McDonnell Peddling the Transportation Policies of Yesteryear

Gov. Bob McDonnell has announced a $4 billion transportation plan, most of which would be funded through borrowing. The justification for heaping on new state debt is that building now will prove to be cheaper than building in the future, when construction costs and financing costs rise in tandem with a recovering economy.

I can see the logic, but I object to the plan on two grounds. First, I believe that human settlement patterns are undergoing a significant alteration — investment and population are flowing back toward the urban core (as reinforced in today’s Wall Street Journal, “Downtowns Get a Fresh Lease“). McDonnell wants to dump billions of dollars into transportation projects geared to the post-World War II paradigm of endlessly expanding the metropolitan frontier rather than the emerging paradigm of retrofitting what we’ve already built. Most of the money will be wasted. Furthermore, $4 billion is a drop in the bucket compared to our transportation needs. We need to conduct a fundamental re-thinking of our transportation policy — which projects we fund, and how we fund them — before putting the state billions of dollars into debt.

The second reason to object to borrowing more money is that Virginia is already testing the outer limits of its borrowing capacity at a time we need to be shoring up our finances, not borrowing more. State and municipal finances will grow more precarious with each passing year, a fact that will be only partially masked by the anemic economic rebound the country is experiencing.

Virginia faces many long-term challenges: (1) runaway Medicaid costs, (2) weak growth in sales and property tax revenues, and (3) declining largesse from the federal government. To that list of problems, which I have blogged about previously, let me add one more: a long-term rise in interest rates. Permit me to quote myself from the “Boomergeddon” blog at some length:

If the economy picks up steam, U.S. interest rates will rise. Even the Obama administration expects 10-year Treasury bonds to reach 5.3% in several years, up from 3.2% Monday, propelling interest payments on the national debt from roughly $200 billion yearly to $800 billion by 2020. If the sovereign debt contagion spills out of Europe, U.S. Treasury rates will rise even higher as investors charge a risk premium. Now comes [the McKinsey Global Institute in a report, “Farewell to Cheap Capital“] arguing that a third force — increased global investment and shrinking global savings — will lead to yet higher interest rates over the next two decades. States the report:

“Nominal and real interest rates are currently at 30-year lows, but both are likely to rise in coming years. If real long-term interest rates were to return to their 40-year average, they would rise by about 150 basis points from the level seen in the fall of 2010, as we write this report. And they may start moving up within five years.”

There has been a decades-long glut of capital as the mature economies of industrialized economies experienced slower growth and declining investment, McKinsey contends. Saving rates have dipped, too, especially in the U.S., but not enough to offset the weaker demand for investment capital. Meanwhile, developing countries, China especially, began saving phenomenal amounts of money as their economies took off. This global shift in the supply and demand of capital — not just Federal Reserve monkeying with interest rates — contributed to the global credit bubble of the mid-2000s.

Now the tide is turning, the report argues. China, India and other developing countries are embarking upon a massive wave of capital investment, much of it driven by infrastructure spending as their societies urbanize. The demand for new roads, rail lines, ports, water and power systems, schools, hospitals and other public infrastructure will reach a fever pitch not seen since the rebuilding of Europe after World War II. McKinsey also predicts massive growth in residential real estate investment to provide better housing for the emerging middle class, as well as strong growth in productive capacity. Global investment could increase from $11 trillion annual today to $24 trillion annually by 2030 (measured in constant 2005 dollars), or from 23.7% of global GDP in 2008 to more than 25% by 2030.

The surging demand for capital will not be matched by a commensurate increase in savings. The world’s largest economies are fast aging, and larger retired populations will draw national savings down, not build them up. The shift will be most dramatic in China, where the government is encouraging people to consume more and the one-child policy will lead within a couple of decades to a lopsided demographic profile of too many retirees and too few young workers entering the workforce.

The shift in the global supply of and demand for capital will likely push up long-term interest rates. And that will present businesses, consumers, investors and governments with very different challenges in the next 30 years.

Consumers are moving in the right direction — they’re sloughing off debt. Corporations are saving more, too, if one counts share repurchases as a return of cash to shareholders. But governments are stuck with deep structural deficits. With the national debt as large as it is, roughly 90% of GDP, the U.S. budget is extraordinarily sensitive to increases in interest rates. If economic growth picks back up, the sovereign debt contagion spreads and McKinsey’s looming global capital shortage materializes on schedule, the U.S. could easily see 8% interest rates on its 10-year bonds by 2020. That would boost budget deficits by $500 billion yearly or more above current forecasts — about the same amount we spend today on all discretionary domestic spending.

In that case, interest rates — not spending, not tax rates — will become the prime driver of U.S. budget deficits.

We cannot revert to the comfortable nostrums of yesteryear. The real estate bust and ensuing financial crisis of 2007-2008 created a massive discontinuity. The old economic and financial order is passing away. Our public policies must adapt to the new, emerging order, or Virginia will be swept away in the coming cataclysm of Boomergeddon.

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18 responses to “McDonnell Peddling the Transportation Policies of Yesteryear”

  1. that human settlement patterns are going a significant alteration — investment and population are flowing back toward the urban core


    Significant changes are going to take a long time, and anyway, I could point to other articles suggesting differently. New York State is losing population, and many low income people are leaving new York city for the suburbs because of high costs. If the influx you predict ever occurs, it will be blunted by even higher costs. Outlying towns like F'burg, Warrenton, and Winchester wlll find ways to become more competitive to get a slice of that pie.

    And talk about wasting money, retrofitting is a prime way to do it. It nearly always costs more to retrofit than to just build new. What you are talking about is not really retrofitting, but demolishing and startig over.

    Once you realize that is what is happening, then it is easy to see what a failure the Urban experiment has been. It has sucked up and burned up enormous amounts of natural capital and financial capital without replacing any of it.

    Consider the failing water mains in the District, Boston, and other places. Have the water bills collected over the past two hundred years collected ANY of the money needed to replace those systtems. Nope. It is going to have to be done with debt.

    Same with the road system, and the rail system. we have failed to charge ouselves enough, and now the bills are coming due, plus the bills for replacement.

    The unfortunate fact is that when it comes to roads, it is the one place you cannot save money by not spending it.

  2. Even if we wind up with a more urban and polycentric settlement pattern, raods will be our best present investment.

    Considering the present trends in technology, the best and fastest path to both EMR's vision of shared vehicles and the idea of multicentic TOD, will involve pilotless automebiles and rubber tired "trains".

  3. Anonymous Avatar

    Excellent post Mr. Bacon.


  4. Anonymous Avatar

    Right on AZA

    Wait until you see the latest version of THE CURRENT TRAJECTORY…


  5. If the economy picks up steam, U.S. interest rates will rise. Even the Obama administration expects 10-year Treasury bonds to reach 5.3% in several years, up from 3.2%


    Which is EXACTLY why you should be borrowing your shirt off right now.

    Rates go up and the cost of existing bonds go down. If so inclined, you will be able to BUY BACK your debt, in several years for a fraction of its cost. Failing that, you will continue to pay 3% and will have borrowed money at far less than its {then current] value.

  6. There are at least three debates occurring here …

    #1: What should government pay for on a general funds (vs user pays) basis?

    #2: How much should government provide on a general funds basis?

    #3: How should government finance what it wants to supply on a general funds basis?

    Let's work in reverse order…

    #3: Of course it's better to borrow when you can borrow cheap. Microsoft is issuing debt to buy back shares. Why? Presumably because debt is dirt cheap right now.

    #2: Revenues (primarily taxes) need to increase by about 10%. This should be done on a regionally adjusted icrease to the top marginal income tax rate coupled with an across the board increase in the gas tax.

    #3: The state government should pay for almost everything on a general funds basis. Why? Because any "user pays" scheme worked out by the General Assembly will be a con game. Our General assembly is riddled with special interests and mindless regionalism. They are also dedicated power addicts who can't wean themselves of the crack cocaine of the Dillon Rule. It's a broken governenace process. However, it is at its most broken when the central government in Richmond dreams up scams which require region-centric funding. If the GA wants to decentralize responsibilty for paying the bill then it needs to decentralize power too. Otherwise, we're all in this together and we all pay for everything.

    As for the incompetence of the McDonnell Administration …

    How did Cuccinelli do with today's first ruling in that health care lawsuit?

    The rot in Virginia lies not with Governor McDonnell but with the General Assembly.

  7. "mindless regionalism"? Is that anything like Home Rule?

    Fairfax has been offered the same deal that every single city and town in Va already has and that is a higher reimbursement rate than the counties get – and control of their own roads.

    It's the same deal that Henrico and Arlington have also.

    In addition, Fairfax has been offered the ability to have an income tax – for transportation and they've never used it.

    46 other states let make the localities responsible for local roads, the MPOs responsible for Regional roads and the State responsible for State Roads.

    It's not a weird concept at all.

    It's a normal concept – except in Va and a handful of other states.

    But Hampton Roads want NoVa and Lynchburg and Emporia to build their roads because the ports "benefit" everyone.

    And NoVa would like Roanoke and Charlottesville build their roads because NoVa "benefits" the state.

    And at the end of the day – despite very wishful thinking and some political money grabs – most localities won't get back but mostly what they pay in taxes – minus the state level fee for state roads.

    If you think you need more money – then there are a variety of answers – not the least of which is a referenda and the projects funded by property taxes or transportation districts or CDAs or you can ask the General Assembly to have a local/regional gas tax supplement.

    Waiting/wishing for the state to fund roads rather than taking responsibility yourselves actually runs counter to all the talk about local decision-making and local-accountability.

    You don't want or need the State to raise taxes – you need to do it yourself if that's what you think you need – and the state even lets you ask your citizens via referenda.

    I'm like Bob Marshall. I want to see the list of "priority" projects in the 4 billion and a clear idea of how that money will be paid back – before I'd support it.

    Congrats to Cucci … the next lawsuit will be to attack Social Security and Medicare on the same basis that Obama_Care was declared unconstitutional.

    Then we can take give everyone a permanent FICA tax holiday.

  8. Well before the gov starts down the debt road, maybe he should take an inventory of how many local governments are fixing to walk away from their obligations.

  9. I think McDonnell is providing a textbook example of what the no-new-taxes Republicans intend in place of taxes.

    That would be – "compensating" taxes on private entities in the ABC chain.

    Taxes on new things like offshore oil if it every comes to be.

    Deferring pension fund payments – essentially not funding your liabilities.

    And now – cynical back-door assault on the State's "pay as you go" AAA bond rating.

    I can't wait to see what happens in January when the Fed Stimulus that was used to level-fund education – goes away.

    Keep in mind also – that the problem with transportation -depending on who you want to believe is .. SUSTAINABLE FUNDING not one or two years worth of "tide you over" funding.

    I have to say.

    I expected McDonnell to REFORM the WAY we do transportation not try to find more sources of one-shot revenue infusions – like the audit and like squeezing the last bit of bond capability that the state has – for some stop-gap purpose.

    They say this man has Presidential potential.

    Would I want this guy using the tactics he is using now – at the Federal Level?

    Holy Moly.

    I'll bet even Groveton will blanch at that prospect.

  10. "I'll bet even Groveton will blanch at that prospect.".

    I've finally started to respect the current occupant of the White House for being willing to go against his own party faithful on the tax hikes and insisting that the unemployment benefits need to continue.

    I was even ready to think that the newly elected Congress would be effective in working with Obama. Until I saw Boehner weeping like a school girl on 60 minutes. Maybe it was a classic 60 Minutes hatchet job but the guy doesn't seem like he can talk about the weather without choking up.

    What was it Big Joe Turner used to sing?

    Turn off the water works baby.
    That don't move me no more.

  11. LarryG, et al are back to their usual arguments.

    Places like Fairfax and Loudoun Counties should pour out tax money for the state's "common good". Law enforcement, schools, agricultural subsidies – everything should be from those who can afford to pay and to those those who need the services.

    Except roads.

    In that case, the places which need the state to return some of their own taxes should go suck eggs.

    Many of us up here in NoVa were born at night … just not last night.

    The "clever boys" try to isolate transportation and ignore everything else. They pretend that "user pays" can only be applied to transportation.

    Lots of things can be "user pays" if you think about it hard enough.

    Law enforcement? The police in Fredricksburg aren't protecting me or my property.

    Schools? The teachers in Richmond aren't educating my children.

    Roads? The roads in Charlottesville cost money to build and maintain. Are there a lot of tollways there?

    The real test of the General Assembly and "user pays" transportation came with the Rt 81 tolling proposal. Do you think the brave men and women of the GA would put tolls on a road that runs through RoVa. Oh hell no.

    "User Pays" for transportation in Virginia = wealth transfer in Virginia, pure and simple.

    If you guys would just admit that you want to pay even less for what you get in return your proposals would be easier to stomach.

  12. There are no regional cross subsidies for the most part.

    There is some confusion on what the role of this state – and most states is when it comes to funding education – across a state such that every kid has access to equivalent resources.

    And I continue to point out that Va and Fairfax is the EXCEPTION to how most states "do" transportation funding.

    Thousands of counties in the US take care of their own county roads as do all the cities and towns in Va and Henrico and Arlington.

    But why would anyone in Fairfax want the state to increase State Taxes anyhow if they suspect that Fairfax would not get back it's full allocation anyhow?

    Why would it be wrong for Fairfax to take a stand to NOT SEND MORE MONEY TO THE STATE?

    You say you want Home Rule?

    HA HA HA

    The truth is – you do't want Home Rule and self-determination at all…


    you want to continue to make excuses and blame others for what you want do yourself.

    Henrico and Arlington pass the self-determination "home rule" test.

    They took the bull by the horns and decided to be responsible for their own affairs.

    Fairfax on the other hand is still waiting for handouts because it thinks they are owed them.

    Stop bellyaching.. and do what Henrico and Arlington did – and be done with it.

    You have the ability to levy an income tax – a capability that hardly any other jurisdiction in Va has – and yet have not shown any initiative on that either.

    Can't have it both ways Groveton.

    If you talk the HOme Rule Talk, you gotta walk the Home Rule Walk or just be like any other whining, sniveling, handout-seeking complainer.

  13. Larry: you are all wet and inconsistent (incontinent?) On this. Groveton wins hands down.

  14. If you guys would just admit…

    I said the same, years ago.

  15. "There are no regional cross subsidies for the most part.".

    I've asked a lot of people who have been in public service in Virginia a long time about that. All of them (from multiple parts of the state) say nobody knows how much (or, I guess, if) one region subsidizes another.

    Do you have access to that data? There are a lot of incumbent state politicians in Northern Virginia who would love to be able to show that there are no regional cross subsidies.

    They get asked about it all the time. They would be advantaged by saying there are no cross subsidies. But I've never heard even one of them say that. Instead they claim that the data isn't collected or NoVa doesn't have enough votes in the statehouse to do anything about it anyway.

    So, LarryG … if you want to help keep the Virginia Senate in the hands of the Democrats – you should provide the source of your statement. Mary Margaret Whipple, Chap Petersen, Janet Howell, Dick Saslaw, etc would all love to quote your statistic in the upcoming elections.

    I can hear them now – "We have represented you brilliantly. There is no regional cross subsidy. We get back all the taxes we pay to Richmond.".

    Help 'em LarryG – quote your source.

  16. There are no DEMONSTRATED regional cross-subsidies for the most part that I'm aware of.

    how's that?

    But here's the deal.

    If you don't have any proof that there is – do you promulgate your policies based on such a suspicion or do you get on with the work you have to do anyhow?

    More excuses and more blame for essentially not taking your own responsibility in the first place.

    And if you really think that anyhow, WHY would you want the state to raise taxes on you in the first place if you thought they'd not give it back?

    Makes no sense Groveton my man.

    Why do you not make sense on this?

    Does your company make excuses and blame other companies and competitors for not performing?

    I seriously doubt it.

    Why do you want Fairfax to be that way?

    Fairfax taxes it's citizens out the wazoo for it's school system because apparently their citizens want them to – even though the State short-funds them – right?

    so what's the deal with transportation?

    Are ya'll whining about the measly billion or two that other taxpayers are giving you for METRO?


  17. Anonymous Avatar

    We'll see whether there truly is a desire for urban living in Fairfax County. Last week, the County sponsored an open house on development at Tysons. A number of landowners and their agents told me that they hope to build residential housing first before more office buildings. That will be interesting to watch whether the development occurs.


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