Brookings Rethinks...Natural Disasters, Transportation, Visas & Housing

Our fourth blog on "15 Ways to Rethink the Federal Budget," a new report from the Brookings Institution's Hamilton project examines national disaster funding, transportation, visas and housing. We've already examined proposals to reform defense spending, tax expenditures, and the Social Security Disability Insurance program, and those proposals should be considered along with the ones below to make our budget more efficient while reducing our deficit. Let's examine each of the proposals.

Reforming Disaster Assistance

David R. Conrad, a Water Resources Policy Consultant, and Edward A. Thomas of the Natural Hazard Mitigation Association examine the federal governments role in disaster assistance in their paper, "Reforming Federal Support for Risky Development." It calls for a review of the federal government's role in responding to disasters, as a considerable amount of spending is involved which may not being spent efficiently. The proposal raises a number of concerns with the National Flood Insurance Program (NFIP), enacted in 1968 to insure Americans living in flood-prone areas. Conrad and Thomas seek to reward good conduct and discourage risky development that may further increase the damages that follow national disasters. They estimate that altogether the reforms could reduce deficits by $40 billion over the next ten years. Their proposal contains three main reforms:

• Incentivize and implement higher disaster-resistant development standards: This would include lowering the premium subsidy for crop insurance, eliminate subsidies for risky development, investing in preventive measures, and imporoving zoning and enviromental regulations.
• Improve federal cost-sharing: The federal government often outspends state and local governments in disaster assistance, reducing incentives for state and local goverments to invest in mitigation programs. Options to improve cost-sharing would include removing tax deductions for damaged property not in compliance with federal standards, tying federal relief to communities' future disaster mitigation, working with private insurance companies to promote more effective coverage
• Further reform of the NFIP: The proposal names a number of opportunities in the insurance program that could be used to reduce the likelihood of, and costs related to, dealing with floods. They include:
  • Charging risk-based premiums and update risk assessments for the effects of climate change.
  • Phasing in actuarial rates for 800,000 subsidized older, primarily residential properties, which have a higher risk of flood damage.
  • Phasing in actuarial rates for future increasing shoreline erosion hazards and incorporate erosion setback requirements for new or reconstructed buildings on erosion-prone coasts, including the coasts of the Great Lakes.
  • Phasing in actuarial rates for areas that will be impacted by inevitable sea-level rise or inland flood-height increases due to improper development upstream.

Reforming Transportation

In "Funding Transportation Infrastructure With User Fees," Tyler Duvall, an Associate Principal at McKinsey & Company and Jack Basso of the American Association of State Highway and Transportation Officials consider how to shore up the transportation trust fund. Although federal transportation spending is just about 2 percent of total outlays, the Highway Trust Fund, the principle trust fund for surface transportation programs is projected to run out in 2015.

As such, it has become necessary for a number of reforms to bring highway spending and revenue in line. Key in their proposal is the case they make for direct road-pricing system as a form of revenue generation. In this system, practiced only narrowly in the US, motorists would pay fees to drive on certain roads. The benefits of such a system is highlighted below:

Economists from all backgrounds have strongly supported some form of direct pricing for roads, similar to the way other utilities are priced. In fact, Nobel Prize–winning economist William Vickrey proposed a specific road-pricing system to reduce congestion in Washington, DC, as far back as 1959 and in the New York City subway system in 1952. Vickrey said, "You’re not reducing traffic flow, you’re increasing it, because traffic is spread more evenly over time. . . . People see it as a tax increase, which I think is a gut reaction. When motorists’ time is considered, it’s really a savings" (quoted in Trimel 1996).

According to the U.S. Department of Transportation, an effective road-pricing system—once fully implemented— could generate between $38 billion and $55 billion annually in revenue while simultaneously reducing road congestion and reducing environmental impacts. Singapore’s broad use of fully electronic road pricing is one of the key reasons the World Bank perennially ranks it number one in the world in terms of logistics performance. With a population of more than 5 million and only 250 square miles of land, Singapore’s transportation system achieves free flow speeds on its expressways and arterials every day. Indeed, the key strength of such a solution is not only that it raises revenue to support surface transportation investments and operations, but also that it does so in a way that confers additional benefits including reduced congestion and pollution.     

Such a proposal could reduce the deficit by $312 billion in the next 10 years.

Reforming the Temporary Work Visa System

In "Overhauling the Temporary Work Visa System," Pia M. Orrenius, Giovanni Peri and Madeline Zavodny argue that the current immigration system is complex and outdated and therefore imposes "significant inefficiencies and costly restrictions on the inflow of foreign-born workers."

This leads to highly inefficient economic outcomes. The problem with the system is that instead of employment-based visas being given to immigrants on the basis of how economically productive they can be, they are instead granted on a first-come, first-served basis or through a lottery. Other difficulties in securing employment-based visas discourages highly skilled and educated immigrants from staying on to work and increase the productivity in the US.

As a result, the authors have come up with some proposals to make the acquisition of employment-based visas an easy and efficient process. They advocate an auctioning visa allocation system that would lead to significant revenue inflows:

Auctioning permits to hire foreign workers would offer a number of economic benefits. It would lead to a more efficient allocation of foreign workers across employers while protecting workers through visa portability and employer competition. Permits would be allocated to employers who value these workers’ contributions the highest and who hence would bid the most for permits.

The auctions would generate revenue for the federal government. Baseline estimates suggest that auctioning of employer permits would generate from $700 million to $1.2 billion in revenues annually, with the higher end of the range possible if more visas are available for high-skilled workers. In the long run, a more efficient immigration system would have an even bigger budget impact by increasing productivity and gross domestic product (GDP).

They expect this proposal to reduce the deficit by $7 to $12 billion in the next 10 years.

Reforming Housing Finance

In "Increasing the Role of The Private Sector in Housing Finance," Philip Swagell of the University of Maryland proposes reforms to increase private funding of housing and reducing the federal government's role. With the federal government through its sponsored enterprises (Fannie Mae and Freddie Mac) guaranteeing more than 90 percent of new mortgages and refinances, the private sector may be taking too small of a role in the housing market. Swagell believes this reliance of federal goverment backing would be unwise if there was another housing collapse and that the savings from the reforms could save $134 billion over the next ten years. He proposes the following:

• Establishing a secondary federal insurance program for qualifying mortage-backed securities (MBS) and selling secondary insurance to securitization firms to foster competition.
• Using the proceeds of the insurance premiums to capitalize a federal insurance fund with which to cover losses on guaranteed MBSs.
• Winding down the legacy Fannie and Freddie investment portfolios. The Federal Reserve would henceforth act as the buyer of last resort for guaranteed MBSs if monetary policymakers judge that elevated mortgage interest rates warrant policy action for the purposes of macroeconomic stability.
• Selling Fannie and Freddie’s securitization and guaranty operations to private investors who will compete with other entrants.
• Empowering the housing finance regulator to carry out its broad array of responsibilities, including ensuring that mortgage quality remains high for guaranteed loans, that adequate private capital is ahead of the guarantee (notably at the level of the firms carrying out securitization), and that premiums for the secondary government insurance are adequate to cover expected future losses on guaranteed MBSs.

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These proposals, among the others we have covered this week, are worth considering given our unsustainable debt path. We need to do something about our fiscal outlook, and it would be preferable for lawmakers to focus on areas of inefficiency, rather than relying on dumb and blunt cuts. Hopefully, lawmakers will be willing to consider the good ideas being put forward by the Hamilton Project.