Charles Katebi

Washington, D.C., has some of the highest living costs in the country. Its metro area contains six of the nation’s ten wealthiest counties, making it the sixth most expensive city for renters. Yet one in five of the city’s residents live on or below the poverty line. For children, the poverty rate exceeds 30 percent. It is very expensive to be poor in the District.

Given the area’s high costs and low incomes, it came as surprise to many when the Council of the District of Columbia ruled to keep Walmart out of the reach of its residents. In an eight to five ruling, lawmakers passed the Large Retailer Accountability Act. It was largely drafted and heavily lobbied for by “Respect DC,” an astroturf front group of the United Food and Commercial Workers union. This bill requires non-unionized retail outlets with 75,000 square feet or more indoor space that are part of a parent company with $1 billion or more in annual revenue to pay employees $12.50 an hour, a 50 percent premium over the city’s legal minimum wage. Guess who meets that description?

This decision comes as Walmart is in the process of building three stores in the city and is considering breaking ground for an additional three. Once completed, these stores will employ 1,800 workers. Walmart’s low prices would surely lower living costs and the indirect effect of driving other retailers to lower their own prices would be even more beneficial. On average, the arrival of a Walmart causes a 13 percent drop in competitor’s prices. When measured nationally, Walmart customers nationally save $200 billion every year.

Supporters of the bill insist that this legislation was not about keeping Walmart out, but raising workers’ wages. Councilman Vincent Orange explained, “The question here is a living wage; it’s not whether Wal-Mart comes or stays… We’re at a point where we don’t need retailers. Retailers need us. Trust me. We don’t have to beg people to come to the District anymore.”

The idea that living standards can be raised but somehow retailers are not “needed” is absurd. The purchasing power of one’s wages is solely determined by the goods and service they can be exchanged for. Walmart’s entire business model is built around providing more products at lower prices than its competitors. But opponents of Walmart have come to the conclusion that it is better to raise the living standards of the big-box retailer’s workers than to raise the living standards of Walmart’s far more numerous shoppers.

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Since its inception, the Interstate Highway System has been universally revered for its scale and accessibility. But the primary funding mechanism which supports it, the federal gas tax, is inefficient and fiscally unsustainable. This past weekend, the Oregon House and Senate moved to craft a new system for generating revenue for the building and maintaining of the state’s roads. Senate Bill 810 would allow the collection of highway revenue based on vehicle-miles traveled (VMT).

This is occurring in a climate of uncertainty over the future federal involvement in highway funding. Currently, revenue for the federal Highway Trust Fund (HTF) is primarily generated from a tax of 18.4 cents on every gallon of gasoline sold for automobile consumption. While this system was built upon the idea that revenue collected from a state’s fuel consumption should directly go to maintaining its federal-aid highways, the reality is that the current system is highly redistributive. In 2005, Alaska received highway funding that was 6.44 times larger than the revenue it contributed to the HTF. Oregon on the other hand only received 95 percent of what it contributed into the HTF.

Other flaws in the system include a widening gap between the revenue generated from the gas tax and the cost of building and maintaining America’s highways. Since 1993, the fuel tax rates for both gasoline (18.4 cents per gallon) and diesel (24.4 cents per gallon) has remained the same while the annual cost of highway maintenance increased by 55 percent — right as more highway segments reach the end of their 50-year lifespans. At the same time, the fuel efficiency of the average car has increased by 5 percent, reducing the revenue generated by the fuel tax. As the chart below illustrates, today’s fuel efficient cars are driving more than ever but are not generating the revenue necessary to expand road capacity or maintain existing infrastructure.

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Last Tuesday, Rep. Rosa DeLauro (D-Conn.) introduced a bill to create a government-owned corporation that would finance infrastructure projects, otherwise known as a national infrastructure bank (NIB). This would be a federal entity responsible to Congress and the president. It would serve as an artery through which private savings and investment is channeled to public infrastructure projects such as roads, bridges, water and wastewater systems, and others. This is not a new concept. In 2007, Sen. Chris Dodd (D-Conn.) introduced the National Infrastructure Bank Act to establish a NIB. Then in 2011, President Obama included a NIB in the American Jobs Act but it was voted down in the Senate. Rep. DeLauro’s latest shot at this concept comes hot off the heels of a report issued by the Center for American Progress called “300 Million Engines of Growth.” One of its recommendations for improving US infrastructure was the establishment of a NIB:

Private-sector investors and companies can be important players in the funding of infrastructure projects by providing up-front financing in exchange for a dedicated stream of revenues from user fees or taxes. A National Infrastructure Bank would support these projects by providing direct loans, loan guarantees, or credit assistance, which would lower the costs faced by state and municipal governments and their private partners. The bank would create a more efficient environment for private investors to participate in rebuilding public assets.

In a world where transportation, home heating, and water utilities were provided like any other good or service in the private sector, the idea of the government needing to establish a bank to finance infrastructure would be largely anachronistic. If a developer sees an area suffocating in traffic because of insufficient highway capacity, he would approach a bank or investment fund and build a road on credit. The loan would then be repaid through tolls the developer collects from the users of his road. This is the model for financing a significant share of infrastructure development in the developed world outside of the United States.

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Another week, another reminder that state and local governments are held hostage by their own employees. After a weekend of negotiations failed to yield an agreement, two of the San Francisco Bay Area Rapid Transit’s (or BART) largest unions went on strike today. Worker contracts that dictated salary, pensions, healthcare, and safety expired at midnight on Sunday, June 30, for the Service Employees International Union Local 1021 and Amalgamated Transit Union Local 1555. When the BART District government agency and the two public employee unions could not come to an agreement, the unions walked away from negotiation at 8:30 pm. ATU Local President Antanonette Bryant remarked, ”Our members aren’t interested in disrupting the Bay Area, but management has put us in a position where we have no choice.”

The key disagreement was over a demand from the unions for a 23.5 percent raise over the next three years. This is in addition to the current average salary of BART transit workers of $83,157 in gross pay, up from $80,500 just since 2010. These workers also pay a flat monthly fee of $92 for health insurance. What is more frustrating is that this strike is being announced even after the BART transit authority had raised its offer of a 4 percent salary increase over four years to 8 percent. It even offered to sweeten the deal by reducing the monthly contributions these workers have to pay into their pension accounts. Even this was not enough.

The BART transit system currently moves more than 40 percent of all commuters into San Francisco from the East Bay. A strike would disrupt the commutes of 400,000 travelers and could add 60,000 cars to an already congested highway system. This is yet another example of the dangers of organized labor in the public service. BART should immediately move to replace the 2,400 train operators, station agents, mechanics, maintenance workers and professional staff that will be going on strike today with non-union transit workers to allow the transit system to continue operating. Seventy years ago Franklin Delano Roosevelt predicted the kinds of threats public employee unions would be making against taxpayers:

I want to emphasize my conviction that militant tactics have no place in the functions of any organization of Government employees. Upon employees in the service rests the obligation to serve the whole people, whose interests and welfare require orderliness and continuity in the conduct of Government activities. This obligation is paramount. Since their own services have to do with the functioning of the Government, a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable.

If a union in the private sector demands salaries and benefits that prevents an employer from operating profitably, the employer either goes out of business or replaces union employees with non-union employees (if the business resides in a right-to-work state). This has served to restrain private sector unions from making unreasonable demands on their employers in recent years. But governments cannot go out of business. When governments run into fiscal crises brought about by unsustainable pension and salary contracts for public employees, taxes are raised and essential services are cut. Public employee unions spend millions to influence the outcomes of state and local elections to keep incumbent supporters in power. This ensures an arrangement where unions are essentially negotiating with themselves.  After a half-century of taxpayer blackmail at the hands of public employees, one this is clear: organized labor cannot be trusted in the public sector.

Earlier this month, the Center for American Progress issued a  report in which it set out recommendations for growing the American economy. A significant priority in this bold agenda is the rebuilding of our nation’s infrastructure. CAP estimates that spending $262 billion annually is required to repair our roads, bridges, water, and sewer facilities over the next 10 years. However, federal, state, and local governments are annually apportioning only $132 billion.

After hearing these statistics, it is natural to conclude that the answer to infrastructure that is aging and breaking is simply a matter of increasing our spending to make up the difference in what we are currently spending and what we need to spend.  This is the conclusion CAP’s report comes to when it proposed: Increasing annual federal funds spent across all infrastructure sectors by $48 billion, along with $10 billion in new federal loan authority. This amount would incentivize an additional $11 billion in states and local matching funds.

But the government at all levels is not actually spending less than any other developed country on its physical foundations. As a share of gross domestic product, the U.S. spent 3.5 percent of GDP on infrastructure in 2010, slightly higher the average of countries within the Organization for Economic Development and Cooperation that spend on average 3.3 percent of GDP. As the graph below shows, the U.S. and other advanced countries have allocated roughly the same share of GDP to infrastructure investments going back to the 1980s:

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France has long feared foreign competition as a threat to its domestic producers. The nation has some of the most punitive taxes and labor regulations that make their products more expensive compared to foreign goods. Surprisingly, France has recently proposed to implement trade barriers in the same sector the French have constantly reminded the rest of the world that they have a comparative advantage in — culture.

In May, a 500-page government-commissioned report was released discouraging the viewing of non-French cultural content and encouraging the viewing of French cultural content. The French President Francois Hollande quickly expressed support for the report’s proposals. Out of 80 recommendations, the most stunning was a 4-percent tax on the sale of all devices, including gaming consoles and digital readers that allow access via the Internet to “cultural content.” The revenue generated from this tax would go towards subsidizing French music, television, and film. Titled Culture: Act II, the report’s recommendations were meant to counteract the influence American culture has had on the Internet, which the reports states “constitutes an immense threat to cultural diversity.”

Typically, protectionist policies are meant to protect weaker “infant” industries that governments wish were more developed. But France’s cultural industries, such as its music, architecture, paintings, and fashion have historically lead European trends for centuries. It is suspicious for policy makers to seek protection for an industry with such superior products.

Nevertheless, if French legislators indeed believe it is critical for French culture to be protected through trade barriers, they should have the political courage to state that French consumers prefer American content over French content because American films and music are of greater quality and value. I am sure French voters will appreciate the notion that the only thing that has kept French culture alive is the protective hand of government.

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Post image for Jerry Brown’s Legacy Train Wreck

California Governor Jerry Brown, along with an entourage of high-profile business and financial leaders from the Golden State, recently traveled to China on a trade tour. The agenda included government and private sector partnerships in electric vehicle production, trash-to-electricity technology, and green energy research and development.

But the tour’s main purpose centered on garnering Chinese financial interest in what Jerry Brown hopes to be his defining legacy: high-speed rail for California. (Embarrassingly for Brown, China indicted its former top rail official on corruption charges during the governor’s junket.) China is currently sitting on $3.4 trillion in foreign exchange reserves. Traditionally, these have been invested in foreign government bonds. But in recent years, China has moved to diversify its holdings away from government bonds—which have been yielding historically low interest rates—and into more lucrative brick and mortar assets. Needless to say, the China’s banks and sovereign wealth funds would be fools to invest in Jerry Brown’s white elephant for several reasons.

First, the project’s estimated costs are ballooning before construction has even begun. Since a statewide ballot initiative in 2008 authorized the creation of a high-speed rail network, projected construction costs for the entire endeavor have ballooned from $34 billion. In a revised business plan published in 2011, the California High-Speed Rail Authority estimates construction will now cost $98 billion to $117 billion, and the estimated completion date of the full first section was pushed back by 13 years. In 2012, the rail authority claimed it found $30 billion in estimated savings, primarily by abandoning the initial full-build plan that would have required completely dedicated and electrified infrastructure and moving toward a “blended” model. Basically, this means the initial system will not be true 21st century high-speed rail, in that it will share tracks with electrified mass transit and trains relying on diesel motive power. The downward cost estimates are also the result of modified inflation projections that assume rates over the course of construction will be lower than previously assumed. These are the estimates before a single track has been laid.

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Progressives have always assumed that if something is good, it must be provided through coercive force by a central government. This is illustrated in progressive support for continuing large Amtrak subsidies. Various liberal policy outfits including the Brookings Institution and the Center for American Progress have been recently celebrating the mild uptick in the government-subsidized passenger railroad’s ridership levels. The train served a record 32.1 million passengers in 2012, a 55-percent increase since 1997. In earlier times, liberal advocates would have congratulated themselves on the success of a government program’s drive to self-sufficiency and move to let it fend for itself in the private sector, in the same way federally controlled Conrail was privatized and later sold off to CSX and Norfolk Southern. But this doesn’t cut it for today’s progressives, who appear to believe Amtrak’s recent uptick in ridership is reason for increasing federal subsidies. This is because they are well aware that Amtrak’s supposed success is largely a mirage.

The rise in ridership appears impressive, until one realizes that 1997 was a severe low-point for train travel. If measuring Amtrak’s total passenger miles starting in 1991, its increase over the past 22 years is a pathetic 8 percent. Its condition looks even worse when considering that population growth has increased over this period by 25 percent, pushing Amtrak’s share of intercity passenger travel down from 0.45 to 0.36 percent. Passenger rail is alone in the dismal state of its ridership. Despite the airline industry’s financial instability, not to mention the costs incurred due to the September 11 attacks and the TSA, airline ridership increased by 68 percent. Even intercity buses carry three times more passenger miles than Amtrak does, while the vast majority of intercity travel is made by private automobile.

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In recent years, members of Congress have worked with various interest groups for the purpose of imposing new economic regulations on the freight rail industry. This action has been partly led by concerns over the scale of consolidation that has occurred in recent years.

The consolidation of this industry is the end result of gains in efficiency and productivity that have come about from railroads having greater freedom to adjust their behavior to cater to the needs of their shippers. Prior to deregulation, a regulatory board called the Interstate Commerce Commission (ICC) had veto authority over most major decisions of freight carriers. The ICC forced firms to maintain service in unprofitable regions, imposed rate ceilings, and bizarrely also required railroads to keep their shipping rates artificially high    Needless to say, railroads under this regulatory regime lacked the revenue or the incentives necessary to maintain healthy railway networks.

With the freedom that came with deregulation, carriers cut waste by discontinuing unprofitable lines and poured cash—more than $500 billion since the enactment of 1980’s Staggers Rail Act—into upgrading and expanding infrastructure in order to cater to the greatest number of shippers at the highest level of quality. According to the Association of American Railroads, as of June 2012, inflation-adjusted rates charged to shippers have dropped by 45 percent since the Staggers Act. Larger carriers that could exploit their economies of scale were able to use their size to charge the lowest rates.

Many are now calling for new regulations to mitigate the perceived harm that post-deregulation railroad consolidation has imposed on shippers. Unlike most sectors, railroads currently retain limited exemptions from antitrust law. Some shippers only have access to only a single carrier with which to transport their products. Critics of the status-quo are now accusing large railroads of abusing their market power to charge excessively higher rates to shippers that do not have any viable alternative to doing business with them. Their proof is in the slight increase in shipping rates that has come about since 2004. In addition, the three large Class I publicly traded carriers (BNSF is wholly owned by Warren Buffett’s Berkshire Hathaway) recently reported profit margins exceeding 15 percent.

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CEI’s Marc Scribner previously commented on how advocates for greater investment in transportation infrastructure frequently disregard the infrastructure measure that really matters — the rate of return on investment. Supporters of greater federal involvement in the provision of roads and transit continue to view these productive assets as utilities. If only they were properly funded, they say, the American public could once again enjoy a world-class travel experience. Even if the federal government threw trillions of dollars into the inefficient bureaucracy that distributes funding for transportation improvements and expansions, the nation’s population will continue to put pressure on our transportation networks in the future.

Marc and others have observed that this congested state of affairs offers an opportunity: if such high demand for motorways carried a price, these assets could be more effectively managed by the private-sector in providing the infrastructure for millions of commuters, but at a fraction of what is currently being paid. While attention has recently been placed on how much of the motorways’ congestion problems lies in their status as free public commons, the same vacuum of incentives for investment and maintenance plague our country’s ports and airports as well.

When paying for long-term investments, airports issue tax-exempt bonds. Because airports lock in long-term fixed costs, they take measures to lock in fixed incomes by forcing airlines into rental contracts for runway space for 25 to 30 years. All else being equal, no rational business would lock themselves into contracts of such duration. Unfortunately, state and local government in the U.S. hold a monopoly on the provision of runways, barring private airports from offering more reasonable terms to carriers. Airlines have no choice but to sign on to these generation-long contracts.

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