Reviving the Economy via Public Transportation

by Timothy A. Canova, Betty Hutton Williams Professor of International Economic Law and Associate Dean for Academic Affairs, Chapman University School of Law

Investment in mass transit and transportation infrastructure could play a significant role in directly stimulating the economy, creating and preserving construction and tax revenues that would more than pay for the initial outlays.

From the Erie Canal to the First Transcontinental Railroad, investment in transportation networks have been the primary engines of economic growth in American history.  During the Great Depression, massive investment in transportation infrastructure, including roads, bridges, seaports, tunnels, airfields and airports, created a modern transportation infrastructure that greatly helped the U.S. mobilization effort in World War Two.  After the war, in the 1950s President Eisenhower’s Interstate Highway Program provided a major stimulus to the economy and facilitated the growth of nationwide markets.  Certainly our generation is overdue for comparable investments in transportation infrastructure such as high speed rail, mass transit buses and commuter trains, as well as aging roads, bridges, airports and seaports.  We need to build a transportation system for the 21st century, a system that is more environmentally sound and that reduces our dependence on fossil fuels and Mideast oil.

According to Jerry Amante, the Chairman of the Orange County Transportation Authority (OCTA), as a result of the decline in sales tax revenues and state funding, the OCTA has lost more than $100 million in the past few years and faces another $330 million in anticipated losses over the next five years.  As Mr. Amante also points out, about 70 percent of those who commute on OCTA buses have no other means of transportation.  They rely on mass transit to get to and from school, work, the doctor, shopping, for the basic necessities of life (“Real Orange” news report by Pat Haslam, KOCE-TV, Jan. 20, 2010, 6:30 p.m. Evening News).  Cutting back on such service will result not only in tremendous hardship and dislocation for many, but will also undermine regional economies and raise a wide variety of costs stemming from higher unemployment.

A big question for this Mass Transit Forum will be funding, how to pay for mass transit, how to prevent further cutbacks and actually expand service, how to increase long-term investment in the transportation infrastructure.  Unfortunately, it is increasingly clear that state and local governments do not have the financial resources to meet these needs.  The weak economy has led to falling tax revenues across the board, with lower revenues collected from the sales tax, state and federal income taxes, capital gains taxes, and local property taxes.  Meanwhile, as state and local governments cut back on their spending, they undermine their own tax bases by laying off workers, imposing furloughs, and shutting down needed programs and public services.  It is a vicious cycle that only leads to further declines in tax revenues. 

The truth is that state and local governments are not primarily to blame for the collapse of financial markets, the weak U.S. economy, and the crisis in public finances.  It was the federal government that fell asleep at the wheel while Wall Street’s biggest financial institutions wrecked the economy.  See “Financial Market Failure as a Crisis in the Rule of Law”:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1489492

It is also clear that only the federal government has the fiscal capacity to address the problem on the scale required.  In 1999, a Republican Congressman from Illinois introduced a proposal, the State and Local Government Economic Empowerment Act, that would have provided a federal solution for transportation infrastructure financing.  H.R. 1452 Download HR1452 Download HR1452_History would have authorized the U.S. Treasury to lend $360 billion over five years (or $72 billion a year) in interest-free loans to state and local governments for capital investments, including investment in transportation infrastructure.  Perhaps the most interesting feature about the proposal was that Treasury would not have borrowed the money in the bond markets from China, the Saudis, or others, but would have issued the loans in the form of United States Notes, the so-called Greenback that Lincoln used to help finance the Civil War and that Franklin Roosevelt issued during the Great Depression.  See “Lincoln’s Populist Sovereignty”: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1489439  As previous generations have well appreciated, Treasury spending and loans in the form of United States Notes do not add a single penny to the federal deficit or the national debt.

The Republican Congressman who introduced this proposal in 1999 was none other than Ray LaHood, now President Obama’s Transportation Secretary.  Among the 22 cosponsors were a variety of Democrats and Republicans, including liberal Democrat Dennis Kucinich and several conservative and libertarian Republicans.  The LaHood proposal made sense in 1999.  It makes even more sense now with states facing a fiscal hole of $200 billion and the federal government facing a $1.6 trillion deficit this year.  The lesson of the Greenback is an important one:  the financial resources have always been there to put real resources to work and to lay the groundwork for prosperity for the next generation.