Economics

Infrastructure

  • International Law
    The Global Forum on Cyber Expertise: Its Policy, Normative, and Political Importance
    The big idea emerging from the Global Conference on Cyberspace 2015—the latest iteration of the London Process—is the Global Forum on Cyber Expertise (GFCE). According to The Hague Declaration, the GFCE will facilitate “inclusive and greater collaboration in the area of capacity building and exchange of expertise in the cyber domain.” These purposes, and the language describing them, suggest the forum will target low-hanging fruit. Although skepticism might eventually prevail, the GFCE reflects policy needs, normative principles, and political interests that make it potentially significant. The GFCE Under its Framework Document, the GFCE will be “a flexible, action-oriented and consultative forum” involving “countries, companies and intergovernmental organisations.” In a “voluntary, complementary, inclusive and resource driven” manner, the forum will “build cyber capacity and expertise” through initiatives on cybersecurity, cyber crime, data protection, and e-governance. GFCE activities will be non-binding but consistent with international law, including human rights, and will “contribute to bridging the digital divide.” The GFCE will inventory existing capacity-building activities, facilitate new projects, and host high-level policy discussions. The forum has forty-two founding members—twenty-nine countries, seven private-sector entities, and six intergovernmental organizations. Policy Needs Cybersecurity policy reflects three overlapping but distinct tracks that, at present, reflect different prospects for international cooperation: Most countries classify cyber threats under traditional security categories—crime, terrorism, espionage, and armed conflict. Increasingly, policy and law in each category confront problems that limit the effectiveness of collective action. Frustrated by worsening cyber threats, a number of countries—including the United States—are developing “full spectrum” capabilities, including offensive capabilities, to deter state and non-state adversaries. This approach raises different challenges, including how deterrence works in cyberspace, but they are not traditionally addressed through international cooperation. Countries have adopted an “all hazards” approach to cyber threats that involves improving cyber due diligence, defensive, and resilience capacities, including information sharing, especially for cyber-enabled critical infrastructure. As The Hague Declaration observed, “the area of capacity building and exchange of expertise within the cyber domain is rapidly becoming one of the most important topics on the international cyber agenda.” The GFCE enhances the “all hazards” track and its momentum in cyber diplomacy. It seeks to build capacity to defend against the range of cybersecurity threats, including threats from criminals and threats to digital data. The GFCE will not displace existing capacity-building activities, but it aims to link and weave these disparate efforts into a bigger, stronger global regime for strengthening cyber due diligence, defense, and resilience. Normative Principles Cyber capacity building is becoming prominent because all states need to improve their cybersecurity. However, the GFCE also has a normative edge in embracing a multistakeholder approach to improving cybersecurity as part of achieving “a free, open and secure cyberspace.” This approach and rhetoric connects with the multistakeholder model of Internet governance and Internet freedom issues that have been sources of contention among states. The GFCE’s references to human rights are also important. The Hague Declaration mentions the Universal Declaration of Human Rights and International Covenant on Civil and Political Rights. It also states the GFCE will be consistent with the UN Guiding Principles on Business and Human Rights, which addresses the human rights responsibilities of companies. These principles cover civil and political rights (e.g., not exporting technologies governments use to violate freedom of expression) and economic, social, and cultural rights (e.g., facilitating use of Internet-enabled technologies to advance the rights to education and health). Less developed is the objective of bridging the digital divide. This concept is associated more with expanding access to information and communication technologies (ICTs) than strengthening cybersecurity. These goals are not incompatible, and the GFCE might support initiatives that increase access to more secure ICT services and narrow the digital divide. Political Interests Although cyber capacity building is important to many states, the GFCE particularly aligns with U.S. interests. In keeping with its commitment to capacity building, the United States supports the GFCE and announced two initiatives with the African Union to improve cybersecurity in Africa, one with Japan and Australia on Southeast Asia, and one with Canada on worldwide cyber threats. But, the GFCE is important to the United States for reasons beyond capacity building. The GFCE allows the United States to show pragmatic leadership in an area of policy need, and the forum reinforces normative principles the United States has long championed. The GFCE helps U.S. efforts to push past damage Snowden caused to its reputation and diplomatic relations. U.S. prominence in the GFCE contrasts with the absence of China and Russia in the list of founding members. In addition, the U.S. initiatives in Africa and Southeast Asia demonstrate that, despite Snowden, countries will partner with the United States in ways and on a scale no other cyber power can match.
    Post April 28, 2015 Net Politics
  • Nicaragua
    Nicaragua’s Grand Canal
    Nicaragua’s proposed Grand Canal would be one of the world’s largest engineering projects. Its proponents say it could transform the country’s economy, while critics say it could be an environmental catastrophe.
    Backgrounder by Danielle Renwick April 24, 2015
  • Cybersecurity
    Sanctioning Hackers
    President Obama signed an executive order today that allows the U.S. Department of the Treasury to sanction individuals or entities involved in "significant malicious cyber-enabled activities" (you can read the order here). The sanctions, which could involve travel bans to the United States or the seizure of funds, would be levied against those who engage in attacks that disrupt or destroy critical infrastructure networks, or who steal intellectual property or trade secrets. State-owned enterprises or entities that benefit from cyber espionage could also be the target of sanctions. This is, as others have noted, a big deal. For years, pundits, including myself, have been saying that the costs of hacking had to be raised, and the next steps would be sanctions targeting individuals. In a June 2014 Asia Unbound podcast, Special Advisor to the President and Senior Director for Asian Affairs at the National Security Council Evan Medeiros hinted that after indicting the five PLA hackers, the Obama administration was thinking about how to penalize the state-owned enterprises that were the recipients of the stolen intellectual property. Three quick questions: How and how often the order will be implemented? It is unlikely to have much effect on North Korean and Iranian hackers, since both of those countries are already under substantial sanction regimes. The same might be said of Russia, since the United States and its European allies have levied sanctions in the wake of the crisis in Crimea. Does that mean China is the main target? Even if it is China, the idea might be to deter the next generation of hackers rather than prevent the current wave of attacks. That is, a PLA attacker may not think much about travel to the United States now, but a college student who has not yet traveled down that road might think twice. They may still have dreams of visiting Los Angeles. If China is the main target, what does Washington think Beijing’s response will be? Right now, the two sides are involved in a complicated dance, where each step seems to be matched by the other. The United States claims China is behind attacks on U.S. networks, China claims the United States is the real evil empire in cyberspace, hacking the entire world. Beijing uses Washington’s demands for backdoors in encryption as justification for similar demands in the revised anti-terror law. Chinese and U.S. tech companies are blocked from each other’s market because of security concerns. If the United States places a travel ban on a Chinese hacker, should NSA employees think twice before they book a tour to see the Forbidden City? Where does the tit-for-tat end? Finally, the executive order says any case must be supported with evidence that can withstand a court challenge. Does that mean we should expect to see the government roll out even more technical details to be used for the attribution of attacks? In the past, the intelligence agencies have hesitated because they wanted to protect their sources and methods. Will the order result in the NSA and others burning more intelligence to levy sanctions? We will have to wait and see how these three questions play out, but there is no doubt that this is a major policy development.
    Post by Adam Segal April 1, 2015 Net Politics
  • Cybersecurity
    Guest Post: Barriers to Sharing Cyber Threat Information Within the Critical Infrastructure Community
    Robert M. Lee is an active-duty U.S. Air Force Cyber Warfare Operations Officer and a PhD candidate at Kings College London researching cyber conflict and control system cyber security. His views and opinions are his alone and do not represent the U.S. Government, Department of Defense, or U.S. Air Force. You can follow him on Twitter @RobertMLee. The sharing of cyber threat data has garnered national level attention, and improved information sharing has been the objective of several pieces of legislation and two executive orders. Threat sharing is an important tool that might help tilt the field away from adversaries who currently take advantage of the fact that an attack on one organization can be effective against thousands of other organizations over extended periods of time. In the absence of information sharing, critical infrastructure operators find themselves fighting off adversaries individually instead of using the knowledge and experience that already exists in their community. Better threat information sharing is an important goal, but two barriers, one cultural and the other technical, continue to plague well intentioned policy efforts. Failing to meaningfully address both barriers can lead to unnecessary hype and the misappropriation of resources. The first barrier is the tight-lipped culture that hinders information sharing within the U.S. critical infrastructure community. Asset owners and operators of the type of critical infrastructure often highlighted in the news, such as the energy and water sectors, live in a culture where reporting incidents seems to only bring trouble. Voluntarily reporting a cyber incident can bring legal repercussions. Likewise, many of the organizations that own, operate, and maintain the United States’ critical infrastructure are publicly traded companies. Even with legal immunity, there are financial losses that can occur from reporting a cyber incident when stockholder and investor confidence is lost. Moreover, reporting incidents can initiate follow-on requests from the government which take valuable time and limited resources to satisfy. It is not uncommon for the critical infrastructure community to think poorly about bringing in outside help instead of trying to tackle issues on their own. Speaking out publicly can also be difficult when news media is quick to highlight stories of cyberattacks on infrastructure and chastise the insecurity of the systems running it. Stories about cyberattacks against the power grid, oil pipelines, and hydroelectric dams generate immense attention especially when nation-state level actors such as Russia, China, or Iran can be seemingly linked. It makes for good media, it makes for good readership, and it makes for a good story. Unfortunately, this hype has lasting impacts, diverting attention to perceived threats instead of the real issues. The difficulty in debunking the hype stems from the second barrier to information sharing—technical shortfalls in critical infrastructure systems that lessen the availability of meaningful data. Proper cyber threat sharing requires meaningful technical data that is often difficult to obtain in critical infrastructure. Industrial control systems use information to affect the physical world. These control systems generate and harness power for the grid, control the flow and purification of water, and operate nuclear reactors. They were built to last for decades, to operate in harsh environments, and be efficient at their designated tasks. Information security for these systems detracted from their mission, such as keeping the power on or keeping the water running, and do so safely with the highest efficiency possible, and so they were often developed with little to no thought of how to keep attackers out. They were also built without consideration of recording and maintaining the type of data useful for threat sharing. After a cyber incident occurs, incident responders are called in to collect data, contain the incident, and extract lessons learned. This data can help identify the adversaries or malicious software in other organizations as well. These indicators of compromise are central to threat information sharing. However, incident response for cyber incidents in control systems is a young field. The data is simply not present in most cases, allowing observers to generate wild theories instead of relying on facts. For example, Bloomberg published an article on the 2008 Baku-Tbilisi-Ceyhan pipeline explosion in Turkey. When the event occurred, Kurdistan Workers’ Party, an internationally recognized terrorist organization, claimed credit for the attack. The Bloomberg article, published seven years later, refuted this claim stating that the attack was caused by cyberattacks, with Russia as a likely culprit. The story presents a number of attack paths that the adversary leveraged to gain access and cause physical damage to the pipeline. Each one of the attack paths presented is plausible, making the story is believable, and has quickly been accepted as a true event. Unfortunately, an understanding of the attack paths presented together with technical knowledge of the type of systems impacted reveals a different story. The incident response data that would have been required to validate the story largely does not exist. Instead, the story relies on anonymous intelligence officials and anonymous incident responders. The report is very likely not true and yet it will remain an incident cited for years to come. The absence of data to confirm the story is the same reason that threat sharing in critical infrastructure is difficult—the data required simply does not exist. Identifying threats to critical infrastructure will continue to be an appropriate motivation for cyber threat sharing discussions. However, facilitating information sharing through legislative change is not a silver bullet. Barriers to threat sharing is more often a mixture of cultural and technical challenges than any one root cause that can be easily overcome. Making information sharing discussions more meaningful will require incentivizing the community, from the companies who manufacture the control systems to those organizations who operate them, to create and run systems that are capable of reporting and storing the technical data needed. It will also require the proper cultural mechanisms to share the meaningful data without facing penalties even beyond those that can be mitigated with legal immunity.
    Post by Guest Blogger for Net Politics April 1, 2015 Net Politics
  • China
    A Bank Too Far?
    The China-backed Asian Infrastructure Investment Bank seeks to address a critical infrastructure gap in the region, but it is also a challenge to the existing global economic order, says CFR’s Robert Kahn.
    Interview with Eleanor Albert and Robert Kahn March 17, 2015
  • United States
    Taking the United States 'Beyond Traffic'
    Play
    U.S. Transportation Secretary Anthony Foxx describes his department's thirty-year "Beyond Traffic" framework.
    Event with Anthony Foxx and David R. Slade March 16, 2015
  • Infrastructure
    Why Public Investment?
    The world is facing the prospect of an extended period of weak economic growth. But risk is not fate: The best way to avoid such an outcome is to figure out how to channel large pools of savings into productivity-enhancing public-sector investment. Productivity gains are vital to long-term growth, because they typically translate into higher incomes, in turn boosting demand. That process takes time, of course – especially if, say, the initial recipients of increased income already have a high savings rate. But, with ample investment in the right areas, productivity growth can be sustained. The danger lies in debt-fueled investment that shifts future demand to the present, without stimulating productivity growth. This approach inevitably leads to a growth slowdown, possibly even triggering a financial crisis like the one that recently shook the United States and Europe. Such crises cause major negative demand shocks, as excess debt and falling asset prices damage balance sheets, which then require increased savings to heal – a combination that is lethal to growth. If the crisis occurs in a systemically important economy – such as the US or Europe (emerging economies' two largest external markets) – the result is a global shortage of aggregate demand. And, indeed, severe demand constraints are a key feature of today's global economic environment. Though the US is finally emerging from an extended period in which potential output exceeded demand, high unemployment continues to suppress demand in Europe. One of the main casualties is the tradable sector in China, where domestic demand remains inadequate to cover the shortfall and prevent a slowdown in GDP growth. Another notable trend is that individual economies are recovering from the recent demand shocks at varying rates, with the more flexible and dynamic economies of the US and China performing better than their counterparts in the advanced and emerging worlds. Excessive regulation of Japan's non-tradable sector has constrained GDP growth for years, while structural rigidities in Europe's economies impede adaptation to technological advances and global market forces. Reforms aimed at increasing an economy's flexibility are always hard – and even more so at a time of weak growth – because they require eliminating protections for vested interests in the short term for the sake of greater long-term prosperity. Given this, finding ways to boost demand is key to facilitating structural reform in the relevant economies. That brings us to the third factor behind the global economy's anemic performance: underinvestment, particularly by the public sector. In the US, infrastructure investment remains suboptimal, and investment in the economy's knowledge and technology base is declining, partly because the pressure to remain ahead in these areas has waned since the Cold War ended. Europe, for its part, is constrained by excessive public debt and weak fiscal positions. In the emerging world, India and Brazil are just two examples of economies where inadequate investment has kept growth below potential (though that may be changing in India). The notable exception is China, which has maintained high (and occasionally perhaps excessive) levels of public investment throughout the post-crisis period. Properly targeted public investment can do much to boost economic performance, generating aggregate demand quickly, fueling productivity growth by improving human capital, encouraging technological innovation, and spurring private-sector investment by increasing returns. Though public investment cannot fix a large demand shortfall overnight, it can accelerate the recovery and establish more sustainable growth patterns. The problem is that unconventional monetary policies in some major economies have created a low-yield environment, leaving investors somewhat desperate for high-yield options. Many pension funds are underwater, because the returns required to meet their longer-term liabilities seem unattainable. Meanwhile, capital is accumulating on high-net-worth balance sheets and in sovereign-wealth funds. Though monetary stimulus is important to facilitate deleveraging, prevent financial-system dysfunction, and bolster investor confidence, it cannot place an economy on a sustainable growth path alone – a point that central bankers themselves have repeatedly emphasized. Structural reforms, together with increased investment, are also needed. Given the extent to which insufficient demand is constraining growth, investment should come first. Faced with tight fiscal (and political) constraints, policymakers should abandon the flawed notion that investments with broad – and, to some extent, non-appropriable – public benefits must be financed entirely with public funds. Instead, they should establish intermediation channels for long-term financing. At the same time, this approach means that policymakers must find ways to ensure that public investments provide returns for private investors. Fortunately, there are existing models, such as those applied to ports, roads, and rail systems, as well as the royalties system for intellectual property. Such efforts should not be constrained by national borders. Given that roughly one-third of output in advanced economies is tradable – a share that will only increase, as technological advances enable more services to be traded – the benefits of a program to channel savings into public investment would spill over to other economies. That is why the G-20 should work to encourage public investment within member countries, while international financial institutions, development banks, and national governments should seek to channel private capital toward public investment, with appropriate returns. With such an approach, the global economy's “new normal" could shift from its current mediocre trajectory to one of strong and sustainable growth. This article originally appeared on project-syndicate.org.
    Post by A. Michael Spence February 23, 2015 Renewing America
  • Infrastructure
    A Bridge Too Far: Made in Detroit, Paid for by Canada
    There are two possible reactions to the news that Canada and the United States have finally ironed out the last wrinkle and can now move ahead with the much needed new International Trade Crossing of the Detroit River.  It will create thousands of short-term construction jobs (far exceeding the much better-known Keystone pipeline project) and will speed movement of goods and people between Michigan and Ontario . I know I should celebrate it as a creative example of cross-border cooperation to solve a thorny problem. It is, as the Department of Homeland Security noted, an "innovative approach." But mostly I’m just deeply embarrassed. To cut to the conclusion: we are getting a new bridge, but our neighbors to the north are putting up every penny for it. Here’s the shortest version of the story I can tell. The Detroit-Windsor border crossing is the second busiest in the world, just recently surpassed by Laredo, Texas. It handles about a quarter of all Canada-U.S. trade, which happens to be the largest trading relationship in the world. It is also slow and badly congested because the 86-year-old Ambassador Bridge and the 85-year-old Detroit-Windsor tunnel cannot handle the volumes of traffic. Plans for a third crossing were drawn up in 2001, but were held up by self-serving lobbying and a lawsuit launched by the American owners of the privately-held Ambassador Bridge. While that was being sorted out, the problem of how to find the $2 to $3 billion to build the new bridge remained a huge hurdle. The United States has a backlog of at least $6 billion in infrastructure upgrades and new projects at U.S.- Mexico border alone, but Congress has only appropriated funds to cover a fraction of that need, and the Obama administration has stopped even asking for it. And as my colleague Heidi Crebo-Rediker has pointed out, the United States is far behind other advanced countries in using public-private partnerships to pay for new infrastructure projects. So in 2012, the Canadians set up their own partnership and agreed to finance the whole project--including land acquisitions on the approach routes through Detroit--with repayment to come through tolls. That left just one piece for our cash-starved government in Washington--about $250 million to build the customs plaza on the U.S. side to inspect and process the traffic coming from Canada. But even that was a bridge too far--in its budget request this year, the Obama administration did not even ask Congress for the money. Speculation had begun swirling that maybe the Canadians could somehow pay for this too, but my friend Roy Norton, Canada’s consul-general in Chicago, smartly knocked this down last year. “For people to muse about Canada paying for it really is preposterous,” he told the Detroit Free Press. “We’re paying for fifteen-sixteenths of this project. It’s silly.” Silly indeed. But so is the whole way the United States funds--or mostly doesn’t fund--its roads, bridges, sewers and all the arteries of a modern society. And so the Canadians have indeed agreed to pay for the customs plaza as well, folding it into the same Canadian-led public-private partnership that will pay for the bridge. Congress still needs to find about $100 million to pay for staffing the new facilities (unless, I suppose, they put Canadian customs agents in the booths, in which case those worried about the sellout of U.S. sovereignty might actually have a point). But that doesn’t need to happen until the bridge is completed in 2020. Again, I know I should be happy about this. As the CFR’s recent Task Force on North America noted, with business costs rising in Asia, the North American region has a chance to become the most competitive in the world. The new bridge will help lower costs in one of the busiest trade corridors in the world, and will make both Michigan and Ontario more attractive places to invest. It is badly needed, and long, long overdue. But the outcome is still mortifying for the United States. When are we going to start behaving like a real country again?
    Post by Edward Alden February 19, 2015 Renewing America
  • Infrastructure
    Dumb Government and Smart Government
    There were two stories in the paper over the weekend – both of them local to the Washington, DC area – that perfectly captured the difference between smart government spending and dumb government spending. Let’s start with the dumb first. Since 2012, the Maryland state government has been offering increasingly generous tax credits to persuade filmmakers to locate their productions in the state, most notably the Netflix series “House of Cards.” A new report from the non-partisan Maryland Department of Legislative Services concludes that the state has wasted more than $60 million to encourage productions that create only a handful of short-term jobs and bring little revenue back to the state. For every dollar the state spends on tax incentives, the report found, about 10 cents comes back. In addition, the report said, “states are fiercely competing with one another to draw productions into their state. This type of competition is not only expensive, but promotes unhealthy competition among states.” That was exactly the conclusion of our recent Renewing America Policy Innovation Memo, “Curtailing the Subsidy War Within the United States,” which proposed a compact among states aimed at ending the wasteful practice of tax subsidies. Subsidizing film production, which is highly mobile, may be the dumbest sort of tax incentive of all, because the benefits are entirely fleeting. “As soon as a film production ends, all positive economic impacts cease too,” the report said. Yet 37 states and the District of Columbia still engage in this folly. Now for the smart spending. After years of political debate, Virginia earlier this year completed the first leg of the $6 billion Silver Line, an extension of the Washington metro that now reaches the booming suburbs of Tyson’s Corner and Reston and will eventually lead out to the Washington Dulles airport. Critics like former Virginia attorney general and GOP gubernatorial candidate Ken Cucinelli argued that the line was a “boondoggle” and a waste of taxpayer dollars. That now looks dead wrong. A Washington Post story this morning showed that many commuters are now able to hop the metro in the poorer neighborhoods of Anacostia and Prince George’s County and arrive in Tyson’s Corner about an hour later. One young woman, who had been working for almost nothing in her mother’s hair salon, now has a $9.25 an hour job at Nordstrom’s in Tyson’s Corner and rides the Silver Line to work each day. Multiply that by the hundreds who already appear to be following a similar route and that’s a lot of money coming back to the poorer parts of the metro region where job opportunities are lacking. This is exactly what infrastructure – a bloodless term for the the roads, rail lines, sewer and water systems that are the arteries of the economy – is supposed to do. It makes the economy more efficient by allowing individuals to move more easily to where the jobs are at, creating new opportunities where none existed before. Infrastructure is one of the few areas where there seems to be at least faint hope of cooperation between the White House and the new Republican Congress. Voters in several states supported big ballot initiatives for new infrastructure spending, suggesting there would be plenty of public support on the issue. Maryland will face a quick test under new Republican governor Larry Hogan, who has been skeptical about whether to build the $2.6 billion Purple Line, which would similarly connect the poorer suburbs in Maryland’s Montgomery County to the wealthier ones. The choice should be an obvious one.
    Post by Edward Alden November 17, 2014 Renewing America
  • Infrastructure
    Obama’s Disappointing Legacy on Transportation Policy
    We’ve seen it all before. Today Vice President Biden gave a speech calling for more infrastructure investment, but without offering a way to pay for it. We heard the same from President Obama this past July, May and February. While the message echoes over and over again, not much in the way of actual policy is changing. Now that we are nearly six years deep into the Obama administration, it is becoming clearer that Obama’s transportation legacy is sizing up to be a disappointment. His initiatives have fallen flat or were obstructed by Congress, and he (along with Congress) has done little to solve the fundamental problem of federal transportation policy—finding the revenue to pay for all the infrastructure investment he’s calling for. How unexpected given how Obama’s presidency began. Infrastructure spending was among the biggest components of the 2009 stimulus package, receiving close to $100 billion, half of which went to transportation. There was also a new visionary idea contained within the package—high-speed rail—with hefty funding to back it up. Obama would be for high-speed rail what Eisenhower was for interstate highways. But very quickly things started going south on Obama’s transportation ambitions. Obama’s signature high-speed rail project has turned into an embarrassment. The idea may have been visionary, but it was not so practical. The benefits of high-speed rail just don’t add up to justify the costs. We don’t have Europe's or Japan’s population density. Nor do we have China’s willingness to throw cash at horrendously wasteful (though impressive) rail projects. Florida, Ohio, and Wisconsin rejected high-speed intercity link projects even though they would have received between $400 million and $2 billion in federal grants. California’s project linking San Francisco to Los Angeles, which is set to receive federal stimulus moneys once construction begins, still may not get off the ground. It’s tied up in courts, and, though a public referendum approved the plan in 2008, polls suggest the public would turn it down if a vote were held today. The projects that got off the ground are not so ambitious—ramping up existing Amtrak lines in the Northeast and Chicago-St. Louis corridors to speeds that barely count as “high” compared to the true bullet trains of Europe, Japan, or China. Congress isn’t buying into Obama’s vision either, having zeroed out funding to his high-speed program for three years running. Congress has blocked most of Obama’s other big ideas. In 2011 he endorsed the creation of an infrastructure bank, which would have leveraged federal dollars with generous financing terms to attract private capital for infrastructure projects. Two years later he proposed a “Fix it First” program where the federal government would hire workers to do urgent infrastructure repairs. But these two initiatives carried a steep price tag of $10 billion and $50 billion, respectively. Without offsetting budget cuts, the Republicans were not going to budge. Only the relatively small TIGER competitive grant program has survived, funded at about $500 million a year for multi-modal transportation projects. Passing basic federal surface transportation spending has been a trying feat, though Congress certainly deserves much of the blame. Going back to the elder Bush, Congress managed to push through surface transportation bills that guaranteed funding for five to seven years, allowing state and local transportation officials to draw up longer-term plans. Over Obama’s tenure, it took ten short-term patches before the most recent spending bill was authorized (MAP-21). Lasting only two years and setting spending at existing levels, MAP-21 was essentially a longish patch itself. Since it expired in July, Congress is back to multi-month patches, this time until next May. Obama’s role in passing a multi-year bill has not been hugely constructive. In a break from his predecessors, Obama did not submit a formal multi-year spending proposal to Congress for the first five-and-a-half years of his presidency. The proposal he did eventually submit this past year, called the Grow America Act, was not taken very seriously by Congress. It would have lifted spending a whopping 40 percent over current levels for the next four years, but failed to provide a viable way to pay for it, citing only the vague possibility of linking cost-savings from a corporate tax overhaul. Soon-departing Rep. David Camp’s (R-MI) tax proposal did envision using revenue from repatriated corporate profits for infrastructure spending. But no one in Congress thinks it will happen. And Congress did not even bother holding a hearing to consider Obama’s plan. This gets to the heart of the problem facing federal transportation policy—existing revenue streams are insufficient to pay for needed levels of spending, and Washington policymakers can’t seem to do anything about it. Everyone agrees, including economists and policymakers from the left and right alike, that we should be spending more money on infrastructure as a country. Yet real spending has been declining since 2002 at all levels of government, and worst of all at the federal level, which has seen a dropoff of 33 percent. The way the federal government funds its highway spending—through a dedicated gas tax placed in the Highway Trust Fund—does not work anymore. Americans are driving less and using more efficient cars. Plus the gas tax isn’t pegged to inflation and hasn’t been raised in over twenty years. Since 2008, Congress has had to borrow from the General Fund to make up the trust fund deficit. Now 30 percent of highway funding is supported by general funds, and projections show it will have to cover a larger share moving forward. Neither Congress nor President Obama has endorsed a plan for setting the trust fund’s finances on solid ground. Americans steadfastly oppose any federal gas tax hike, making it difficult for anyone to endorse the idea. Borrowing from the General Fund means transportation competes with other priorities in desperate need of cash. Since public dollars are in short supply, everyone is eager to introduce a larger role for the private sector. Presidents going back to the elder Bush have promoted public-private partnerships (P3s) and research on congestion pricing, and Congress has loosened restrictions on tolling. Private project management and financing has indeed taken off, especially for new large-scale capital projects. Obama has built on his predecessors’ P3 efforts, expanding the popular TIFIA loan program first created under Clinton. Last summer the Department of Transportation formed a new center to guide state and local governments through the intricate P3 process. Obama’s transportation legacy may actually be that the process of devolution started under his watch—or, in other words, that transportation decisions began passing from the federal government to states. Amidst federal paralysis, at least thirty states have launched serious initiatives to increase transportation-dedicated funding since 2013. Most major metro areas are expanding commuter rail networks, projects which are financed mostly by local taxpayers. Maybe local is the better way to go, since the vast majority of Americans only use infrastructure in their own county. Local ballot referenda for transportation bonds have a stellar success rate. But this is more the result of federal inaction than deliberate policy. And it probably is not the legacy Obama was hoping for.
    Post by Rebecca Strauss October 16, 2014 Renewing America
  • Russia
    Global Economics Monthly: October 2014
    Bottom Line: The use of financial and economic sanctions against Russia demonstrates their power to penalize countries with globally integrated markets. We now need a strategy for convincing other countries (and markets) that this new weapon will be reserved for combating serious violations of international norms and not used as leverage in conventional commercial disputes. A code of best practice or principles could help guide the use of sanctions. In debating the consequences of Western sanctions on Russia,some observers voice concerns that sanctions are becoming an easy option for the United States and its allies when conflicts emerge. In a war-weary world, sanctions are an attractive alternative to military action, and, as I have argued elsewhere, the Russia experience has demonstrated the power of financial sanctions to impose costs on large, globally integrated economies. By imposing sanctions, Western powers wanted to send a strong signal to Russia (and to other countries contemplating similar actions) that there was a price to be paid for its violation of Ukrainian sovereignty and continued destabilization of the region. The United States and Europe may also have wanted to send a broader message: governments should adhere to basic international norms if they wish to participate in global markets. But concerns have now risen regarding which norms will be defended and how. What constitutes an egregious violation of international rules? I have been an advocate of comprehensive sanctions in order to impose substantial up-front costs on Russia. I have also argued that there is inevitable momentum for an extension of sanctions in this case, both as a response to Russia's actions in Ukraine and to its evasion of sanctions announced earlier. I still see this expansion as appropriate, although I recognize the costs to U.S. and European interests. However, it is also important that sanctions advocates address the risks of extension, including the concern that certain measures to increase sanctions could disrupt global markets to a greater extent than previously witnessed. Already there are reports of market makers pulling back on risk positions over concerns of a broader lack of liquidity should sanctions be extended to current payments. Such concerns can act as a brake on international cooperation and encourage countries to limit their integration in global markets as an insurance policy against future sanctions. More broadly, such considerations may increase efforts to create new international institutions, such as the Asian Investment Infrastructure Bank (AIIB), which risk fragmenting the framework for global economic governance if not properly coordinated with existing international financial institutions, such as the World Bank and Asian Development Bank. These concerns about the future overuse of financial sanctions fall into three basic categories: Are financial sanctions too easy to implement? Sanctions could become an easy option that is too readily applied in future cases. Although sanctions have not brought about peace in Ukraine, I would argue that the effects on Russia are significant and the costs will rise over time as capital outflows continue, investment in Russia is discouraged, and lost confidence contributes to a low-growth, high-inflation outcome for the Russian economy. Historically, it was assumed that a strong international consensus was needed for sanctions to be effective. That may be less true now; the power of sanctions stems from a country's exclusion from financial markets, providing some scope for the United States to go it alone. Is the United States at risk? Other countries may find their inhibitions lowered on the use of sanctions, making the United States a possible future target. One could imagine that, for example, countries opposed to U.S. policy on Taiwan or the Middle East might impose sanctions citing the Russian example. How far is too far? Once sanctions have been imposed, the pressure to extend them could lead to excessive use. In the Russian context, this debate revolves around whether sanctions should be imposed on the payments system. To some, the payments system is a global public good that needs to be protected, which suggests that a higher standard should be set for sanctions in this area. Unlike a prohibition on oil drilling by foreign companies, for example, a restriction on Russia's access to the payments systems reduces the benefits to other users across the globe. The Policy Response The United States and its allies no doubt value their options in the current environment. Indeed, the ambiguity about what could come next creates an additional cost for those considering doing business in Russia, which constitutes an important element of the effectiveness of sanctions. But that same ambiguity is a source of concern and can contribute to a loss of legitimacy. Can this leverage be preserved while assuring the rest of the world that sanctions will be used judiciously and appropriately? The strategy for addressing these concerns may have relied on other governance reforms, such as International Monetary Fund (IMF) quota reform and market-strengthening initiatives—including a Doha Round agreement, the Trans-Pacific Partnership (TPP), and the Transatlantic Trade and Investment Partnership (TTIP)—to signal U.S. commitment to an open, thriving, and rules-based global marketplace. Unfortunately, all these initiatives appear to be in trouble, as does the global trade liberalization agenda more broadly. Better communication can also be part of the strategy. It was inevitable, given the complexity of the standoff in Ukraine and the need to build alliances with the Europeans, that policy would have to evolve in ways that were not always transparent to markets. Now that the United States and its European allies have more experience, there is an opportunity to distill lessons and explain the policy both to other countries and to the broader public. A conversation with allies about the principles behind sanctions comes at a useful time. Some European countries are experiencing fraying support for sanctions, perhaps associated with differential costs from the sanctions and concerns about an energy shortage if the dispute extends into winter. With sanctions at current levels, these tensions can be mitigated, but opposition could intensify should the U.S. government decide to extend sanctions. A more ambitious idea would be to explore the possibility of a global code of conduct, or rules of engagement, which specifies—in a more concrete fashion than has been done to date—the conditions that could lead to the imposition of sanctions by the United States and its allies. There are other examples of informal codes in the economic sphere that can provide inspiration. The Santiago Principles, for example, are a set of twenty-four voluntary guidelines for investments by sovereign wealth funds that were agreed to by a broad range of countries in 2008—both those with sovereign wealth funds and those receiving investments. The analogy is not direct, as the Santiago Principles focused on ensuring that states acted in a commercial manner and avoided destructive competition through commitments regarding disclosure, transparency, regulation, and governance. Nevertheless, there are some interesting parallels. First, the codes were voluntary and designed to respect the sovereignty and independence of the state-owned investment funds and the need to maintain control over investment choices. Second, the goal was to encourage better international standards and establish best practices to promote accountability and transparency. These principles have been successful in framing the investor behavior of these funds and also in clearing away some of the uncertainty and ambiguity surrounding these organizations. Any code of conduct would need to promote transparency regarding the decision to impose sanctions and their application, objectives, and conditions for removal. This code would discourage retaliatory measures and tit-for-tat responses that could prove destructive. It may be a bridge too far to seek agreement on a specific code. But even in this case, the effort to articulate goals and objectives could help stabilize markets and address the concerns of important U.S. allies. 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    Report by Robert Kahn October 16, 2014
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