Capital planning and budgeting: spending money isn't the same as investment

An article, "The world has too many workers. Here's one way to fix it," in the Washington Post discusses the proposal by the Democratic think-tank Third Way, which recommends a massive "infrastructure investment" program of building more roads and bridges (etc.) mostly as an employment measure because global demand is depressed and therefore there is an oversupply of under- and un-employed workers.

-- GLUT: The U.S. Economy and the American Worker in the Age of Oversupply

Spending vs. investment.  The problem with the proposal is that spending money shouldn't be the goal, investing money on infrastructure that will have significantly greater economic return over the long term than the cost, including financing (called return on investment or ROI) to build it is the goal.

Too often governments spend money on projects that have limited economic value.  Sports arenas and stadiums are one such example.

While the federal stimulus spending at the outset of the Obama Administration on "infrastructure" through the American Recovery and Reinvestment Act (ARRA) was good in terms of keeping some people employed, because it was jobs-focused -- directed to so-called "shovel ready" projects -- it wasn't so great at investment because many of the projects had limited long term economic benefits.

While fixing roads and bridges helps maintain economic activity, building new roads generally have limited marginal return, because "most" of the most important road projects -- those with the greatest economic return -- have already been built.

Meanwhile, substantive infrastructure investment projects that could expand the "economic pie" continue to languish.  Freight rail, high speed rail and rail-based transit projects are examples of investment that has long term increasing returns.

I think about this a lot because I grew up at a time when you could see the result of New Deal era construction programs, such as dormitories built at the University of Michigan where I went to college, or sidewalks constructed in the 1930s that were still in tip top shape, and make the connection between the spending, the construction of high quality buildings and mobility infrastructure, and understand that they were still contributing to economic growth decades later.

The challenge for the US economy today is to invest in those projects -- mobility infrastructure, energy distribution infrastructure, research and development of various types including medical research -- which will generate extra-normal returns, rather than to spend money on projects that have either neutral or negative economic benefits.

This is tricky for some people.  For example, while it is true that an electric car may be "better" for the environment than a gasoline-powered car, better still is shifting people from automobility to sustainable mobility.

Although maybe it's fair to argue that the tax incentives for buying electric cars are worthwhile because of how they support the development of a new industry.

Ethanol as an energy source for automobility is another example of spending vs. investing -- although good for corn farmers -- it takes 1.53 gallons of ethanol to generate the same amount of energy as 1 gallon of gasoline.  So adding any ethanol to gasoline reduces the miles per gallon that is achievable.

Again, I suppose you could argue that spending money on creating an ethanol energy-based infrastructure sets the stage for the move towards cellulosic ethanol, which is predicted to have an energy density up to 3 times greater than that of corn-based products.  But in the meantime the ethanol interests get entrenched and instead of moving towards better energy returns they lobby for the continued use of corn, even expanding it.

Similarly, not all rail projects are created equal.  For example, does it make sense to invest in the Purple Line light rail program in Montgomery and Prince George's County Maryland, which is project to have upwards of 75,000 riders/day on a single line o16 miles in length with 21 stations, with transfer stations at four legs of the Metrorail system and simultaneously linking to stations serving all three MARC railroad commuter lines, or the Tide in Norfolk Virginia, which has fewer than 7.000 daily riders.  [Note that the Purple Line will have greater impact than the average light rail system because of how it builds and extends an existing rail transit network.]

Water treatment facilities.  On the other hand, the new waste treatment process recently installed at the Blue Plains Water Treatment facility in DC is an example of the kind of facility that probably ought to be installed at every major water treatment facility in the US.  It reduces the amount of waste produced by the plant significantly, it improves the quality of the treated water, and it generates 30% of the energy required to run the plant.

Conclusion.  In any case, in a situation of limited resources, hard choices need to be made using strong metrics concerning economic return and public good.