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Fulfilling John Hayford’s Legacy: Moving Economics Toward a New Way to Value Infrastructure 2023 Leon N. Moses Distinguished Lecture in Transportation Northwestern University Transportation Center Northwestern University Evanston, Illinois November 8, 2023 Patrick T. Harker President and Chief Executive Officer Federal Reserve Bank of Philadelphia The views expressed today are my own and not necessarily those of the Federal Reserve System or the Federal Open Market Committee (FOMC). Fulfilling John Hayford’s Legacy: Moving Economics Toward a New Way to Value Infrastructure 2023 Leon N. Moses Dis�nguished Lecture in Transporta�on Northwestern University Transporta�on Center Northwestern University Evanston, Illinois November 8, 2023 Patrick T. Harker President and Chief Execu�ve Officer Federal Reserve Bank of Philadelphia Good evening, everyone. To everyone here at the Northwestern University Transporta�on Center, it is indeed an honor to have been asked to present this year’s Leon N. Moses Dis�nguished Lecture. Now, if I may, here is how I intend to proceed tonight. I will begin by answering what could be a central ques�on to the evening: “Why does a president of a Federal Reserve Bank care about transporta�on?” From there, I will share a broad outline of some of the research being conducted by the staff at the Philadelphia Fed, which, I believe, can be put into ac�on to help us achieve a stronger economic and more reliable transporta�on future. I will conclude by providing my economic outlook. A�er all, I’ll note that the Moses Lectures in 2011 and 2017 both centered on U.S. economic outlooks, so why break unnecessarily from this apparent six-year cycle? Also, I am acutely aware of the impact that interest rates and monetary policy can have on infrastructure investments. And if �me allows, I would be happy to engage in a discussion and answer any ques�ons to add further clarity to our proceedings. 1 But first, my day job requires me to make one thing very clear. And that is the usual Federal Reserve disclaimer. So, please note that the views I express are my own and do not necessarily reflect those of anyone else on the Federal Open Market Commitee (FOMC or in the Federal Reserve System. Or as folks back home in the Philadelphia region know, when talking about this evening, please say, “Pat said,” not “The Fed said.” Now, with all that business out of the way, let’s dive in. I should start by recognizing that I find myself in very like-minded company. My predominant area of study, a�er all, wasn’t economics. It was civil engineering. Economics was that side project that later became my full-�me job. But my way of looking at things — even in economics — is very much with that same lens I ground in my engineering days. Now, let me take this a step further. As an economist, and especially as president and CEO of the Philadelphia Fed, my goal is to ensure a stable economy that provides opportuni�es for everyone to grow and succeed. As an engineer, and specifically as a civil engineer, my goal is to ensure a safe, reliable, and stable infrastructure, which provides opportuni�es for all communi�es to grow and succeed. I know I am far from the first person to recognize this important interdisciplinary rela�onship. I can just look around this room to know there are many others who do as well. And fi�ngly enough, all the way back in 1917, John Hayford, then director of the College of Engineering here at Northwestern University, wrote an essay in the Journal of Poli ical Economy �tled “The Rela�on of Engineering to Economics,” from which I will read the following: Economics and engineering are closely related. Economics has been defined as the social science of earning a living. With the same appropriateness, engineering may be defined to be physical science applied to helping groups … to make a beter living. 1 See John F. Hayford, “The Rela�on of Engineering to Economics,” Journal of Political Economy, 25:1, available at uchicago.edu. 1 2 Those words ring just as true 106 years later. But in my current capacity, I can look to the Federal Reserve’s own dual mandate, the two pillars of our ins�tu�onal mission that Congress handed to us in the late 1970s: price stability and maximum employment. And neither, I could argue, are achievable without some level of modern transporta�on infrastructure, and more specifically, engineering for modern transporta�on infrastructure. The ability of goods and services to flow to and from markets helps ensure that prices can remain stable. And we cannot achieve maximum employment unless employers have accessible places in which to site their businesses and workers have a way to get to and from those places of employment. Now, certainly, the Federal Reserve does not build transport infrastructure. But the monetary policy decisions we make and implement have a direct impact on the ability of those actors responsible for such ac�ons to undertake them. I will return to this thought later in my economic outlook. But with this overall intellectual background, where do we find ourselves at this moment? By any measure, we are at a cri�cal �me not just in our economy, but for our infrastructure. We are now roughly 70 years removed from our na�on’s last, great infrastructure boom, including the construc�on of the Interstate Highway System. And as with most things, �me isn’t always kind. The condi�ons of our infrastructure call out for broad investment, and the condi�ons of our economy require us to look anew at what infrastructure means to our overall health, both literally and figura�vely. Without a doubt, the United States would not be the preeminent global economy if not for our infrastructure. We are a vast na�on, and our roads, bridges, tunnels, rails, and airports are very much the �es that bind the union together. But in what condi�on do we currently find these �es? For the past almost 70 years, we have been in a mode to maintain the infrastructure we currently have. We became very good at fixing things, and, let’s face it, we s�ll are. Case in point: When a sec�on of Interstate 95 in Northeast Philadelphia collapsed this summer — prac�cally paralyzing the East Coast’s most essen�al transit corridor — it only took a mater of days for an ingenious repair plan to be put into place and the road reopened. But in some ways, this is the excep�on to the usual cycle of infrastructure 3 repair, as it took cu�ng through red tape and a quicker-than-usual accoun�ng of the economic ac�vity being lost for officials to spring into ac�on at such speed. Transporta�on infrastructure, as we all know, is expensive to undertake and o�en slow to accomplish. But the I-95 collapse and rebuild could also become a pivot point for the way we look at infrastructure. I could argue that the way many have tradi�onally looked at infrastructure is much akin to the old Oscar Wilde line about those who “[know] the price of everything and the value of nothing.” We’ve become very good at knowing how much a project will cost, but we haven’t been as good at explaining the value of a project — the long-range economic and quality of life benefits inherent in it. And so, I would say this is not just a �me for us to get beter at fixing, but a �me for us to take a fuller stock of the results of what we built in the first place and the long-term implica�ons of what we may build in the future. I-95 in Philadelphia in itself is a good example for us to examine both of these thoughts. And, at the Philadelphia Fed, it’s also perfectly located for us to do just that. If you travel on I-95 through Philadelphia, it stands out in several ways. The first is more sensory and tac�le: I-95 severed the residents of Philadelphia from the Delaware River waterfront. In the 1950s, the riverfront was overwhelmingly industrial, and the residen�al areas located on it were older, so litle thought was likely given to the construc�on of an elevated highway with beter water views than the newer buildings and houses to its west. But I-95 was also constructed in an age when suburban living became the new model of the American Dream, and when highways could speed families out of city centers and into new single-family home developments, complete with yards and driveways, in neighboring coun�es. And when a highway was built, the noise and air pollu�on from that many cars and trucks helped push those who could afford it toward those new suburban developments. 4 Last year, two of my colleagues at the Philadelphia Fed, Vice President and Economist Jeffrey Lin and Economic Advisor and Economist Jeffrey Brinkman, took a closer look at I-95, its impact in depopula�ng Philadelphia, and the poten�al benefits of capping the highway. 2 And Lin, I should note, is a Wildcat, having completed his undergraduate studies in economics and mathema�cal methods in the social sciences here at Northwestern, and studied under Dr. Leon Moses. So, my colleagues started by looking at the popula�on effects of freeways on central city neighborhoods, and what they found, if not startling, is s�ll stark. The standard narra�ve is that freeways provide access to opportuni�es. And this was true in the suburbs — freeways atracted development and popula�on. But this was decidedly not the case in central ci�es. Lin and Brinkman found, in central ci�es, a popula�on decline of nearly one-third in the census tracts closest to freeways, while the popula�ons in the tracts more than two miles from the nearest freeway increased by more than 50 percent. And the decline in those neighborhoods closer to a freeway makes sense, not just because of noise and pollu�on, but because of the nega�ve barrier effects to local ameni�es — the dead-ending of streets that previously provided through access to jobs or shopping, making previously straight-forward trips longer for residents. Lin and Brinkman also calculated the value of neighborhood ameni�es in areas of Philadelphia closest to freeways to be roughly 11 percent lower than in those areas farther out — and in a similar analysis, they found a 17 percent difference in Chicago. Engineering created a means for speeding people and goods between ci�es and from city centers and into suburbia, and beyond. The Interstate Highway System was an enormous achievement, and it created big benefits for some. It also had enormous costs for others, especially residents of central ci�es. But engineering now has the opportunity to mi�gate some of that damage, to eliminate barriers to ameni�es, and in the process, create new economic incen�ves for folks to move back and opportuni�es for those who stayed. See Jeffrey Brinkman and Jeffrey Lin, “The Costs and Benefits of Fixing Downtown Freeways,” Economic Insights, Q1 2022, available at philadelphiafed.org. 2 5 We know, through both anecdotal evidence and through fron�er research, that more people, especially young college graduates, are looking anew at urban living. 34 New work from home op�ons means that ci�es and towns are compe�ng even more on the quality of life they can offer residents. Addi�onally, traffic throughout the Philadelphia Metro area has become so endemic that one of those ini�al benefits of living in the suburbs — speedy access to the urban core — has been all but eliminated. The Philadelphia waterfront today is a place where former warehouses and factories are being repurposed and renovated for residen�al and more ground-level commercial uses. The Delaware River itself is also a cleaner estuary, and one which the city has con�nually sought to highlight for both residents and tourists through projects like the Penn’s Landing Fes�val Pier, the mul�modal Delaware River Trail, and a just-started project to cap a one-10th of a mile por�on of I-95 at Penn’s Landing to become a new urban park. And Lin and Brinkman even looked at this last idea: capping I-95 to reconnect neighborhoods with ameni�es. But they looked at a much bigger landscape than the current project, which is geared to only a small part of I-95 adjacent to the neighborhoods directly east of Center City and the tourist and business heart. They conceived of a project to cover a litle more than four miles of I-95 and simulated its poten�al impact. And what their simula�on suggests is a poten�al popula�on boom in those neighborhoods that I-95 effec�vely cut off and to some extent emp�ed, as connec�ons between those neighborhoods and the city at-large were remade. They also calculated that the benefit to households in these neighborhoods at roughly $245 million per year, or $3.5 billion over the life�me value of such a project, was greater than the es�mated current cost of undertaking such a program. These are big numbers. What they point to is the significant damage that highway construc�on did to central city neighborhoods. What they also point to are the significant current opportuni�es for remedia�ng that damage, if we can also focus on the value of these investments, instead of only the costs. See Victor Couture and Jessie Handbury, “Urban Revival in America,” Journal of Urban Economics, September 2020, available at ScienceDirect. 3 See Nathaniel Baum-Snow and Daniel Hartley, “Accoun�ng for Central Neighborhood Change, 1980–2010,” Journal of Urban Economics, 117, May 2020, available at ScienceDirect. 4 6 But it’s not just about plan�ng grass. While parks and open space are vital, we cannot discount infrastructure that could link neighborhoods together. Public transit has poten�ally a large role to play here. With limited excep�ons of, for example, the New York City Subway or Boston’s T, we o�en think of mass transit mostly in terms of bringing suburbanites back into ci�es. In Philadelphia, for example, the regional Southeastern Pennsylvania Transporta�on Authority (SEPTA) is o�en skewered by Philadelphians for a percep�on that it caters mostly to suburbanites — a gripe rooted in the fact that prepandemic, from 2007 to 2017, SEPTA’s suburban-based Regional Rail system received the plurality of the agency’s capital funds even though inner-city transit atracted far more riders. 5 Fair or not, percep�on maters and can sway public acceptance. Again, this is an area where there is guiding research from the Philadelphia Fed. Economic Advisor and Economist Chris Severen looked at the economic benefits of the Los Angeles Metro Rail system, an ambi�ous effort to draw people from the epicenter of the na�on’s car culture out of their autos and into mass transit. 6 What Severen found was a 15 percent increase in transit use when Angelenos were commu�ng from one neighborhood to another directly connected by Metro Rail. The increase in Metro Rail commu�ng in directly adjacent census tracts was 10 percent. A common concern these days with local infrastructure investments is who benefits. Are the benefits going to incumbent residents who may have been harmed by past policy? Or are they going to incoming residents who end up displacing exis�ng residents? On the other hand, some people might worry that transit access might actually hurt neighborhoods, for example, by introducing more noise or conges�on. Interes�ngly, in the LA Metro case, these neighborhoods did not experience a lot of disrup�ve change. The appearance of a Metro Rail sta�on did not bring in a new wealthy subset. What Metro Rail primarily did was to enhance resident choice of transporta�on op�ons. It added an amenity in which residents found an intrinsic value — the ability to ditch their car. The added benefits of those cars that were kept off the streets, in terms of traffic, noise, and pollu�on, just become a bonus. More than that, it may have See Jim Saksa, “SEPTA Riders Overwhelmingly Take the Bus and Subway. Why Does Regional Rail Receive More Funding?” May 2017, available at WHYY. 5 See Christopher Severen, “A Ticket to Ride: Es�ma�ng the Benefits of Rail Transit,” Economic Insights, Q2 2020, available at philadelphiafed.org. 6 7 changed percep�ons of transit as something only for the suburbs or wealthy residents. Again, this kind of research is helping us learn about the value of transporta�on infrastructure — the long-range economic and quality of life benefits. Such infrastructure projects may be cri�cal in undoing one of the great transporta�on engineering injus�ces of all. We now know that highways cut off people from opportuni�es today. But this might understate their nega�ve effects on the next genera�on tomorrow — through increased racial segrega�on and the decreased intergenera�onal economic opportuni�es that con�nue to this day. And this brings me to a third bit of research in which the Philadelphia Fed was involved. Economic Advisor and Economist Bryan Stuart recently teamed up with researchers from the University of Texas and UCLA. 7 Their window into these intergenera�onal effects was to look at the long-term economic impacts from the historical placement of railroads. And they found, true to the cliché, that there was a “wrong side of the tracks.” The placement of railroad tracks cemented segrega�on within communi�es and limited the upward mobility of specifically Black children who the tracks separated from community ameni�es such as schools and jobs. We can see this in Philadelphia, too, which has the unfortunate dis�nc�on of being the “poorest big city” in the na�on, and the 11th most racially segregated 8 with a citywide poverty rate above 20 percent. But is this just a mater of bad luck for these families who find themselves below the poverty line? The research conducted by the Philadelphia Fed would say no. Many of these outcomes were caused by past policies. Many of them could be addressed through transporta�on infrastructure investments today to beter connect workers, families, and opportuni�es. In 2022, Larry Santucci, a senior advisor and research fellow at the Philadelphia Fed’s Consumer Finance Ins�tute, released his work in which he mapped the history of racial covenants at nearly 4,000 proper�es See Eric Chyn, Kareem Haggag, and Bryan Stuart, “The Effects of Racial Segrega�on on Intergenera�onal Mobility: Evidence from Historical Railroad Placement,” Federal Reserve Bank of Philadelphia Working Paper 23-18 (2023), htps://www.philadelphiafed.org/the-economy/regional-economics/effects-of-racial-segrega�onon-intergenera�onal-mobility-evidence-historical-railroad-placement. 7 8 See “A Map of Racially Restric�ve Covenants in the City of Philadelphia,” Consumer Finance Data, htps://www.philadelphiafed.org/surveys-and-data/consumer-finance-data/racial-covenants. 8 citywide. 9 Racially restric�ve covenants were one of the tools that early 20th century developers, home builders, and White homeowners used to prevent non-White individuals from accessing certain neighborhoods and homes. Allow me a moment to explain the findings in Santucci’s own words: We didn’t see a lot in areas of the city where the housing stock was older, such as along the Delaware waterfront, where White residents may have been happy to vacate … But we did find racial covenants bordering White and non-White neighborhoods and cordoning off the up-and-coming, more suburban areas in the Northeast, Northwest, and Southwest sec�ons of Philadelphia. On a map, many of the areas of Philadelphia directly impacted by the growth of highways and the White flight it enabled stand out in this proposi�on. Santucci specifically notes the Delaware River waterfront, the example with which I opened this talk. But even today, residents in the majority Black neighborhoods of Philadelphia and the surrounding region face commute �mes, on average, that are 34 minutes longer per week than their White counterparts. Or put another way, in the span of a year, Black commuters lose a whole 24-hour day in commu�ng �me that White commuters keep for themselves. That was the finding of another recent report by Severen and his Research Analyst Nassir Holden. 10 This research can serve as the star�ng place for engineers and local officials, if not indeed federal ones, to take a more holis�c approach to transporta�on. Simply making repairs, while necessary, in many ways will only extend or even exacerbate long-standing inequi�es and inequali�es. Simply making a repair to a freeway that stands as an impediment to economic progress and equity won’t remove it as an impediment — it will only solidify its standing for more years. Simply valuing infrastructure in the same old way, usually by the flow of cars or people, is self-limi�ng. We should start valuing its benefits in greater totality, and especially the benefits to those who are situated near these projects. And the Philadelphia Fed’s research is helping us to beter define these benefits. See “Q&A: Larry Santucci on Philadelphia’s Racially Restric�ve Covenants and Their Las�ng Effects,” Federal Reserve Bank of Philadelphia, available at philadelphiafed.org. 9 Christopher Severen and Nassir Holden, “Not All Rush Hours Are the Same,” Economic Insights, Q3 2023, available at philadelphiafed.org. 10 9 But certainly, these improvements will not just happen on their own or through the benevolence of others. We must pay for them. Local governments collect taxes, some of which are used for local infrastructure, but most infrastructure projects have costs that require them to be bonded out over years. Those funds allow for construc�on workers to be employed and for materials to be purchased. And that is where the Federal Reserve’s ac�ons can have an impact and where I, as a member of the FOMC, recognize my place in this transporta�on future, if even just tangen�ally. But our ac�ons on monetary policy do have a direct impact on the borrowing rates for such bonds, among so much more. Our efforts to tame infla�on mean stabilizing the costs of construc�on and labor. And with that, I would like to give you a brief overview of my overall economic outlook. As you are aware, a week ago, at our last mee�ng, the FOMC voted to hold the policy rate steady — our second consecu�ve hold and the third in the last four mee�ngs a�er 10 consecu�ve interest rate hikes. I not only voted to support keeping the policy rate steady, but I was also among the first of my colleagues to state my posi�on that the �me had come to do so, possibly for a while. Let’s rewind for a moment. We did a lot in not a lot of �me. We rapidly moved monetary policy into restric�ve territory to tame infla�on and get it heading back down to our target of a 2 percent annual rate. Now, what we didn’t do was give the folks living in this economy, whether businesses or families, a lot of �me to adjust in between rate hikes. And today, if you look along the trend lines, we are experiencing a slow but steady disinfla�on. Interest rates remain in restric�ve territory and, so long as they are, they will con�nue to put a damper on infla�on. Yes, this economy is proving to be resilient and at �mes unwilling to bend to the will of economic models, but I believe that the path we are on is the correct one. I am not going to be swayed easily by a single month’s worth of data. One month can just be an outlier and not a harbinger. But we don’t know unless we have more outward months to weigh against it. With monetary policy, there are always lags. Holding the rate steady will give those lags �me to catch up. It will allow us to make more measured and educated policy rate decisions going forward — decisions, which I must add, could go either way, depending upon what the data tell us. 10 But for the moment, as I said, I see a slow but steady disinfla�on occurring. I s�ll expect infla�on to fall below 3 percent year over year in 2024 and to get down to our 2 percent target therea�er. I do expect GDP growth to cool off in the coming quarters, but I do not expect a recession. Consumers have been powering recent GDP growth — more than half of last quarter’s increase was due to consumers con�nuing to open their wallets. Time will tell if they have exhausted their pandemic-era savings and begin to ratchet down their own spending. Time will tell the full impact of the restart of student loan payments for countless borrowers. But I would also argue that a confident American consumer is not a problem. Indeed, they may be the ones ul�mately capable of helping us achieve the so� landing we all envision and that has proved quite elusive in the past. It is also clear that the labor market is coming into a much beter balance. I an�cipate the unemployment rate to end the year slightly elevated from where it currently stands — to about 4 percent — and to rise slowly in 2024 to about 4.5 percent before dropping again to 4 percent. That would put us back in line with the natural rate of unemployment, where the labor market and steady 2 percent infla�on can coexist in balance. Of course, there are many lurking uncertain�es. The posi�ve movements to setle the auto worker strikes give us hope that things may soon return to normal for workers and employers. But even then, there are s�ll other labor ac�ons that are slowing down other industries, such as the actors’ strike. We are also now only nine days away from a poten�al federal government shutdown, the impact of which would only grow the longer it goes on and could poten�ally trim a full percentage point off fourth quarter GDP. And of course, there are interna�onal issues that can impact our own economy. But at the end of the day, while I see us on the path of taming infla�on and protec�ng our economic underpinnings, I would also cau�on that a decrease in the policy rate is not something that is likely to happen in the short term. I ascribe to the posi�on that rates are going to have to remain higher for longer, as the other downward pressures on infla�on work in tandem with the current policy rate to return our economy to balance. 11 And for transporta�on, this higher-rate climate may have an impact on our ability to see some new projects get from the drawing board to shovels in the ground. The necessary repairs will s�ll be done, and projects already begun will con�nue. But progress is something for which America has always been known. And the more we take our eyes exclusively off the costs of a project to the overall economic benefit of a project, the more we will see that price tags, while important, aren’t the only thing to consider. We can s�ll, if we take the research into considera�on, make Oscar Wilde proud. And with that, I will conclude my prepared remarks for this evening. I once again thank you all for the privilege to be here. I would be happy to take your ques�ons. 12