The Interstate Highway System is justly lauded as one of the greatest engineering and political achievements of the 20th century. President Obama regularly invokes the nearly three-decade initiative when talking about public works projects that could get the economy back on track. Unfortunately, the simplified story about the Highway System misses the fact that billions of dollars were likely wasted because we built a system too large to serve its core purposes, and we failed to ensure the investments were in the right place at the right time.On balance, the spending might have been worth it, but aggregation overlooks uneconomic allocations of resources at the margin.
As it is, the Interstate Highway System was wildly over budget. The U.S. Department of Transportation reports that initial estimates put total construction costs at about $27 billion. By the time the system was completed in the 1980s, the federal government had spent more than $114 billion and the total cost accumulated to $129 billion.
No incentives existed to prevent overbuilding. This overbuilding may have resulted in tens of billions of dollars in excess federal and state government spending even though many economists suggest that the economic benefits of the system outweighed the costs of its construction. After all, the result of the project was a 46,876 mile long system that knitted together all major U.S. metropolitan areas, and economists have shown that the interstate system was a boon to business as intercity trucking became more efficient and less costly and urban congestion fell dramatically.The cities became less congested because the interstate highways, which originally were not to be run into cities, made migration outward, and congestion there, more likely.
Nevertheless, billions of dollars were likely wasted because the users - commercial truckers as well as passenger cars - were never required to directly consider the costs and benefits of using these roads with a true user fee such as a toll. In the 1950s, Congress decided to eschew tolls altogether, opting instead for the politically expedient and administratively efficient (at the time) gas tax. The end result was a system where many roads were built to nowhere, or at the wrong time, and transportation subsidies became endemic. A price sensitive private sector, in contrast, might have otherwise built roads elsewhere and for even more productive purposes.Perhaps so, although an advocate of Keynesian stimulus in an era of cheap capital is likely to tell the authors, "Look, I don't want to have to explain to my grandchildren that the socialist revolution came while The Best and The Brightest quibbled over allocating the stimulus money in a first-best-efficient way."
It is this reality of overbuilding that should sober ideas about infrastructure spending "paying for itself" or "filling a need," particularly in an advanced and mature economy such as the one within th United States. Certain parts of the Highway System certainly showed positive economic gains, but many other segments were unnecessary - or at least not necessary at the time the government built them. While spending federal dollars on road development is not the only arrow in the quiver of the pro-stimulus argument, a more sophisticated look at our experience with the Interstate Highway System at least suggests that Washington should be careful about simply dropping billions more dollars on the economy without considering the potential inefficiencies they create.