Since infrastructure represents durable capital that will last for decades and since it is stuck in one place, we must think a little bit before we make a multi-billion dollar bet on such stuff. Note that Glaeser emphasizes that "bus good, train bad". An investment in bus technology offers much greater option value as they can be redeployed on new routes or sold to other jurisdictions as new news arrives. A train's underground tracks represent a sunk investment that a mayor can't sell back to Amazon! Mayors mostly value such investments because of the public sector union jobs generated to build the thing. The Mayor of Los Angeles continues to seek out billions of dollars in Federal subsidies for trains. Why would he disagree with Dr. Glaeser? In part this is due to the fact that the LA Mayor wants other people (such as Ed Glaeser of Weston, MA) to pay for his city's infrastructure. Spending other people's money is fun and many mayors spend much of their time lobbying for such subsidies. I ride the new LA Expo Line to USC each day and I do hope that new real estate arises around its station nodes BUT the people of LA should have paid for this train (not the people of Weston, MA).
As I argued after Hurricane Katrina and Hurricane Sandy, cities should pay for their own defenses and should pay for their own infrastructure. Such cities can finance their investments by issuing municipal bonds. The bond market (by pricing default risk) would determine the interest rate that these cities would borrow at. If you worry that Flint Michigan will face a higher interest rate, then progressives could use their cumulative resources to subsidize the loan for the Flint tax payers.
Why do I support local provision of infrastructure? The main beneficiaries of such infrastructure are the local residents and thus the property owners in these cities gain. If a city such as New York doesn't want to invest in its airport, then another city such as Newark can gain a competitive advantage by upgrading its airport. Let's have competition between possible transportation hubs.
Now, I understand that highways cross state borders. Similar to the Irvine toll roads, higher quality roads could be financed with tolls that vary by time of day.
So, as I think about different pieces of infrastructure ranging from; bridges, highways, power plants, flood protection, sewer treatment, transmission capacity, airports --- why should the Federal government be involved at all in subsidizing these investments?
Would local leaders make "better" , more efficient public policy decisions if they were investing their own money? Would public sector unions face greater challenges in extracting rents from city mayors if the city's own taxpayers had to pay the public sector wage premium?
In my own work on climate change adaptation, I'm interested in what is the optimal durability of our capital stock during a time of risk and volatility? In the presence of "option value" and learning, do we really want a system that subsidizes multi-billion dollar infrastructure investments? Perhaps "small is beautiful" and perhaps mayors would purse more incremental steps if they are spending their own money.
Again, during a time of income inequality --- how will poor cities fund their own projects if federal taxpayers aren't paying for them? Such cities can issue bonds and people who want to redistribute their wealth to these cities could explicitly contribute to these efforts through purchasing bonds from these cities and accepting an interest rate discount. I could also imagine a type of negative income tax in which the federal government makes a block grant to poor cities and allows the city to spend the $ in any way that the city selects but offers no subsidies for specific projects. This approach would provide income to the poor cities without distorting their investment incentives.
UPDATE: For those who wonder what I have written on urban infrastructure; here are some of my relevant papers;
- Rhiannon Jerch & Matthew E. Kahn & Shanjun Li, 2016. "Efficient Local Government Service Provision: The Role of Privatization and Public Sector Unions," NBER Working Papers 22088, National Bureau of Economic Research, Inc.
- Siqi Zheng & Weizeng Sun & Jianfeng Wu & Matthew E. Kahn, 2015. "The Birth of Edge Cities in China: Measuring the Spillover Effects of Industrial Parks," NBER Working Papers 21378, National Bureau of Economic Research, Inc.
- My 2013 PNAS paper on Bullet trains in China
- Dora L. Costa & Matthew E. Kahn, 2015. "Declining Mortality Inequality within Cities during the Health Transition," American Economic Review, American Economic Association, vol. 105(5), pages 564-69, May.
- Glaeser, Edward L. & Kahn, Matthew E. & Rappaport, Jordan, 2008. "Why do the poor live in cities The role of public transportation," Journal of Urban Economics, Elsevier, vol. 63(1), pages 1-24, January.
- Baum-Snow, Nathaniel & Kahn, Matthew E., 2000. "The effects of new public projects to expand urban rail transit," Journal of Public Economics, Elsevier, vol. 77(2), pages 241-263, August.
- Li, Shanjun & Kahn, Matthew E. & Nickelsburg, Jerry, 2015. "Public transit bus procurement: The role of energy prices, regulation and federal subsidies," Journal of Urban Economics, Elsevier, vol. 87(C), pages 57-71.
- Kahn, Matthew E., 2015. "Climate Change Adaptation: Lessons from Urban Economics," Strategic Behavior and the Environment, now publishers, vol. 5(1), pages 1-30, June.
- Dora L. Costa & Matthew E. Kahn, 2015. "Death and the Media: Asymmetries in Infectious Disease Reporting During the Health Transition," NBER Working Papers 21073, National Bureau of Economic Research, Inc.