Bend Over: How The Taxpayer Gets Screwed On Infrastructure Funding

Sandy Relief money and pork — who would have thought?

Taking shape on Manhattan’s West Side is a $185 million, federally funded tunnel that leads to nowhere, for now.

The 800-foot-long, 35-foot-deep concrete trench could someday lead to two new commuter rail tunnels under the Hudson River to New Jersey, if the billions needed to build them ever materialize.

The access tunnel is being built now because the massive Hudson Yards development with six skyscrapers, the tallest being 80 stories, will soon be built on top of it. Trying to dig such a huge trench through the bedrock after those buildings are completed, officials say, would be an engineering and financial nightmare.

U.S. Sen. Charles Schumer, D-N.Y., was among the lawmakers who pushed Congress to approve Superstorm Sandy relief money for the planned flood-resistant access tunnel, calling it mitigation to protect infrastructure from future storms. But he argued it would have to be built now because the skyscraper developers could not be delayed indefinitely.

Not surprisingly, all roads (or tunnels) to nowhere lead back to Senator Chuck Schumer.

It takes a special kind of politician to earmark funds in a hurricane relief bill to dig new tunnels, which are purportedly “flood resistant,” but can’t be used unless several billions more are invested in connecting them to the existing infrastructure. It’s like buying a five gallon gas can, putting 94 octane fuel in it, and then demanding a Ferrari.

Unfortunately, this is how our politicians treat us every single day.

As a New Yorker who works in Manhattan, I can’t tell you how many construction projects move at a snail’s pace. Of course, people outside of the Financial District are all too familiar with the story of 1 WTC and how long it took to build (eight years). The North Tower of the original WTC moved tenants into it in just over two years.

What’s going on here? I see two major issues: costs and debt.

1. Union labor and regulation add to costs.


Look, I’m not saying that we should have construction folks work in unsafe conditions. What I am saying is that governments should open up bids to all companies — union or not — with good safety records and who can get the jobs done in a cost-effective manner for the taxpayer. A few years back the Regional Plan Association estimated that currently, union labor adds anywhere from 20-30% in additional costs to construction. Combine that with cost overruns — and the taxpayers are on the hook for a lot of money.

Government regulation adds costs to construction as well. Josh Barro did a good job summing up why rents in New York City are so expensive, noting that regulations in NYC restricting crane operation, scaffolding, and the like can increase costs by nearly 20%.

2. Federal funding does not help the construction process. It hurts it.

Even worse (in terms of delays) is the reconstruction of the Fulton Street subway station. This project has been going on for, well, over ten years and is still not completed. The project went way over budget and then the powers that be had to cut back on it. In 2009, though, the MTA sought federal funds in order to restore the project to its former state. Of course, there is a big banner blasting that the project is “made possible by the American Reinvestment and Recovery Act,” colloquially known as “The Stimulus” bill (referred to herein as the “ARA”), which was signed into law by President Obama in 2009.

Do you see a pattern here?

Public projects are a feeding trough for the pigs in our society who overeat and then cry for more. Fulton Center originally was projected to cost $750 million. Unfortunately it (1) cost millions more than projected and (2) would have basically fallen apart, but for The Stimulus bill that provided another $500 million (!) for the project. In the case of the tunnel to nowhere, they are literally useless unless billions more are spent.

What’s even more devious here is the fact that the American taxpayers — and not just New Yorkers — are paying for the costs of Fulton Center.

When a city wants to fund a municipal project, it can raise money through debt offerings. People can buy the “tax-free” municipal bonds as a way to get income for themselves. The city can then finance a project and pay it off over time. The city can also raise taxes on its residents (income, sales, excise, or property taxes). Of course, raising taxes is un-American. Therefore, borrowing money becomes the way to pay for these infrastructure projects.

The problem with Fulton Center, with Schumer’s “Tunnel to Nowhere,” and similar projects is that they are becoming more and more often funded by the U.S. governmentThe federal government is issuing debt to borrow trillions to pay for things like the ARA. The U.S. Treasury sells its bonds to the Federal Reserve through the euphemistically-termed Quantitative Easing program. But since the Fed simply buys U.S. government debt without question, it creates a situation where governments can “borrow” from the Federal Reserve rather than from their constituents (who might not want to lend the money) or from their taxpayers (who may not be able to fund the city’s spending largess).

In other words, there’s no check and balance to this spending because it’s just put on the “credit card.”

We can do this when rates are low. But what happens when rates go up? The interest on the national debt is projected to quadruple over the next decade. This will require (1) incredible economic growth, leading to (2) increased tax revenues or (3) massive spending cuts.

Rather than borrowing billions to pay for infrastructure, the government should focus on paying that out of existing tax receipts, since infrastructure is a more legitimate government expenditure than welfare. Of course, that would require some major political willpower that our current representatives do not have. Eventually the trough will run out.

As always, free markets are better markets.

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The biggest news this week, besides corporate earnings, will be the GDP report (1.1% growth in the last quarter) and the April employment situation (+215k nonfarm payrolls). Both should be market movers. The Federal Reserve’s monetary policy announcement on Wednesday afternoon will move the market as well.