Infrastructure: The best deal in the economy

People say that the government should be run more like a business. So imagine you are CEO of the government. Your bridges are crumbling. Your schools are falling apart. Your air traffic control system doesn't even use GPS. The Society of Civil Engineers gave your infrastructure a D grade and estimated that you need to make more than $2 trillion in repairs and upgrades.

Sorry, chief. No one said being CEO was easy.

But there's good news, too. Because of the recession, construction materials are cheap. So, too, is the labor. And your borrowing costs? They've never been lower. That means a dollar of investment today will go much further than it would have five years ago -- or is likely to go five years from now. So what do you do?

If you're thinking like a CEO, the answer is easy: You invest. You get it done. Happily, that's what the administration is proposing to do. But its plan is too modest. The $50 billion bump in infrastructure spending it has proposed is only for surface transportation. The infrastructure bank envisioned in the proposal is also likely to be limited to transportation. And as for our water systems, our schools, our levees? This is not a time for half-measures. It's a rare opportunity to do what we need to do and to save money doing it.

In 2009, Congress passed the American Recovery and Reinvestment Act, known to its friends (and enemies) as the stimulus. Billions of dollars went to the Transportation Department to improve our roads, rails and runways. That money was in turn given to the states, which quickly drew up lists of what they needed to do and how much it would cost.

When the feds checked in on the funds, what they found shocked them. The project costs were coming in at 18 to 20 percent less than estimated. The Transportation Department then looked at the share that went to the Federal Aviation Administration for runway repairs. The money that the FAA had thought would complete 300 projects was going to finish 367 projects -- about 20 percent more than projected.

The stimulus, they realized, had blundered into an incredible bargain. The recession was driven by the collapse of the construction sector. People who built things were now out of work. The materials used to build things were now on fire sale. The companies that organized the building of things were suddenly desperate for jobs. As a result, building things was suddenly dirt cheap.

And it still is.

Unemployment in the construction sector is at 17 percent -- and that doesn't even count the construction workers who've simply given up looking for new jobs. Steel, gas and lumber prices are all well below their pre-crisis highs.

"There's work that needs to be done," says Larry Summers, outgoing chairman of the National Economic Council. "There are people there to do it. It seems a crime for the two not to be brought together."

But what about the debt, you might ask? Well, what about it? Delaying a dollar of needed infrastructure repairs is no different than racking up a dollar of debt.

"You run a deficit both when you borrow money and when you defer maintenance that needs to be done," Summers says. "Either way, you're imposing a cost on future generations."

Plus, if America has to borrow money, now is the time. The interest rate on 10-year Treasuries is less than 3 percent - the lowest it's been since the 1950s. So a dollar of debt is cheap, and a dollar of infrastructure investment goes far.

"There's a 20-dollar bill laying on the ground here," says Michael Greenstone, an economist at MIT and director of the Hamilton Project at Brookings Institution. "We should pick it up."

We'll have to pay down that debt, of course. But part of paying down the debt is increasing economic growth. What worries the market is the size of our debt against the size of our GDP. If our economy grows faster than our debt, then in the eyes of the market our debt shrinks. But if our economy is going to grow fast enough to outpace our debt, we'll need an infrastructure that can support that kind of growth. Tomorrow's energy contracts won't be won by the country with yesterday's energy grid.

'Grand bargain' needed

The problem is that the way we choose our infrastructure projects is an embarrassment. About 10 percent of infrastructure spending comes from politicians securing earmarks. Most of the rest depends on a formula in which the government just hands money over to the states. There's no requirement for cost-benefit analysis or rate-of-return calculations. The decisions are horribly politicized.

If taxpayers are going to make a huge investment in our nation's infrastructure, then we're owed an assurance that policymakers are choosing the best projects. That suggests a grand bargain, in which more infrastructure money is tied to reforms ensuring a better process for spending that money.

The infrastructure bank takes a step in this direction, but making good decisions with taxpayer money should be the rule, not the exception.

There has never been a better moment for America to rebuild its infrastructure - and reform the way it makes infrastructure decisions going forward. An unlikely and unwelcome array of forces have converged to match our needs and the economy's bargains almost perfectly.

The only question is whether we'll run our government like a business, alert to good opportunities, or whether we'll run it as we have done, squabbling among ourselves while things get worse.

How about it, chief?