Inflation Means We're Spending More Money on Less Highway

The hardest-hit victims of inflation might just be America's state transportation departments, which are seeing the costs of building roads shoot through the roof, eliminating their recent efficiency gains.

The costs of highway construction have increased over 50 percent from January 2021 to September 2022, according to government spending data parsed by Eno Center for Transportation Senior Fellow Jeff Davis. The big drivers have been rising costs of materials, including steel, concrete, and asphalt, as well as the diesel fuel needed to power road construction equipment.

These inflationary increases in highway costs mean that even though the federal government is spending a lot more money on infrastructure—thanks largely to the November 2021–enacted Infrastructure Investment and Jobs Act (IIJA)—its real ability to build and maintain roads and highways is falling.

The $1.2 trillion IIJA increased overall infrastructure spending by $550 billion and highway spending by $110 billion. Davis' article says that real highway spending has fallen by $21 billion.

The inflationary hit to highway spending comes just as states were making real strides in improving the efficiency of their road spending in terms of road quality per dollar spent.

State departments of transportation (DOTs) saw their per-lane mile costs for highway capital spending, maintenance spending, and administrative spending all fall in 2020, according to the latest annual highway report from Reason Foundation, the nonprofit that publishes Reason. A smaller percentage of the country's bridges were also structurally deficient.

That decrease comes after a decade of per-lane mile cost increases. Reason Foundation's measurements adjust for higher expected spending on urbanized roads.

Meanwhile, pavement conditions on interstate highways, both rural and urban, improved slightly. Falling spending and improving road quality would suggest "that we're in a fairly good position," says Baruch Feigenbaum, senior managing director of transportation policy at Reason Foundation and lead author of the most recent highway report.

But he cautions these data are from a very weird 2020, and so they don't capture the most recent price hikes. Rising highway costs, he says, can largely be attributed to factors outside of the control of state DOTs.

In some ways, the transportation sector is the victim of its own success. All the new infrastructure spending is hiking demand, and therefore costs, of materials needed to build or patch up highways, rail lines, and more.

The Reason Foundation report does provide some guidance on how states can spend their highway dollars more effectively, even in an inflationary moment.

Virginia and North Carolina are the best-performing states in the report's rankings, which consider spending per lane mile, pavement quality, and road fatality metrics.

Feigenbaum says these states also long had the best quantitative cost-benefit selection processes, which are then used to determine which projects get funded. These processes are intended to replace pure pork-barrel spending whereby politicians decide what gets funded without doing much analysis beyond how many votes are at stake.

Having a more quantitative, cost-benefit selection process helps weed out bad projects and improve on already acceptable ones, says Feigenbaum.

"When you go through this analysis, you are forced to cut out unnecessary stuff that's in the project because if costs are too high then you're just not going to get funded," he says.

Public-private partnerships can help reduce the problems of rising costs in an inflationary moment too, says Feigenbaum, by shifting financial risk onto a private party and off of taxpayers.

The federal government has plenty of ways it could make infrastructure cheaper as well, apart from not causing decades-high inflation. "Buy America" provisions that require recipients of federal funding to purchase domestically manufactured materials could be eliminated. So could requirements to use unionized labor. The federal government's long, arduous environmental review process—which often leaves projects in limbo for years or even decades—could be significantly streamlined.

Thus far, the Biden administration has made a lot of hay about expanding Buy America provisions and maintaining union labor requirements. It's reversed the Trump administration's streamlining of environmental review.

It's up to states to find cost savings where they can.