Grow The Economy By Reforming Public Investments

In his state of the Union, President Obama proposed new public investments to grow the economy over the longer term, and committed the administration to reorganize federal programs and organisations to improve efficiency. His example of fragmentation of federal agencies in inspecting salmon was memorable and all too typical. As he looks for targets to reorganize government, the President should start by reforming the public investment programs he supports. The only way programs such as high speed rail and highway construction will deliver on the promise to grow the economy is if they are fundamentally redesigned to achieve higher economic bang for the federal investment buck.

Federal high speed rail might have been transformative it federal funds were concentrated on several major projects with high demand potential, such as the Northeast Corridor. However, this program so far has spread money across 62 projects in 23 states. GAO recently took the program to task for failing to articulate a strategic plan prioritizing needs and projects across the nation.  Moreover, the Congressional Research Service concluded that, absent policies discouraging automobile use such as higher gas taxes, it is questionable whether higher ridership benefits would offset the considerable costs of these projects.

Federal highway programs offer a textbook case of funds that fail to support projects with the greatest potential return for national or regional economies.  Essentially, the federal grants to states largely allocate the gas tax back to their source, with little redistribution based on relative transportation needs or economic differences in taxing powers across the states.  Not only do states typically not use formal cost benefit analysis to select projects, but, once federal funds arrive at their destination,  about half of federal highway grants are used by the states to replace their own money previously dedicated to highways,  operating in effect like a back door general revenue sharing program.

Federal tax incentives for business investments have similar issues. For instance the federal research and development tax credit allocates millions in tax credits for business for these purposes. However, studies have shown tax subsidies are often used by firms to supplant their own funds planned for research and development.

Redesigning programs for investment will be important if we want to ensure greater economic impact.  The Race to the Top program ushered in as part of the stimulus is a good case of a reform that is working to leverage education reform in the states.  Putting away the peanut butter spreader, the federal government this time is being highly selective in awarding a pool of $5 billion to states that demonstrate commitment to supporting education reform goals in teacher hiring, performance metrics and incentives.

Ideally, funding should not be the only tool of government on the table for transportation investments, among other areas. Congestion pricing, for instance, is a promising strategy to rationalize demand for scarce public goods, such as airport slots or highway access during rush hour. Such pricing strategies are already used in selected local areas throughout the nation, showing real promise in rationing demand for tunnels and highways during peak periods. According to DOT, congestion pricing could reduce the need for additional highway spending by$20 billion.

Paul L. Posner is the Director of the Public Administration Program at George Mason University.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at