The U.S. supply chain: Our nation’s link to creating jobs

National policy discussions about how to get our economy moving again are now rightly focusing on how to generate economic growth and, most important, create jobs. These discussions increasingly involve infrastructure expenditures yet do not directly take on one of the most important elements of achieving both goals—improving the U.S. supply chain.

The supply chain is one area in which the U.S. economy has enjoyed a global competitive advantage—and the freight rail industry is a vital part of it. U.S. supply chain costs account for less than 8% of U.S. Gross Domestic Product. By contrast, for global competitors such as China, supply chain costs are greater than 20% of GDP.

This competitive advantage exists because, over the past 150 years, the U.S. developed the world’s most extensive and efficient surface transportation networks. The infrastructure that comprises our road, rail, and waterway networks has given the U.S. economy and U.S. workers an edge as relatively lower U.S. logistics costs helped to offset rising costs in other areas.

The U.S. supply chain has leveraged that infrastructure network further by creating a highly efficient intermodal model, based on freight rail. This nationwide intermodal network has helped fuel the growth of many of our nation’s most successful industries and of the logistics companies, ports, railroads, and trucking companies that serve them.

Despite its success over the past few decades, the U.S. supply chain is now facing a great challenge. The problem is that the capacity that has been the core of this efficient system has been filled up, leading to declining performance and increasing costs. The data show growth in every mode. On the highways, from 1980-2006, vehicle miles traveled increased 97% for automobiles and 106% for trucks, while the total number of highway lane-miles grew only 4.4%. Similarly, over the same period, U.S. rail route-miles became one-third smaller, while units transported increased more than 70%.

These trends will continue, since all the forecasts point to even more growth in transportation demand. The U.S. population has grown from 200 million to 309 million during the past four decades and is projected to reach 420 million over the next 40 years.

There can be no dispute that U.S. infrastructure investment is not keeping pace with increasing demand. In the 1960s, the U.S. spent about 4% of GDP on infrastructure; today it is about 2%. Compare that to China, which is investing between 9% and 12% of GDP per year, and Europe, about 5%.

We clearly need to aim our public and private investments in infrastructure at meeting demand. The U.S. supply chain should be at the core of a national transportation policy, which should take the same integrated view of our nation’s multi-modal infrastructure that its users do. National transportation policy should prioritize freight mobility in planning, programmatic, and funding decisions, especially in a tight budget environment where economic sustainability is at a premium.

Privately funded railroads are already investing in infrastructure at record levels—collectively spending nearly $13 billion in 2011—and that amount will need to grow in the future to meet expected demand. If we maintain public policy that ensures railroads can increase investment levels, railroads will continue to invest in the projects that strengthen and expand the nation’s rail networks, and their role in the supply chain.

While freight railroads rely on private capital to do this, the rest of the inland supply chain is dependent on public funding and user fees to provide additional capacity, as well as public-private partnerships. Yet, relative to the rest of the world, the U.S. has done very little to attract large amounts of direct private investment in transportation networks.

Though public sector surface transportation expenditures have increased over time, during the past few decades they have not kept pace with national growth. Expenditures on highway maintenance and improvements are shared by local, state and federal governments. When growth in vehicle miles is taken into account, real highway spending across all levels of government has fallen by nearly 50% since the creation of the Highway Trust Fund (HTF) in 1956. The federal contribution to highway spending, in particular, has remained fairly constant, and since 1993 has fallen behind rather than responding to additional infrastructure demand.

We need a public surface transportation funding stream that reflects reality. Federal budgets are shrinking and General Funds are an unsustainable and inappropriate source of support for federal transportation programs. Funding should be user-derived and reflect actual maintenance and capacity needs. Although imperfect because of improved fuel efficiency, the fuel tax substantially reflects those values and, for now, should be increased. In addition, more direct pricing of road use must be a larger part of meeting demand. Finally, public policy should encourage private participation in transportation infrastructure. Public financing of infrastructure investments is an important part of this “all of the above” approach to sustaining U.S. infrastructure, but the foundation of funding at all levels of government should be user-derived support for the assets they use.

However, additional revenues should not be added on top of a policy framework that is outdated and lacks accountability to the transportation users that pay into it. Federal transportation programs need to be performance-driven and focused on the nation’s highest national transportation priorities. Federal policy should promote and reward innovation at all levels of government to deliver the highest priority projects in the most efficient and cost-effective way. Reforming national and state permitting and regulatory policies to advance economically significant infrastructure projects is one of the keys to maintaining the competitiveness of the U.S. economy and creating new jobs.

The payoff for getting the transportation long-term public policy piece right will produce economic benefits now. U.S. Department of Commerce economic models show that in the rail industry alone, 17,000 jobs are created for every $1 billion invested by the nation’s freight railroads, and that every freight rail dollar spent produces $3 in economic output. Getting it right will enable the U.S. economy to realize even greater supply chain efficiencies to improve the competitiveness of the U.S. economy and workers. For railroads, that means expanding freight rail capacity, which will improve fuel efficiency while reducing highway congestion and greenhouse gas emissions.

More important, it will mean more high-paying jobs in communities across the nation’s rail network, where they are needed most.