States and Localities Can’t Afford Big Government Projects

The fiscal situation will likely make huge capital projects like the space shuttle program and Boston’s Big Dig a thing of the past.
September 2011
John E. Petersen
By John E. Petersen  |  Columnist
John E. Petersen was GOVERNING's Public Finance columnist. He was a Professor of Public Policy and Finance at the George Mason School of Public Policy.

On July 8, the nation shot off its last manned spaceflight with the launch of the Atlantis shuttle. Some three decades after the program began, government-sponsored trips to the moon and beyond are over. The space agency may dream of a future, but present fiscal circumstances do not auger well.

Perhaps the last Atlantis flight and the nation’s retreat from outer space may be symbolic of the nation’s reorientation toward a smaller, more limited government. By any measure, the space shuttle program was a mega-project. It cost a total of $197 billion (in 2010 dollars) and employed 10,000 people in Texas and Florida. [For more on life after the space shuttle program, read "States Embark on a Space Race."]

Today, the U.S. has lost its taste for the kinds of mega-projects that marked the 20th century. All around the country, these big projects are being slowed down, stretched out or just plain canceled, as governments pinch pennies to shrink to an affordable size. A recent report by the Urban Land Institute and Ernst & Young put it this way: “After more than 30 years of conspicuously underfunding infrastructure and faced with large budget deficits ... a politically fractured government has mustered little appetite to confront the daunting challenges, which include finding an estimated $2 trillion just to rebuild deteriorating [infrastructure] networks.”

Rebuilding the infrastructure, much less maintaining it, will be expensive -- and that’s money most Americans believe they don’t have. The stumbling blocks to raising support for rebuilding the country’s infrastructure are simple to see. Voters, who over the past decade have had stagnant incomes, shaky jobs and shrinking wealth, resist paying higher taxes or user fees. For years economists have pressed for charges that embody the “full costs” of services, and in a complex, interrelated society, those costs grow. At the local level, bond issues may still pass, and there are occasional tax increases for new projects. But that is the exception, and local governments find themselves unwilling to pledge uncertain future revenues.

Since 1994, the U.S. Congress has time and again refused to raise the federal gasoline tax, which is one of the lowest in the world, or to allow states to put tolls on interstate highways. In the 1960s, spending on new projects and maintaining facilities amounted to 5 percent of the GDP. Today, though we are a much richer country, it amounts to 2.5 percent of GDP -- that’s about half the rate at which Europe invests or one-third that for China. Somehow, the infrastructure is supposed to be “free,” or at least paid for by somebody else.

What is to be done? Clearly the Great Recession was not enough to change public attitudes, and it may have reinforced the negative view that government can’t do anything to help. The $870 billion stimulus program is seen by many as ineffective, while others argue that it spared the country from even harder times. These views are mostly split along partisan lines.

Fundamental questions need to be asked about how well the nation’s economic and political system operates. Maybe in the next few months (or years), solutions will emerge that prove workable, if not always agreeable. Privatizing more activities will be appealing, but will hardly save any money since the private sector will only do the job for profits. How a prolonged regime of government austerity, including a declining stock of public capital, will shape up for the average man and woman remains a great political mystery.

As Americans grapple for politically acceptable policies, the international competition grows. In a decade or two, China will likely surpass the United States in having the world’s largest GDP. Already, Scandinavian countries are pulling ahead in GDP growth. Moreover, the distribution of income in the United States has changed sharply in the past three decades in favor of the very highest brackets, while mobility among the income classes has diminished.

Still, Americans are convinced that their economic and political system is the world’s best. The nation’s collective decisions may give substance to our oft-spoke notion of freedom carrying a high cost for this and subsequent generations.