Lose Use It or Lose It

President-elect Obama announced parts of his economic plan in his radio address Saturday. One part of this plan is to introduce a "use it or lose it" requirement to federal highway funds given to the states. In other words, if states do not use the monies allocated to them in a given fiscal year, that money will be withdrawn the following year. The idea is that this will stimulate state spending on road construction, which will inject money into the state's economy and create more jobs. This is a bad plan, however.

When a government entity is faced with a "use it or lose it" proposition, they will always use it; that isn't even really an issue. They'll use it. The problem is, the kind of incentive structure that this sets up for state governments. This sort of policy encourages state departments of transportation in the exact opposite direction of fiscal accountability. Imagine for the sake of illustration some state's DOT coming up to the end of the fiscal year and finding that their highway needs have required them to spend $250 million for the year - or perhaps good management has kept costs below projections. Either way, suppose they received federal grants for that year totaling $300 million. Unless they want to be docked $50 million the next year, they need to find some way to spend the remainder of the budget, and they need to do it quickly. Since their needs have already been met, whatever they spend the remainder of their money on (repaving roads that don't need repaving, for example) is going to be wasteful spending. The more efficient means of handling this would be to allow the state to return the remainder without penalty, or carry it over to the following year; this would reward efficient management of resources, rather than penalizing it as the "use it or lose it" policy will do. Given the president-elect's position during the campaign on bringing down ballooning deficits, I would expect that he would eschew this kind of irresponsible policy.