Policy at water in the west. Matthew turner is professor of economics at brown who has written a bit about transportation. Dan wilson is at Federal Reserve bank in San Francisco and speaks only for himself and not for janet yellen or anybody else at the fed. And cliff linsen is our colleague here. I have asked each to say pretend we had a president of the United States who has a short attention span. And pretend that he ran for office saying i want to spend a lot more money on infrastructure. Pretend for a moment that this tax credit thing was something thought up and will never resurface again, what would you tell him about how to wisely spend the money . I asked each to give us the seven or eight minute spiel that they would give in the oval office and then we will have interaction. It is putting a lot of pressure on time to ask them to keep to that thing but make you do it. Maybe i can start with you because we havent talked about water at all. There has been a bit of focus on water lately both the supply of and also the pipes to which it is delivered. So our nation is social and economic well being depends on access to clean water but unfortunately water is a hidden infrastructure partly because people dont know where the water is coming from and where it goes. The connection is i open the tap and water comes out. They dont have a good understanding of what it takes for water provider to bring water to you and what it takes to clean it up and put it back to the environment. This disconnect has led to lack of interest and enthusiasm to invest in the water section as a whole. So when it comes to water we talk about some interest in investing in new infrastructure or replacing the pipes but the numbers that are on the table are very insignificant compared to what we need to be done. A lot of the Water Infrastructure is 40 years or older. They are aging and they are reaching to the end of their lifetime. So we talk about investment. We talk about the money that is on the table which is insignificant compared to what they need. Then we need to be smart in the way we invest in the money mpt when it comes to Smart Investments i think one thing that had been being promoted a lot is doing Asset Management, trying to focus on the fact that the infrastructure that we have we have to be i think larry mentioned something very important. We generally are very reactive to fix water challenges, water problems, the pipe breaks everybody tries to fix it rather than being proactive and understanding what challenges are, where the infrastructure needs and try to invest in those challenges or red zones situations. Asset management is a great example for that. A lot of the cities can use this kind of system to evaluate their assets, to see how the systems are working, where is the smart investment within this set of assets that they have. I can give you a very good example because sanitation district, they were having a lot of sanitary overflow issues. They were told that they have to fix this challenge. They went to the users and said we want to raise the rates to pay for the fix that we need to do to meet the environmental regulations. People did not vote for that rate increase. They went back and tried to rethink. They bought a company and worked with him and did evaluation of the system, Asset Management and then they identified what are the red zones . What are the break points that if they dont fix they will have a main break in the system and they ended up doing a better job of fixing some of those. They went back to the public afterwards and public was willing to pay for some of the investments that they have made because it was a smart investment. So that is a very good example of doing Asset Management. When you go beyond that i think one of the things we are a little bit behind is that the spectrum is shifting and having a paradigm shift. We are as a government not necessarily sort of reaching that point yet. Like 20 years ago Energy Sector was there. They had the crisis and dealt with it and tried to change the way they manage energy, change the way the policies have been set. We are sort of going through the same shift with water. Drought in california has been an issue, access to clean water and reliable Water Supplies have been a critical issue for some of these communities. When you go back to flint, michigan, the same situation. You have Water Quality challenge which is again bringing water off to the public interest. So there have been issues going on that people started getting more interested. What it takes to bring clean water to them. Taking advantage of the opportunity so we need to think about how we can be smarter and use data to manage our system more effectively. There are smart meters using the existing data, the amount of water they use, how they respond to price change and climates and trying to understand if the demand for water is changing. Using this data to become smarter in the way we manage our water system and then using that information to see what kind of infrastructure do we really need in the future. Right now a lot of the Water Utilities think about big infrastructure and big dam, big pipeline and bring water from one location to the next. Maybe the next generation 21st Century Water system does not require another dam. Many need to think more locally. Maybe we can replace some of our infrastructure with doing some projects such as recycling, reuse, Green Infrastructure, another great example. It sort of has this broad umbrella because when you think about west coast which has water scarcity issues, Green Infrastructure can help enhance water supply issues that we have. It captures storm water and rain water without getting polluted and uses it for future. When you think about east coast d. C. Is a great example of using Green Infrastructure to deal with Water Quality issues. There are solutions that are for both sides of the coast and in the middle and sort of addresses that issue. One last thing i would like for everyone to think about is the fact that when you think about water we have put it in different buckets. We have organizations that have water supply, bring water to you. We have organizations that do wastewater treatment. They collect the water. We have organizations that flood. These are all different silos that we have created. This fragmentation has caused a lot of inefficiencies in the system. This is all one water. The same water that we need to deal with floods we can actually be better in taking that water, storing it and reusing it so when it comes to going back to some of the local solutions that we can use is capturing rain and flood water and reusing it. And then you go back to recycling and demand for water and how that is going to impact and how we can use that base water stream . It is in the second silo and how we can connect that to our water supply which is very important. If the president said sounds good but i have been hearing talk about user fees should we finance the pipes in flint, michigan, the flood recycling on the west coast by charging more for water at the place at which it is used or should i take advantage of the low Interest Rates that larry talked about and have a giant National FederalWater Infrastructure project like eisenhower . I think both user fees are very important. We are having this conversation in california on some of the user fees. The reality is when you talk about water we are not covering the cost of investment that we need to make for the future. This is a very important issue which is for every dollar of revenue we have to invest 4 for Capital Investment to uptake and future investment for Water Infrastructure. We are not necessarily paying the amount that we have to for the Water Infrastructure that we have. And goes back to the public knowledge. Public awareness is very important. There is a lot of resistance to our user fees. As you sort of raise public awareness, try to make them understand the reality is think about how much you are paying for your water bill. People are willing to pay 100 for their cell phones. Every Family Member in the household has a cell phone and every bill is about that much money. How much are you pay frg your water . In my house Single Family home four Family Members about 100 for both water and wastewater. Thats nothing compared to what we what advantages the water brings to you which is about health, well being, daily needs. We dont think about it. The reality is if the water doesnt come out of the tap you dont value it. I think the quick closing remark is in the Energy Sector we had the same thing. When you start in california we have blackouts and brown outs people realize i need this electricity to survive daily. People are much more willing to think about what are the next options that we need to have user fees. We did have user fees in california which that user fee actually user fees are good if you cant show transparency in the way you are using that. If you can say i take this user fee and invest it in x, y and z and collect data. And the same thing for water. We had this public goods chart. We had the user fees they were supposed to be invested in Energy Efficiency, Innovative Energy infrastructure such as Renewable Energy and low income communities which you can help them to pay for some of the high costs of their electricity rates. That really has a big impact in our Energy Efficiency efforts in california which has been significant in understanding where our demand is going to be in the future. Demand management is the cheapest and least expensive way of dealing with future needs that we have for infrastructure. And those fees actually went to some of these Energy Utilities to invest. Thank you very much. Lets turn to transportation. Thank you. I have a friend who is a fish biologist. He thinks fish are important. I think transportation infrastructure is really important. But so before i start, let me try to give you perspective on this. Imagine taking all of the stuff that you buy in a year or that the government buys on your behalf and stacking it in a pile and then stacking the money that you use to pay for that next to it. The stack of money would be gdp. If you think of assigning those dollars to the factors that made your pile of stuff, about half of the pile would go to labor. About half of it would be wages. You think about assigning a fraction of the pile that goes to trucks and boats and trains it would be about five percent. You can bring that five percent up to 10 or 15 if you start thinking about commuting costs and time people spend in their cars. It is sort of like the self help books say. The important thing is people, not things. With that said, how do we think about how important transportation is . The problem with thinking about transportation as being a small sector is that we wonder as larry said if we reduce the cost of things can we somehow match up jobs and people and tools and buildings so we can make more from less so the world works better and we are all richer . That process is hard to observe and we should think about examples. I think eds point that we want to be very careful about thinking which projects we fund is right because not every transportation project will have the magic effect. So examples, the detroit example is classic. St. Louis, the example of the Public Transit in detroit is the classic example of this. In st. Louis they turn the stop lights off at 6 00 on week days because nobody is using those roads. The problem in those places is that they have more infrastructure than we need. If we put more there it will not let people do things better. Its just going to be more of something that is not used. Another example, this is something you see in the paper. Lets build infrastructure to create Economic Growth. How might that work . Consider, i want to think about another example. Improving the i95 corridor. We will add a lane and it will mean you can drive ten minutes faster. Probably cost 10 billion, maybe 20. Lets think about how that might create Economic Growth. How could that create Economic Growth . Suppose there is some company which as a consequence of that reduction in time to new york chooses to locate in providence instead of somewhere else . What that tells us is that company doesnt care where it locates. If that company is viable only because it can get to new york in two hours and 50 minutes instead of three hours that means they had some other thing they can do that was almost exactly as good. Spending that to get to new york in ten minutes indoesnt give us a lot of magic where we can combine people and tasks a lot better. Now, if you look at the data on these kinds of things it is really easy to find examples where that improvement in road connections from new york to providence will cause some business that would otherwise have located in North Carolina to locate in providence. Thats not creating Economic Growth. Thats just changing where production happens. When you look at transportation projects the first effect that you should think of is not that it is creating Economic Growth but shifting it around. Now, if we think of transportation projects that way and we want to apply careful cost benefit analysis what should we do . So first everything that has been said about maintenance is absolutely right. Maintenance is really good because it means you are fixing stuff that gets used. Right away youre devoting resources to things that are valuable. We have this reveal preference test. Lots of people want to use this stuff so it is wearing out. What else can we do . The other thing we can do, if adding transportation infrastructure to a place shifts people and Economic Activity to that place where do we want people . We want people in the places that they want to go or where they are rich. Instead of building roads in places that are empty where no one wants to be or places where they are poor, build them in seattle and San Francisco. If you live in seattle statistically identical workers make almost as much money as that same worker in southern texas. This is a heavy lift politically. This is the opposite. The stated intention of the stimulus infrastructure package was to build things in depressed places. Dont do that. Build in places that are booming. Because you expand capacity of those places to house people and people will go there. And we are not banking on the magic of this thing that is very hard to see and that im convinced is small that infrastructure lets us combine things better and make more from less. We are banking on the fact that we know some places are better at making stuff than others. Lets get People Living in places that are good at giving people nice lives. Little things besides that. Dont build light rail if it needs a subsidy. Build buses. Every time i think of providence it is a little town and it is out of the way and not very important. They wanted to spend 100 million to build a small light rail system. If you do the math on that on the basis of the projected ridership by the people who want to get paid to build the thing the taxpayer was paying between 7 and 10 per rider after they collected the fares for every Single Person who got on the train. There is just no way to make that make sense. Buses are the way to go. So train bad, bus good. Congestion pricing is also something that we all like that. Last thing is the seas are rising. We have 40 or 50 years before it gets to be a crisis. But if we fight that most of the time we will lose. Yes, holland does it and we will be able to do it but most of the time we will lose the battle against rising tides. The good thing is we have 40 or 50 years to plan. 40 or 50 years is a long time in the life of a building. If we plan an orderly retreat it wont be a disaster. If we stand and fight i think i know how that is where we end up under water. Another thing we think about is we want to build our infrastructure so that we can manage an orderly retreat from something we predict will happen on the coast. Where is providence on the spectrum . Shore front property or under water . Providence is subject to periodic hurricanes and is only above water because of a massive sea wall. Another reason not to spend money on light rail. Thats right. The light rail system would surely be under water in 50 years. Another good reason. First thing i would tell the president is just to repeat to what you mentioned before that everything i am about to say and everything i say today is my own views and not the views of the Federal Reserve bank of San Francisco or Federal Reserve system. I would start by asking what do we mean when we are going to get the highest return on Infrastructure Spending, what do we mean by the return . What kind of return . Are we talking about return in terms of gdp or something more harder to measure like Public Safety or some other type of longer run benefit. So im going to focus my remarks on the Macro Economic returns. And so here the horizon we are talking about is really important.