work if there's no transportation system.

So what you're really looking at is an ongoing investment, just like, you know, you pay your cable fee every month to get the service of cable. The idea that we just throw money at a project once and we're done -- you've got to maintain it. You've got to upgrade it. And that's the kind of thing that the process that we've had in place has never done a very good job at, forecasting out.

CALABRESI: Let me then try and separate out two of the main themes that you laid out at the beginning with regard to homeland security. One is protecting against attack; and two, it's protecting the general infrastructure, its ability to function in the face of, say, just natural disasters or just, as you say, in general.

How much of this really is the latter and not properly thought of in the public mind as a matter of protecting against terrorist attacks, which, of course, is, you know, foremost in everybody's mind? And just to follow that thought slightly, do we really know that al Qaeda, if they were able to, would really target these nodes of infrastructure?

The fact is, as I recall -- and again, just sort of testing the premise -- a 9/11 report found that Obama -- I'm sorry -- Osama bin Laden had decided not to target nuclear facilities and instead had gone for the symbolic target that produces more of the kind of spectacular effect.

Do we know for sure that, in fact, there is an interest in blowing up dikes or things like that?

FLYNN: I think what we can clearly say is that, in fact, in that analysis that Osama had, it was both the ingredient of why you do this effort to assure the infrastructure that's critical is safeguarded, and that is, if it's -- one of the issues was it's pretty well protected; nuclear plants are pretty well protected. So it took it off the target list. You have to put together a pretty successful conspiracy, which is using numbers of people. You've got to do surveillance. You've got to do dry runs. And if you find, in fact, that it's not a soft target, you back away, and then you go after something that's softer.

But the lesson that Osama took away from targeting, while it was done by the visual and symbol, was the huge economic disruption he caused as a result of that. So if you look at what he said afterwards, it was the real sort of brilliance of this, accidental, was the economic dislocations, which was largely what we imposed on ourselves because of how we reacted.

And that falls to the broad thesis, I guess, I've been trying to advance here, which is right now we've put an incredible amount of resources into this notion of we can eliminate the threat by hunting and destroy the adversary. Well, what about the best defense may be a pretty damn good defense, which is that if you make the targets that are most attractive actually less attractive, then you take out the motivation for engaging in catastrophic terrorism at critical infrastructure as an end game.

You're still going to have terrorism, but what you're not going to have is massive, cascading effects that have real value to our adversaries because they seriously hurt us. So we should do it, again, primarily because it makes sense to do it as an economy. We should do it because nine out of 10 of us live in a place, if we just stayed put for the life of a mortgage, are going to be seeing a natural disaster.

And then we should also do it, by the way, because we're in a world where this is where adversaries are likely to go. So all that should make a compelling reason for not blowing off infrastructure like we've been doing for the last three generations.

CALABRESI: Let me ask you one final one before we turn to questions. Then how broadly -- again, sort of testing the limits here or figuring out where you draw the line -- how broadly are you conceiving of the areas that need this kind of attention? We've talked a lot about the kind of tangible things. What about the intangibles?

McConnell talks about cyber-security as critically important. In a way, one could think about investments in hospitals from a homeland security perspective, in the case of, you know, most dramatically, a bioterror attack or something like that, but just as a general matter of, as you know, the kind of services that society might provide. How much do you include intangible infrastructure in what you're talking about?

FLYNN: What I would minimally advance here is public health, public safety, emergency management are key parts of infrastructure, because as we say with the case of New Orleans, it wasn't the hurricane that destroyed the city. It was the collapse of the flood control system, and ultimately the failure of those services to be able to do what they were supposedly designed to do.

And right now, in the kind of budget crisis, of course, that states are facing, we have 33 states in the country right now that are basically taking axes to their public health budgets. The administration cuts stopped because the whole idea was priming the pump; the funding to states for pandemic preparation. I'm sorry that Fran's not here, because she took a close (look at ?) this whole issue.

So we basically a threat that's still out there -- not manmade but one that's going to play itself out with probably more dire loss-of-life economic consequences -- we're just imploding that infrastructure that we're going to need to rely on to manage that threat. So, again, that's why this notion of looking at infrastructure less as sort of fixed objects with more services they provide gives you this more broadened approach.

CALABRESI: Did you have a philosophical circle you drew around that?

EHRLICH: No, I was taking a lesson.

CALABRESI: Okay. Okay, well a good time to open it up for questions then. A couple of reminders. Please wait for the microphone and speak directly into it. Please stand, state your name and affiliation, and please keep your questions concise so we can get as many in as possible. Right here on the front row.

QUESTIONER: Hi. Sam Speevy (sp). It was my understanding --

CALABRESI: Where are you from, sir?

QUESTIONER: Oh, unaffiliated person. Of the 825 billion (dollars) in the stimulus package that's being proposed, it was my understanding that a third was going to be directed towards infrastructure. My question, though, is are security design criteria being considered as an element of the statements of work for capital construction, infrastructure improvement projects that go forward, or is that -- you know, I think Stephen might have answered this indirectly earlier -- is that still an embryonic concept as far as how the money is going to be spent?

FLYNN: The answer right now is it's an embryonic concept because what we're really -- you know, what Congress is doing, with the administration's support for the initial tranche of money, is taking the off-the-shelf projects where this was not a requirement. So I would argue it was a failure certainly of post-9/11 that every time we thought about investing money in infrastructure, particularly federal money, that we weren't saying, do we apply this criteria to it as well?

So, and the criteria itself is fairly embryonic. I mean, if you actually look at many of the assessments that have been done with critical infrastructure, you know, it ranges the gamut. A lot of them were put together by 23-year-old contractors who did Web searches. You know, that's the quality of the initial sort of facility security plans that we had out there. So there's not a whole lot of analytics that are underneath that, that have real civil engineering kinds of, you know, wait until we get real two-fers.

So, clearly the knowledge is there but it's been sort of in this very much sidebar community. Now we're seeing a lot of resources are going to move very aggressively towards these, you know, off-the-shelf projects. And we're just not going to get there the first phase. Again, I think we need to do that, and hopefully that's part of what we're doing here today, raising the profile.

For this to be sustainable, which it must be -- politically sustainable -- we've got to make sure that we get the spending right. Otherwise this whole infrastructure game, again, could get discredited.

EHRLICH: And this is what you're up against. This is almost a states' rights kinds of issue in that the states think they have a right to have a parcel of money dropped in the state capital to be given out and that be the end of it. And that's the root obstruction to design criteria for a variety of collateral issues -- environment, security and the like -- and it's also the root objection to anything that nationalizes or federalizes the scope of planning because small states complain that they're not going to get highway money because they're small.

FLYNN: Then maybe I just -- (inaudible) -- because this I think is where we connected. While security, again, should not be the dominant variable, it is the one variable, particularly if it's a stated objective or a national/homeland security achievement, where the federal government can impose that kind of discipline on our traditional process that deferred very much to the states to do whatever they wanted.

And so it's now federal largesse that's going to make infrastructure investment happen, and this is precisely, of course, what Eisenhower did. The states did not like the idea of an interstate highway system. They were very fearful that -- one, their biggest source of corruption was a roads crew, so that was a problem; secondly, that the road that may be built may be past "Rosie's Diner," you know, which is not going to get serviced anymore. So Eisenhower used the national security mobilization -- if the Cold War gets hot we've got to be able to mobilize, and also to evacuate, believe it or not. Tell that to people from Houston, you know, post the recent hurricanes. But the idea of that interstate highway system was also billed as a civil defense argument.

But that gave the rationale for the federal government to essentially put a national system in place where we had really a patchwork quilt of roads. Literally when Eisenhower in 1921 did this expedition, he left Washington to show these new-fangled things the Army had: trucks. And remember, they still had a cavalry before the First World War so, I mean, with horses.

But in any event -- and when they took them across country, it took 69 days to get to San Francisco. You literally came to the edge of a state and there was no road, all right? And so they had to forge rivers. And it took 69 days to get across the country. The nature of how we built infrastructure in this society is basically local up and then some would get linked together with something that he thought wasn't sustainable, given the power that we had become and our economy being what it had become. That's discipline we have applied only to the interstate highway system. We haven't done it more broadly, as we saw with our grid, and on we could go with the other sectors.

EHRLICH: You know, you admonished against long questions, but not against long answers.

CALABRESI: I know, I know. I realize now my mistake.

EHRLICH: Let me, very quickly -- the grid. Dude, the grid is the next place where we're going to see exactly that. The world wants the smart grid, which is really packet switching for electricity. Just like the Internet, the information, like a hyperactive mouse, finds its way through the maze and gets to you, and the electricity doesn't go that way. And we deregulated generation before we thought about whether or not the transmission grid could do that. And this is very -- I get that this is very security-oriented, because if you blow a hole in a part of the grid, the packet-switching grid, the smart grid, will just simply work around the hole and take care of it. The problem -- "the" problem -- the reason why it's not done now is states' rights because of the historical accident of states running electric utilities, as was commemorated in PURPA, the Public Utilities Regulatory Practices Act, now 30 years ago it's a complete anachronism. And, again, it will be fascinating to see how the administration goes about de-fanging the state regulators and forcing them into some kind of harmony about standards for a grid that we should have had 20 years ago.

CALABRESI: Okay, next. Over here in the front row again.

QUESTIONER: Hi. Rob Quartel. I agree with most of what both of you have said, and you answered my first two questions immediately, which was about the actual short-term benefit of any of these programs in terms of stimulus. And then the other was about yield management. We have a project in Jordan that collects data on every truck that moves in and out of the country from other countries and through the port that gets data on the drivers, security information, the trucks, the cargos, and tells them when to appear, and it's reduced -- it's created about 25 percent more efficiency and 40 percent price drops.

There's nothing like that here and there's no conversation about that in any of the infrastructure stuff. It's a very old-school jobs thing. And, by the way, there's no one to build it because we've sent the Mexicans home. But is there anything beyond the grid that talks about actual technology and technological management? I think there's a lot that could be done, but it's not part of the conversation.

EHRLICH: There is, and it's about GPS and it has privacy issues.

QUESTIONER: GPS's. That's not yield management. (Off mike.)

EHRLICH: Well, not in the way it could be. Okay, now we -- as Larry Summers once said to me, you haven't said anything interesting until you can get intelligent people to argue. (Laughter.) And, all right, now we're there. And GPS really is that because you could use it to do real-time traffic management involving lane changes, speed limits, coordination with the information you get out of smart parking terminals and so on and so forth. That kind of system-wide look would be there, and -- and I've talked to DOT a little bit about this -- the data we have are cars or drivers. We data we ought t have are trips. And, in fact, DOT is starting to play around with the idea of a database of trips, and so then we can start really planning facilities -- how much do we need long haul versus short haul and so on?

FLYNN: Can I do a quick follow up? People get fascinated by RFID and GPS and technologies. Underlying all of those things you need to have a way to process and think about and pull together data systems, which are very different than the GPS, and that's not what's in the conversation. What's in the conversation is all these pop stuff, RFID and GPS.

EHRLICH: RFID is about supermarkets, I think. But the technology to do that does not need to be invented; it only needs to be integrated. Now remember, I did five years at Unisys so I've never been in the computer industry. (Laughter.) But everything that we need to manage that information flow, real time and for analytic purposes, is on the shelf. It's simply a matter of forcing transportation planners to think in those terms, or at least so I think.

FLYNN: If I can, just coming at it from the other direction -- one of my lines about security, which is why this convergence conversation is so important that I think we're trying to have here today -- is the only one thing worse than no security is dumb security, all right, and we do a lot of dumb security. So a perfect illustration of this was an effort that was initially going to say, we're going to get this transportation worker identification card so we actually know who shows up in a port environment, and we're going to do it in a real hurry. And right after the Dubai Ports world debacle that was going to be a push: In three months we're going to get this done.

Well, I remember talking though with the leadership at TSA about this, and let me tell you how that's going to work. Right now less than half of the workforce that brings -- basically drives trucks into the Port of Los Angeles and Long Beach actually has a kind of identity document that would establish that they actually belong here. So, that is, we have a large illegal population that's playing this role

So what's going to happen is if you put this in place quickly, is not that that workforce is going to go away, but the one person who can get the ID card is going to get it. They're going to shuttle into port and pick up boxes and drop it at every vacant lot and empty street around the L.A. area, leave them for the night, and then the illegals will come in the morning and take it to the distribution center.

So in the interests of security, what you've done is you've put all the containers that used to be in a relatively safe place, pushed them out in the street because you haven't thought about this as a system, and how it interconnects with that system, and clearly basic things, So right now we've got a TWIC card. We would actually apply it. We just have no readers for the actual biometrics in it. Oops, couldn't figure that one out.

So, yes, data is an element of this as we think about security, but it also should be driven primarily by the economics, but we often have these two conversations going in parallel and working at cross purposes instead of a more holistic approach that looks forward. At the end of the day I can't get security if you have an inefficient environment. So the more efficient and transparent the environment, the better I can police it. So there is a security rationale for making investments in these areas. It's not a cost tradeoff issue. That sometimes happens, but in almost all instances it's a two-fer opportunity.

CALABRESI: Let's mix it up a little bit. Back over there?

QUESTIONER: Yes, Gary Miller, American Patriot. That's my affiliation. Could we open the lens a bit? We've talked about the intra- and inter-U.S., but our life's blood is from the maritime. That's where we get all our goods and services from overseas. That's where the threat comes from, from outside, so on and so forth. When we're talking about port security, you've seen one port, you've seen one port. You talk about state's rights; they're all different. And then we hear 100-percent inspections. When it comes to vulnerability of the infrastructure, both our external and internal waterways and the goods and services that flow, where do you see that going? Because we've wrestled with that for the last eight years and it seems like we've made small strides but nothing revolutionary.

CALABRESI: This might be an opportunity if you have any particular insight into the president's proposal to do ports on the stimulus.

FLYNN: Yeah, I would say -- I mean, Gary, you're right. The economists will certainly tell you that the bulk of economic activity in the U.S. still is intra-U.S., all right? It still requires moving stuff by surface transportation, rail or truck amongst the internal market, and that's the bulk of it. But our competitiveness as a society going forward is clearly going to be linked to the rest of the world, and we've got this little challenge. We've got these big oceans in between us and the rest of the world's market, and 95 percent of the world's population doesn't reside here.

So the only way that we stay really competitive in this market is to make sure that that geographic distance is essentially not much of an economic variable, and that happens by making sure the maritime piece really works well, but ultimately that's an inter-modal issue because ports are just on-ramps and off-ramps. They have to connect to the rail, have to connect to the trucks, and vice versa, to work.

So now we're dealing with a global network and we have to clearly think of our prescriptions within that globalized context. And part of our challenge here as we've looked at port security usually as a gates, guards and gun -- how to protect that on-ramp, off-ramp in the kind of way I described, with a TWIC card, instead of really seeing that that is a much more complicated piece that we're trying to police. But it's not just protecting the port for the port's sake; it's protecting the global supply chains that basically make it possible for us, from an energy standpoint, manufacturing, retailing and virtually everything else that we consume, that it flows as it must, in almost a just-in-time environment. And there we're seeing that we're really struggling.

The biggest issue -- I think missing element -- is not just protection, but the idea that should something go wrong, that we can restore and recover it quickly, and that's where we find that very little has been done and a lot of work that needs to be done to provide the kind of assurance, again, that should these things fail because of accidents, because of Mother Nature, because we're getting old and falling apart -- on it goes and then act of terror -- that they actually can be recovered quickly. That's an immediate need that we have to advance overall.

EHRLICH: Let me add two things of relevance to that. One is, purely from an infrastructure perspective I would rather fix Chicago then fix the ports. Chicago is where freight goes to die. It's just a mess.

CALABRESI: Could be in Kansas City as well -- two places.

EHRLICH: That's fair. Or if the South had won the Civil War, look at it this way, the port would have been -- it would have been in New Orleans where the rail junction went, and it would be under water. So I'd separate the infrastructural and the security concerns because they happen in different extents in different places. Moreover, in ports there are users who can pay, and they're easy to identify, and that works itself out.

The second thing I'd say is America's economic future and -- America's economic future immediately means we're in a world of conjecture and I am your conjecturer is, as a low-cost, resource producer with an interesting superstructure of technology, a low-dollar and relatively abundant resources and a good technology for extracting them, God save the Earth around it, but agricultural products -- coal, wood and the like -- dollar-denominate stuff, that we will be the low-cost global producer of, and that stuff is going to go racing over rail to ports, and there is going to be much more of it. It's going to be a much larger share of the U.S. economy. To some extent we've always hidden from ourselves the extent to which our economy was getting by on that stuff. So that has to go into the port calculation, in my view.

CALABRESI: Right here in the middle.

QUESTIONER: Ted Kassinger with O'Melveny & Myers. To what extent is our standard-setting process an element that's important to making things work in the way that you envisioned? How much, from a -- whether it's scientific or engineering standpoint -- how much work do we need to do to make sure that things connect in the way they connect, make sure that biometric systems work? Is this a long-term process that's going to hold back the effort?

FLYNN: Absolutely it's a long-term effort we have to engage in, and we're starting behind the curve. And, again, I think this is the real challenge to the new administration. While they've got kind of the right rhetoric out there -- this is what they want to do -- when they actually pull back the curtains and look at the structures in place inside the federal government to do the kinds of things we're talking about doing here, they're going to find that there is virtually nothing there. And so we're in a race to get that capacity up in time to make sure these investments we make are sound ones, and I hope, obviously, we'll engage in that process.

But, broadly put, the challenges really are, as we talked about on the government side, sector by sector, but is also very much in the parts of the civil engineers. You know, it's physical structures. There's a great divide between folks who are in the software -- (inaudible) -- and so forth. And so when these standards are set, they're typically set within narrow sectors, and what we really haven't come up with, as much as we need to, is the folks who will see the cross-sectoral kinds of implications and then figure out how we calibrate standards for that.

You know, another illustration: Kansas City is the second-largest rail switch. It takes you basically three days to get to Kansas City and it typically takes more than three days to get across the Missouri River, okay? To get from the West Coast -- I'm sorry -- to Kansas City, that's three days, and then it's three more days just to get across a bridge and get back on the next switch. That doesn't make a lot of sense from a pure transportation, but all the coal that services the six Southwestern states' power plants run through that same switching area. We're a nation with just-in-time food supply. Just under three days of food are on our shelves right now. In Manhattan it's one day. Every day virtually -- not every item, but every day you have to swap out -- restock the shelves. So you disrupt that system, you disrupt the nation's food supply.

So the energy is affected, the food supply is affected, basic retailing and so forth is affected. What we have is a problem with our standard-setting in that we're not seeing those cross-sectoral -- and DHS still doesn't see that Kansas City location as a tier-one critical infrastructure because it looked at its trains and passenger trains are more risky than freight, and energy -- it didn't think about energy actually requiring coal to produce it, and the food, that missed it too. So the result is because we don't have that cross-sectoral perspective, both from the standard-setting as well as the governance, we have these big sort of gaping wounds that we're not addressing.

EHRLICH: Two things about that. The first, where is MFT (ph) in that? Does this play a role, or should they play a larger role? Are they the appropriate place to be doing standards?

FLYNN: I think the answer is yes they should, and we have other, of course -- what we really need to get is -- it just hasn't matured enough, and I don't think -- because there hasn't been a mandate for it to mature enough. But we also have things like the National Academy of Sciences that can provide the convening power. We have associations like the American Society of Civil Engineers, that we can pull different groups together. We have plenty of expertise in this country, and that's worked out.

EHRLICH: And it's organized; it's shovel-ready expertise.

FLYNN: Yeah, it is. All right, I'll let the other --

CALABRESI: I don't want to know what they're shoveling if --


FLYNN: Exactly.

CALABRESI: Okay, in the back on the right over here.

QUESTIONER: Yeah, Michael Bopp, Gibson, Dunn & Crutcher. You both indicate that we should spend more money on infrastructure in general. I can understand that position. But you also both -- I think, Everett, you mentioned that the Highway Trust Fund is unsustainable, which is absolutely true, and you mentioned an infrastructure bank, which, to me, as I've seen it in proposals, basically means appropriate a lot of General Fund money to a bank and then distribute it in grant form. There's no sort of money coming back to that bank. And so I guess my question is, how would you propose to pay for additional spending? Are you thinking about -- or would you propose sort of severing the traditional link between users paying for mainly highway and bridge infrastructure and funding through the General Fund, or are you proposing basically a massive gas tax increase?

EHRLICH: No, no, and no. I think we start this way. We take the around $60 billion that we're spending on modal -- I've seen numbers as low as 54 (billion dollars), as high as 74 (billion dollars). We take some of it off the top and still give it to the states for cat and dog projects, rural covered bridges. If it goes on a postcard let's keep it away from the feds.

We take the rest, we bring projects to it within a perimeter of, you know, roads, mass transit, ports, airports and so on. And the government either subsidizes it to some extent -- not the 90/10 cost-sharing or the 100/0 cost sharing -- (inaudible) -- but whatever they think is appropriate, given the scope of benefit -- puts that money on it and then takes the project and assembles it and securitizes it into an asset that represents a diverse group of projects from around the country, and it takes them to market, which allows it to recapitalize itself as those funds are repaid and those securities retired.

I like that for a couple of reasons. First, of course, in the process, that we give projects what they are worth, using a consistent set of criteria. Second, the projects that the bank would approve would be subject to a market test. Whatever was given to them on an appropriations basis -- all right, look, this thing, you want a hundred dollars; we're willing to give you $20 in subsidy, and we could give you 20 bucks or we could say we're going to pay an interest subsidy, or we could create a sinking fund that will prepay your payments by 18 months through the life of the project. As anyone who has been around project finance knows, there's plenty of ways to skin a cat. And as Lincoln said, if you can't, at least hold a leg.

The 80 is the banks' estimate of what local users and local government are going to come up with, and when it goes to market, we find out if they were right. And I think that if we're going to have an institution such as the one that Felix and I have proposed, it has to be subject to that kind of market test. Otherwise you get the kind of horrific nonsense that we've approved. And I realize I'm coming here to you, a group of sentient people, saying that securitization is still a good thing. And I believe that, and the fact that crooks have securitized their, quote, unquote, "stuff" means that they're crooks, right, but otherwise it's like Bill Sikes telling you to blame the knife.

So, in that sense, the bank, once capitalized, is self-locomoting, and it specifies, with some clarity and transparency, what's actually being appropriated as a subsidy and gives Congress that kind of control. If it ever were to take off, I imagine it could probably sell preferred stock to the public if it was credible and long-lasting, and use that for the permanent capitalization and proceed like that.

Let me say this -- 30 seconds of answer abuse. The positive thing about what we're seeing now in the stimulus is that we have blown a hole into the tax code so wide and so pervasive so as to defy description, and after the 2010 election, we will get to fix it, and the fix is going to be some kind of a consumption-oriented tax. And I say this as a liberal "D." It's going to be a VAT. It's going to be a carbon tax. Climate change will emerge as the solution to a problem as opposed to a new problem.

When I was at CED five years ago we wrote a paper about this. In essence, the income tax, regardless, has broken down. It's carrying too many riders, too much nonsense like special savings accounts and special treatments and two different kinds of income and two different kinds of rates, capital gains and other stuff. I wish my mom had made me capital gains so I could be like everybody else but enjoy benefits that you don't.

It's a broken-down system. As Rudy Penner once famously said, "The more we ask the tax code to do, the less it will accomplish." And so, with that broken system, we finally delivered, I think, the coup de gras in this thing, and we'll come back to sign a consumption, energy, carbon-type system, hopefully with an inheritance tax, and it will be replaced --

CALABRESI: Did that get your question?

EHRLICH: And more, I bet, yeah.

CALABRESI: Right up here. Thanks. Wait for the mike, please, sir. Thank you.

QUESTIONER: John Petty (sp), TechSec (sp). I'm kind of discouraged by what I hear. The story is not the policy but the execution. And Mr. Ehrlich tells us that the states' rights create an encumbrance to what a national role ought to plan, and indeed my own experience is that is a problem. The federal sector, Mr. Flynn tells us that the guys who say we want to have smart cards aren't smart enough to realize that you have to have readers for the smart cards. That wasn't just transportation; that was true in judicial and the border control program and everything else.

In my own experience -- direct experience in the federal sector -- is the progressive inefficiency of execution. We all talk policy; can we talk execution or what we can do to enhance execution?

FLYNN: I think you've really identified an elephant-in-the-room problem that this new administration is going to have to face, which is the extent to which there is clearly now a public sector engagement -- you know, we're talking almost quasi-nationalization in terms of the financial sector -- but we're talking about an ambitious effort with regard to our other infrastructures. It screams that you have some management capacity to execute what you're trying to do. But our federal civil services imploded over the last 20 years. Outside of some baskets of competency at DOD and Treasury, and a little bit left at Justice -- a very little -- the rest of the federal apparatus is, to some extent, third-world-like.

And so, to the extent to which we want and need the public sector to increasingly work in this collaborative approach to deal with problems as they really are, not narrow issues, subsets, functional subsets, we don't have the human capital to behave that way. So this is going to be, you know, part of the disappointment of the rhetoric when the reality starts to hit, I think in execution.

That being said, I think one thing that we know is that we're not going to do this New Deal-like. It doesn't make a lot of sense to do it New Deal-like. That was just all about essentially government investment and government -- building government capacity to execute these things. We have a very potent private sector. We, again, have the expertise that's shovel-ready out there. The real challenge will be is not getting so much in the intra-Beltway kind of how do we get our act together? That we're going to have to manage, but we also have to figure out how we really tape this core capability that's far beyond us.

EHRLICH: We are not at the point where Tommy the Cork will solve the problem for us, but I'm very optimistic about this because we've just had a long period of time, and it wasn't just the last eight years -- I say as someone who was in the Clinton administration -- where we didn't think about this. When I ran the Census Bureau, the average professional was 48, which I then regarded as a reasonable age, and I think of it as being horrifyingly young.

But we're finally talking about this, and you could not get an audience a year ago for -- you want smart grid but you don't want to get rid of PURPA. You want to do stuff with the auto industry but you're chicken to make the price of gas something consistent. Or you want to build the broadband Internet but you're still screwing around with this dopey stuff about net neutrality, right, or open Internet so that, you know, people can build fiber or cable that becomes a hostage in a rate hearing. I mean, these ideas about consistency never occurred to anybody because the state was bad. We're past the state was bad and that's a tremendous cause for optimism. I mean, we now can be freed from those shackles and start to think about what the state ought to do.

CALABRESI: We have time for one more brief one. A reminder, everybody, this is on the record. All the way in the back. And briefly, please, because we are right up against the --

QUESTIONER: Sure. I'm Dan Fowler from Congressional Quarterly, and my question sort of relates to homeland security. If you could make one recommendation to the Obama administration as it relates to protecting critical infrastructure from a terrorist attack or a natural disaster, what would it be? Thank you.

FLYNN: I think really it's -- hopefully this conversation this morning really highlights it. The one recommendation is that you see this infrastructure investment that we're about to embark on as an opportunity to achieve a sustainable life cycle of that infrastructure against foreseeable hazards, both natural as well as potentially manmade. And the green element is there as well.

So rather than viewing critical infrastructure protection as a narrow function that essentially relatively small and not-very-capable agencies within DHS do, while we go out and build lots of infrastructure across the country and do lots of other things, what we really see is that this is something that has to be managed in a cross-policy, sort of cross-agency way, and we get this twofer, three-fer opportunity.

And, again, that's maybe the final point I really want to drive home here. For whatever reason, for the last bunches of years, the quality of life issue of letting our infrastructure implode hasn't worked to mobilize us to address this stuff literally falling apart around us. The economic case for making sure that we have efficient, reliable infrastructure hasn't worked because of the kinds of problems it has laid out here.

To a large extent, you know, we need a trump card to sort of create the political mass to start dealing with this as a national imperative, and this is where I think the security issue essentially helps to give it that prominence. If a core part of our strategy on going forward is no longer exclusively hunt and destroy missions for those who would cause us harm -- and a very expensive proposition that is -- but is an investment in our own national resilience, then you have that national security imperative plus the resources we often dedicate as the American people to make ourselves safer, and we get this twofer, three-fer opportunity.

CALABRESI: Okay, thank you very much. Thank you for coming. (Applause.)







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