There must be something in the water. Republican gubernatorial candidate Mitch Daniels has decidedly split from the rest of his party and, to paraphrase the Democratic front-runner in the presidential contest, appears to be doggedly manning what remains of the conservative wing of the Republican party.
Well, at least the fiscally conservative wing. During his tenure in the Bush administration, Daniels had to preside over a federal budget exploding under an administration that sought to greatly increase the size, scope, and cost of the federal government, while simultaneously reducing its tax base. Rumor has it that the administration's fiscal irresponsibly finally got to Daniels, who always campaigned on a platform of slashing, not ballooning, government costs. The rest is, as they say, history. Daniels found the opportunity to exit Washington and come home to run for Governor.
Master of his own domain
And now that he has, Daniels is finally free to politically act out his ideological conservatism. The strongest evidence for that was his announcement, last week, that while he would not change the route of I-69 (i.e. along and parallel to the existing Canada-to-Mexico NAFTA highway), he would seek to have its funding structure changed radically. Instead of building I-69 as freeway, the normal practice for Interstate highways, he would push for it to pay its own way as a toll road.
Daniels' announcement, at least for people like myself (namely socially-liberal market champions who cannot see the point in building another government highway in a state that already has more than most), was a breath of fresh rationality in a process that has heretofore had precious little contact with commonsense.
The most important feature of toll roads over freeways is the fact that the latter's form of funding tends to obscure its actual costs of the road, whereas the former allows a fairly straightforward analysis of where the money is coming from and where it's going. In the words of contemporary corporate reformers, a toll road tends to have a lot more transparency. More important still is the fact that a toll road does a better job of internalizing a road's costs to its users.
Internalizing? Well, economists talk of costs being "externalized" or "internalized." They say that the cost of a good or service is fully internalized when its price reflects all of the costs associated with producing it. Conversely they say that some, or all, of the costs of something are externalized when there is some aspect of its manufacture that is not reflected in its end price.
For example, the Westinghouse Corporation built electrical transformers for approximately 30 years in Bloomington. During the manufacture of those transformers, the corporation improperly disposed of its manufacturing byproducts by dumping Aroclor (a PCB product) down the drains and into the city's sanitary sewer system. Thus Westinghouse externalized the cost of making transformers by transferring some of their manufacturing costs to Bloomington's residents and taxpayers. Not only were there direct costs involved (replacing the entire sanitary sewer system and plant), but there were significant indirect costs (lowered property values, health costs, losses of community goodwill, etc.). Yet none of those costs have ever been passed onto the remnants of the Westinghouse Corporation, its shareholders, or the purchasers of its transformers. Those costs were externalized.
Build it and they will come
Let's get back to roads. Early in the history of the nation's Interstate highway system (i.e in the 1940s) a conscious decision was made to implement it as a system of freeways, as opposed to tollways. On a freeway, by definition, no toll is levied directly against its users. Users are "free" to use the road. This was a reversal of centuries-old practices of having roads, particularly large highways, fund themselves through the direct imposition of tolls. Indeed, various vestigial remnants of earlier toll roads exist today--such as the Pennsylvania Turnpike and the Indiana Toll Road, both of which preceded the Interstate system and retained their toll status when they were subsequently absorbed into it.
But it would not do to build out the nation's Interstate system as a system of toll roads. The architects of the system realized that, if the roads were not "free" for their users and instead relied on tolls for operation, there would be insufficient traffic to justify their cost, and thus their building. In 1956 the federal government implemented the Highway Trust Fund, which disconnected road users from paying the direct cost of the roads and replacing transparent toll funding with something a whole lot more complicated and a whole lot less transparent. To say that the highway lobby was ecstatic would be an understatement.
But the system worked too well. Users flocked to the new "free" roads, while other forms of transportation and freight carriage faltered or failed outright as they could not compete against massive government highway subsidies. The result is that today, roughly 30 years after the Interstate system was supposed to be finished, we are both contemplating additional capacity (such as I-69), as well as the reality that we can't afford to pay for it, at least under the old way of doing things. And, as yet another affirmation that everything old is new again, on the table we find that relic from a leaner past: the toll road.
It's absolutely fascinating that Daniels would propose a toll road for I-69. It's fascinating for the reasons we outlined above, but what's really interesting is the degree of Realpolitik, on Daniels' part, that it represents. As the early Interstate designers well knew, the public will shun a toll road if free roads are available. And, if the road is almost totally redundant (as I-69 is), they won't use it at all.
Tolls are used to not only pay for the ongoing maintenance of a road, but also to repay the bonds issued to finance its original construction. Those bonds, like most construction bonds, come from private investors. The difference with a toll road versus a freeway is that the repayment on the bonds comes from the direct proceeds of the road, not from guaranteed government highway funds. No users, or insufficient users, means, as happened in Virginia with the Greenway toll road, no repayment. No repayment means default. Default means that bond holders get nothing back for their investment.
Daniels knows that the private bond market, freshly wounded from disasters like Virginia's Greenway project (where toll collections barely cover annual maintenance, leaving nothing to pay back the $400 million invested in its 14 miles of original construction), will not underwrite the costs of I-69's construction if that cost is to be paid back from a toll system. Thus a toll-road I-69 is a nonstarter. Championing I-69 as a toll road is the equivalent of championing no-build.
Daniels revealed a level of political sophistication that I didn't think he had. He's fooled the pro-highway forces, including the Herald Times, by putting forth a proposal that looks like it would accelerate the highway building process when, in reality, it would be the final nail in this misbegotten waste of energy's coffin. He's avoided alienating his base of corporate interests while simultaneously getting rid of what would have proven to be one of the state's most serious financial liabilities. Did I forget to mention the political goodwill generated among the progressive anti-highway crowd?
Welcome Governor Daniels. Machiavelli would be impressed.
CIVITAS is a weekly column of civic commentary by Gregory Travis. Contact CIVITAS at