Whole Foods feels the pinch of a changing market

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Whole Foods Market, jokingly referred to as “Whole Paycheck” for consumers, who as a late night television wag quipped love organic foods but can’t stand having money, has been fighting declining sales and increased competition as basically every supermarket chain and other retailers enter the organic food market.

When it was founded in 1980, Whole Foods was one of the few natural food supermarkets in the United States. It enjoyed the benefits of a first mover and defined the organic grocery concept. Over the years, it experienced rapid growth, positioned itself as the preeminent organic grocery brand and charged premium prices. In June 2003 it became the nation’s first National Certified Organic Grocer.

But faced with declining sales in recent years, the firm is trying to reinvent itself as a lower-priced supermarket. The company has experienced six straight quarters of declining same-store sales, a key grocery industry performance metric, as consumers become less willing to pay a premium for the Whole Foods brand.

Organic and locally sourced offerings have increased at mainstream grocery store chains as organic food has become popular among American consumers, especially millennials. According to the Organic Trade Association, organic sales increased 209 percent between 2005 and 2015 and totaled about $43 billion in 2016.

As the American organic and sustainable foods market has grown, competitors have repositioned their brands to enter this segment of the grocery store business. In recent years, Whole Foods has seen increased competition from chains like Trader Joes, B-Fresh, Wegmans and Kroger; discount natural food operators like Sprouts and Fresh Thyme; and big box retailers such as Walmart and Costco, which cater to socially and environmentally conscious customers at lower price points.

According to a 2016 research report by Webush Securities, Whole Foods is about 15 percent more expensive than conventional supermarkets such as Kroger, Wegmans and Safeway. The same report found that Whole Foods was about 19 percent more expensive than specialty grocers, including Trader Joe’s and Sprouts Farmers Market.

Meal kit firms such as Blue Apron and HelloFresh add another layer of competition. On top of that, growing online grocers like Amazon Fresh and Fresh Direct appeal to the same affluent customers as Whole Foods. Earlier this year it was rumored that Amazon.com, Inc. considered buying the company. Big box retailers are also diversifying their food offerings, aggressively courting the health food market to capitalize on consumers’ growing interest.

To make matters worse, Whole Foods is facing pressure from activist investor Jana Partners, a $8.5 billion hedge fund. In April, Jana, which owns 8.3 percent of the company, unveiled a list of complaints about the firm’s “chronic underperformance for shareholders,” its management, operations and strategy.

To enhance growth prospects and combat sliding sales by positioning itself as a competitively priced grocer, the firm has announced a plan that includes cutting more than $300 million from operating expenses, closing nine stores and abandoning its goal of reaching 1,200 stores. Earlier this year the firm eliminated its dual executive leaderships structure and demonstrated an increased commitment to shareholders by increasing the quarterly dividend and authorizing a new share repurchase program.

The firm plans on expanding its new “365 by Whole Foods Market” store format aimed at “value conscious” consumers. The danger here is that this expansion will cannibalize demand from the higher-end Whole Foods stores rather than take consumers from competitors.

Closely related, the firm has cut prices to shed its whole paycheck image and plans on offering direct discounts to those enrolled in a new customer rewards program by the end of the year.

These actions convey a sense of urgency and represent steps in the right direction that should boost stock prices. Still, Whole Foods will have difficulty shedding its costly image and getting consumers to understand the new value proposition in an increasingly crowded market while dealing with the “perennial gale of creative destruction.” If they don’t succeed, they may yet be acquired by one of their competitors.

Originally Published: May 27, 2017

Rich getting richer is no accident

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The upward redistribution of income in the United States over the last four decades has been well documented. Many argue there is little we can do about forces like globalization, accelerating technological change, the transformation to a service economy, taxes and government programs that have put downward pressure on wages for the ordinary American worker, but there are steps government could take to address these changes.

Economic inequality is the result of conscious policy choices. This issue is especially relevant in light of President Trump’s new tax blueprint and the health care overhaul recently passed by the House of Representatives.

From the 1950s to the mid-1980s, the richest 1 percent of Americans earned a touch under a 10 percent share of the national income. By 2012, that number was about 20 percent.

Overall wealth is even more concentrated than income. In 2012, the top 1 percent of the population controlled about 42 percent of the wealth.

The promises many politicians make about material comforts are duplicitous, since only a small minority have access to such comforts and they come at great expense to the majority. Working-class Americans feel left behind, stewing in their resentment of economic hardships and being forced to make daily choices between things like buying gas or putting food on the table.

They have come to believe government is run by and for the rich, who are used to getting their own way and face none of the daily struggles they do. Much of the American working class lives in a provisional world where making it to the next day is a victory.

Average Americans were cut adrift from their former lives, given little help to build new ones and disparaged as a basket of deplorables. All this was largely happening outside the view of the media and the political class.

You don’t have to have the psychological acuity of a self-important academic to understand the ironclad rage of the working class, which is proving to have the shelf life of radioactive waste. Is it any surprise that when powerless to determine their own destinies and achieve the American Dream, they backslide into anger and resentment?

This was not supposed to happen. In the optimistic period after the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1992, free-market capitalism, with its invisible hand miraculously transforming selfishness into common good, was seen as the way to usher in a period of prosperity and peace.

More recently, one event after another has exposed this utopian narrative. The 2008 financial earthquake revealed fault lines running through the economic system that cost millions of Americans their jobs, homes, life savings and hopes for decent retirements. It unraveled communities, especially those where manufacturing jobs have disappeared and the well being of the working class has been marginalized by circumstances beyond their control. It was a cataclysm far worse than any natural disaster.

Troubling results from growing inequality include dampened economic growth, reduced social mobility, and a corrosive impact on democratic institutions. Another important consequence is weak consumer demand to support the economy.

It would be wise to recall how Henry Ford simultaneously created transportation for the masses and drove economic growth. He furnished consumers with reasonably priced cars while raising wages for his own workers to make the car affordable to them.

Rather than raising the federal minimum wage, a modern version of Ford’s approach would be to expand the earned income tax credit to supplement low-wage workers’ incomes, which would mean the government paying Americans whose earnings are below a certain level. The program was started under President Ford in 1975, expanded once by President Reagan and again by President Clinton.

President Trump has proposed expanding the earned income tax credit beyond the 27 million working families who currently benefit from it. Such a move would increase demand and economic growth by providing working class Americans with the living wage they deserve.

Originally Published: May 13, 2017

Technology turns reality on its head

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Over the last decade, Americans have witnessed a breakdown of traditional industry boundaries. New industries are being created and existing ones restructured by the accelerating pace of technological innovation.

This shift is taking place in the context of a larger economic transition from the Industrial Age that began in the second half of the 18th century to the Information Age, fueled by revolutionary technologies such as the digital computer, the internet, and related information technology.

The increasing pace of technological change impacts human capital markets. Today’s children will grow up in a world unlike that of their parents, as technology transforms media, medicine, transportation and every aspect of how people conduct themselves.

The nanotechnology revolution and gene sequencing, which is just beginning, promises significant upheaval for a vast array of industries ranging from tiny medical devices to new age materials for earthquake resistant buildings. Recent service innovations include social media and online search engines that respond to voice commands.

Reality is getting complicated. Dealing with it will require taking some of the wealth created from the new industries and reinvesting it in skills development for displaced workers and rethinking policies about work and education.

Two things are certain: technological progress is relentless and accelerating, and today’s technology becomes outdated almost as soon as it can be brought to market. Consider the multiple models of smartphones introduced each year.

Advances in technology are causing disruptive changes in mature industries by introducing substitutes or altering the industry landscape by opening up whole new frontiers. For instance, revolutionary change in self-driving technology has enabled even companies such as Alphabet, the parent of Google, to enter the motor vehicle market.

Every major car company is researching and building its own version of a driverless vehicle, and industry observers are predicting they will have autonomous vehicles, internet-connected driverless vehicles without a pedal and steering wheel, on the road in five-to-ten years. The vehicle may turn out to be the ultimate mobile device.

Cutting-edge advances in artificial intelligence will have an unequal impact on livelihoods depending on which industries and individuals can create or adapt to these breakthroughs and which are left behind. They could be as consequential for labor as the agricultural and industrial revolutions that preceded it.

Two-and-a-half million people in the United States make their living from driving trucks, taxis, or buses and all are vulnerable to displacement by driverless cars. These jobs are just the tip of the iceberg.

For example, it is likely that children born today will never drive a car and may have a job in a career that does not yet exist. Robots have displaced manufacturing jobs in electronics, metal products, plastics, and chemicals with activities such as welding, painting, packaging and even operating heavy machinery.

These changes are disorienting and more than a little scary for the ordinary American already dealing with a sense of economic insecurity. Meanwhile, recent developments in robotics, artificial intelligence, and machine labor are automating work that is cognitive and non-manual. Robots are increasingly being used for a variety of tasks from precision agriculture to robotic surgery jobs that were largely immune from technological advances.

Automation will not happen overnight. It will take years to play out fully and will vary across industries, firms, jobs, and activities. But the time is now to come to terms with the uncomfortable reality that in the future, just a fraction of the population may have the talent and education to work alongside machines, while everyone else will bear the brunt of the changes.

These discontinuities raise important public policy issues about the social framework that makes sure those who are losing their jobs are able to stay afloat long enough to pivot to new opportunities and force us to rethink issues such as providing a guaranteed universal basic income. The future is arriving sooner than we thought and our country is unprepared.

Originally Published: April 29, 2017

Private firms offer a route to financing infrastructure

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President Trump and his advisors have identified recruiting private firms as active participants as one solution to the choking shortage of money to finance critical infrastructure needs. He’s right, but maximizing the private sector’s impact will require the administration to think outside the box.

If properly structured, public-private partnerships could tap into billions of dollars of private capital hungering for low-risk investment opportunities that offer decent returns. Piles of dough would be deposited on the front steps of city halls and state houses with the steely hand of the private sector at the tiller, minimizing the need for scarce taxpayer dollars to get infrastructure projects underway.

This means designing such partnerships as overtly commercial enterprises able to demonstrate reasonable prospects for earning reliable income streams large enough to pay consistent returns to their private investors. Not a simple challenge to be sure. But scarcely one that’s beyond the capabilities of Wall Street’s more innovative investment bankers.

Making this work on a sufficiently large scale would require significant rethinking of how government deals with private firms (which may be overdue anyway), since some of these partnerships may require user charges to generate the necessary income streams. If approached creatively, this could actually enhance the likelihood that the activities of these partnerships would meet environmental goals and other regulatory mandates that serve the public interest.

In many jurisdictions, the public may not sit still for turning over the responsibility to operate an infrastructure project to the private sector because they know a business’ natural instinct is to maximize profits. Government could set up some sort of regulatory commission to oversee the project like they do for utility companies. But a better approach might be to set up an independent commercial corporation fully funded by user fees to build, own, and operate the infrastructure asset so taxpayers can participate in any upside from the project.

The state or local government could solicit bids from private investors to buy shares of equity ownership in return for annual dividends paid by the corporation. That brings private equity capital to the corporate balance sheet, reducing the amount of debt capital it has to issue.

In theory, government’s incentive is to offer the most service for the lowest cost. Private investors, on the other hand, have the opposite incentive: to charge the highest user fees the market can bear while providing the least service it can get away with.

But a second class of private investors would likely purchase equity shares in the enterprise mainly because they have a vested interest in assuring better roadways or other transportation infrastructure in the area. These investors might be private utility companies, local banks, and other local firms whose future revenue growth depends heavily on rising levels of economic activity. This class of owners would push for user fees that make sense from a financial standpoint and service levels that meet public needs in a financially responsible manner.

This model may be a reliable way to ensure that, for example, the original cost of every facility is evaluated on a lifecycle basis so customers and operators alike don’t wind up being confronted by expensive ongoing maintenance nightmares. There would also be the certainty of long-term financial commitments so taxpayers never have to deal with orphaned facilities displaced by disruptive technologies such as autonomous ride sharing vehicles.

This model holds owners responsible for sound asset management in a clear and unambiguous way. Opportunities for abuse by limited-life warranties, guarantees written by “paper companies” that melt into the woodwork when push comes to shove, and the kind of multi-party finger pointing that only ends up enriching the legal profession would be minimized. These realities are unlikely to be lost on the relevant parties.

Alternative models based on elaborate legislative mandates might accomplish the same thing. That is, if you believe the necessary legislation could be passed without being riddled with compromises, trade-offs, escape clauses and weasel language.

originally published: April 15, 2017

No easy or cheap fix for America’s infrastructure

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Earlier this month, the American Society of Civil Engineers’ “2017 Infrastructure Report Card,” which looks at 16 categories of infrastructure from schools to airports to dams, gave the nation an overall grade of D+. Creative approaches can be used to finance some of the needed improvements, but others will need to be paid for the old-fashioned way.

The report is yet another in a series of reports making the case that America has under invested in infrastructure for decades. Such chronicles of wretched conditions are a national sport that is nearly as popular as the Kardashians. But although much of the material is familiar, infrastructure is a gift that keeps on giving; there always seems to be something new to chew on.

The report card projects that $4.59 trillion will be required to bring America’s infrastructure to a grade of B. That is more than the nation’s annual budget of about $4 trillion.

Americans can quibble about the actual size of these projections, just as maritime historians quibble about the size of the iceberg that sank the Titanic. But it scarcely matters whether the estimates are off by 5 or 10 percent (give or take). What matters are the general proportions of these needs and the risks for the U.S. economy if they are not addressed. The longer we wait, the bigger the problem becomes.

Most who deal with this issue agree that the country’s infrastructure is in a bad way, but there is much partisan disagreement over how to pay for the fix.

Using public-private partnerships to invest in infrastructure was one of President Trump’s major campaign promises, but fiscal conservatives in Congress are reluctant to back massive spending that exacerbates the federal budget deficit and skyrocketing federal debt.

Democrats, on the other hand, are for more direct federal spending. By reducing taxes on overseas profits, they believe some of the estimated $2-$3 trillion companies have kept outside the U.S. could be repatriated. The result is that the political hills come alive with the sound of heated debates over proposals to address the infrastructure gap.

The permanent political aristocracy’s failure to deal with infrastructure reflects the simple fact that talking about balancing the budget is easy, but doing the things you have to do to balance it is hard. By the very nature of the process, politicians are focused on the very near term.

Upcoming elections, like hangings, have a way of focusing the mind on the here and now. That is why the federal gasoline tax of 18.4 cents per gallon and the diesel tax of 24.4 cents per gallon, the most important sources of federal transportation funding, have not risen since 1993. During that time, they have lost about 40 percent of their purchasing power due to inflation. Fuel tax revenues can no longer keep pace with needs.

This is not just a problem with politicians, it’s also a problem with voters, who say the deficit is a major concern, yet favor lower taxes, more benefits and fixing our infrastructure. Put simply, they don’t want to pay for the government they want.

It’s time to get real. Nothing works without a funding source and we will need hard cash to correct our under-investment in infrastructure. The feds, state and local governments, and the private sector have plenty of access to capital markets to finance infrastructure; the real issue is identifying revenue sources such as user fees or taxes to repay the debt.

A partial solution is to minimize the need for scarce government dollars by recruiting private firms as partners to help start, fund, and run infrastructure projects that have predictable revenue streams, like toll roads. But a larger universe of projects such as schools, dams, and local roads, for example, cannot be monetized.

Infrastructure’s biggest challenge is funding. In the real world, that comes down to a choice between taxes and user fees. There is no free lunch.

originally published: April 1, 2017

Weighing the risks in responding to North Korea

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The Korean peninsula has been divided since the 1953 Armistice Agreement that ended the Korean War. South Korea has always faced a hostile, antidemocratic, heavily armed, nation just an hour’s drive from the capital of Seoul. Now North Korea’s pursuit of a functional warhead that can reach American shores is a major security threat to the United States.

North Korea is a highly centralized communist state with about 25 million people and almost no real GDP growth. According to the State Department, the North’s annual military expenditures average about $4 billion, which accounts for around a quarter of the country’s average $17 billion gross domestic product. China is North Korea’s most important ally, biggest trading partner and main source of food and energy.

Take away North Korea’s nuclear weapons and it would be regarded as a failed state. In contrast, South Korea is a high-tech, industrialized economic power fully integrated into the global economy.

North Korea’s nuclear threat to its neighbors, America’s interests, and the rest of the world has escalated. Earlier this month it fired four ballistic missiles into the sea off Japan’s northwest coast, provocatively landing about 200 miles from the mainland. The country’s missile program has progressed from tactical rockets in the 1960s and 70s to short-range and medium-range ballistic missiles in the 1980s and 90s.

The launches violate multiple UN Security Council resolutions and represent a direct challenge to the international community. The test launch apparently was a response to annual United States and South Korea military exercises that the North regards as a rehearsal for an invasion.

North Korea said its launches were training for a strike on U.S. bases in Japan. It appears that North Korea is on a trajectory to launch an intercontinental ballistic missile capable of reaching the continental United States, something President Trump has vowed would not happen.

The day after North Korea launched the ballistic missiles toward Japan, the United States deployed missile launchers and other military hardware needed to create an anti-missile defense system in South Korea to intercept and destroy short- and medium-range ballistic missiles.

The North’s nuclear weapons and long-range missile development and testing program pose a security threat to the region and the global order. Decades of economic sanctions, diplomacy, and sweet words have failed to topple the neo-Stalinist hermit kingdom or force a rollback of its nuclear and missile programs.

The underlying assumption behind economic sanctions is that North Korea’s leaders care about their country’s economy and the deprivations endured by their civilian population. They understand that in chess, the pawns are always sacrificed first.

Tightening the economic noose around North Korea bought time without using American muscle, but at the cost of delaying hard decisions and creating an unacceptable risk to America’s national security. In turn, the breathing space gave North Korea time to develop its weapons program. It’s wise to remember soft power is irrelevant unless underwritten by hard power.

The North Korean mess is another example of U.S. administrations kicking the can down the road, then discovering at the 11th hour that they have run out of road. President Trump is dealing with a more dangerous North Korea than did any of his predecessors and has little room to navigate.

His options are limited and all involve risks, trade-offs and hard choices. They include continuing to increase the use of sanctions and hoping the cumulative effect will work, engaging in high-pressure diplomacy with China to rein in its client state, or cutting a deal directly with North Korea. All should be weighed against the risk of a nuclear-armed North Korea.

Then there is the high-risk military option: a limited surprise attack on this rogue state. Or even allowing South Korea and Japan to develop weapons of mass destruction.

Sadly, the most likely outcome may be learning to live with a clear and present danger to the United States and its allies in northeast Asia

Originally Published: March 18, 2017

Technology transforming the automobile industry

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It’s obvious that the automobile industry is on the cusp of a technological revolution. Manufacturers and technology companies are working together to reinvent the automobile, much like the way Apple reinvented itself from a computer company to a cultural force or even how Madonna has remained a media icon by constantly adapting to new trends.

Although new technologies and consumer markets are still in their gestation stage, Ford, for example, is making major investments that will transform it from a company that just makes cars to one that touches all aspects of mobility.

Technology companies see a driverless world of autonomous or robotic vehicles as a software and artificial intelligence play. For them, the car is a platform, a commodity, like a cell-phone body. You can get the car body anywhere; the real smarts are in the software. The car may be the ultimate mobile device.

As the value of each vehicle becomes more dependent upon the software it contains, tech companies may be in a better position to capture this value than the automakers. New technologies are redefining boundaries between software firms and the lumbering dinosaurs of the automobile industry.

Opinions differ as to when widespread adoption of fully autonomous and commercially viable vehicles will occur. They could dot our roadways in five-to-ten years but saturation will take several decades.

Market penetration may not be uniform; it could start in trucks, for example, before private cars, or even as part of an on-demand commercial ride sharing fleet. In any case, it is not too early to start planning for the roadway management challenges that will be created by autonomous trucks and cars sharing the roads with driver-operated vehicles.

Autonomous vehicle proponents claim they hold the potential to dramatically reduce traffic casualties by eliminating human error. Activities like speeding and driving while texting are deadly. The National Highway Traffic Safety Administration says human error is a factor in 94 percent of fatal crashes. According to the National Safety Council, as many as 40,000 people died in motor vehicle crashes last year, a 6 percent increase over 2015. An estimated 4.6 million people were seriously injured.

When we begin seeing fully driverless cars hinges as much on the regulatory environment as advances in self-driving technology. Autonomous vehicles operating without a steering wheel, brake pedals, and human intervention pose questions about whether regulations can catch up to technological advances.

Market participants argue that realizing the safety benefits of autonomous vehicles will require a single national standard, not 50 sets of rules. Automakers complain that states are moving ahead with their own regulations, creating the potential for a confusing “patchwork” of laws under which autonomous vehicles operate. As of December, California, Florida, Michigan, Nevada, Utah, and the District of Columbia had enacted laws authorizing autonomous vehicle testing under certain conditions. Washington, Ohio, Pennsylvania, and Texas have active testing programs but no legislation.

On the same day Uber started to test its self-driving Volvos near its Bay Area headquarters, the state’s Department of Motor Vehicles ordered the firm to stop because its cars did not have the proper registration for such testing. Uber loaded the cars onto a self-driving truck and sent them to Arizona.

Michigan now allows companies to test self-driving vehicles without steering wheels, pedals or a human that can take over in an emergency. In contrast, California has a rule that self-driving vehicles can only hit the road with a safety driver.

It is uncertain how soon fully autonomous vehicles will enter the mainstream. When they do, avoiding the pushback that, for example, on demand mobility firms such as Uber and Lyft have faced in a variety of cities will require clarifying the proper role of all levels of government within the regulatory landscape. If autonomous vehicles are safer than their driver-operated counterparts, it is imperative that regulators not risk preventable injuries and deaths by unnecessarily delaying their deployment.

Originally Published: March 4, 2017

Widening gap between rich and poor a challenge for capitalism

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Capitalism is a well-known paradigm that attempts to answer the question of what constitutes an economically just society through the production and distribution of economic goods. It is a classic example of a paradigm that was developed by studying what was going on in the real world and reducing it to abstract theory.

As practiced in most societies, capitalism is an inevitable outgrowth of the human instinct to trade goods with each other. This instinct seems to be as strongly hard-wired into the DNA of our species as the instinct to reproduce and has defied all attempts to suppress it. Various forms of capitalism have, over time and across countries, improved the lives of billions of people, especially since the collapse of the Soviet Union and China’s adoption of a form of state capitalism in 1976. But how effective is it when it comes to the just distribution of goods among members of society?

A late-night television wag once quipped that paradigms were the last refuge of the intellectually challenged. Preconceptions can be a useful starting point for organizing great masses of empirical evidence, but it is prudent not to edit the evidence to fit our normative theories about what the real world ought to look like.

This was the mistake made by the Medieval European philosophers who based their cosmology of an earth-centered universe on accepted Christian myths carefully propped up with Aristotelian logic. The result was the need for constant tinkering with their theoretical models to accommodate a growing body of astronomical evidence about how the known planets actually moved.

Not to mention centuries of embarrassment for the Roman Catholic Church after it forced Galileo to recant the evidence of his own eyes that supported the “heretical” sun-centered cosmology of Copernicus.

As capitalism matured and came to dominate western societies during the last two centuries, it attracted the attention of various writers who developed paradigms to explain it. Beginning with Adam Smith and proceeding through John Stewart Mill to today’s stained glass theorists of the Austrian and Chicago schools, these writers with the regularity of Swiss trains sought to purify their paradigms and give them a hard core of academic logic.

In Smith’s world, competition among those who pursue their own interest promotes the general welfare of society more effectively than the efforts of any individual who might deliberately set out to promote it. As he simply put it: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Critics argue that, as currently structured, capitalism disproportionately benefits the wealthy and powerful. They say it exacerbates both economic inequality and other pressing societal problems, such as environmental issues.

Stated differently, one downside of capitalism as currently practiced is that it results in the rich getting richer and the poor getting poorer. This has led to unprecedented stagnation in American social mobility and been a major factor in the anger many Americans are expressing.

This condition is a real challenge in a country where, just this past November, we learned just how deeply economic and demographic factors has divided the electorate. To paraphrase Florida Sen. Marco Rubio, it is a country in which half the people absolutely hate the other half. The relationship between the haves and have-nots is dramatized by the media and by politicians firing up their base.

In any case, the practical test of a vision’s standing in the real world is whether it can consistently pass the French Revolution Test. That is, whether it can win acceptance by a sufficiently large majority of a society’s members to withstand the inevitable assaults from those who find it objectionable and seek to replace it with their own visions – by force, if other means fail.

Originally Published: February 18, 2017

Put a money-back guarantee on infrastructure work

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Americans are told that the most serious problem facing the nation’s transportation infrastructure is a lack of money. Perhaps people would be willing to pay more if they receive a money-back guarantee in return.

Today’s roadway funding depends primarily on motor-vehicle fuel taxes and state and local appropriations. But federal fuel tax revenues no longer keep pace with needs because of the self-serving assumption that it’s become politically impossible to “raise taxes.” Everyone wants better roads and bridges, but almost no one wants to pay for them.

All this makes finding adequate funding to rehabilitate the nation’s highway system, add new lanes and highway corridors a major challenge. Between 2005 and 2015, there were two five-year federal surface transportation reauthorization bills and 34 short-term funding extensions. To maintain the committed level of funding, the federal government was forced to raid the General Fund for an average of $10 billion per year to supplement the dwindling Highway Trust Fund

Even so, Congress struggled to find the revenues to support a long-term bill without increasing the fuel tax, which has remained at 18.4 cents per gallon for cars since 1991. Congressmen have moved in unison to avoid dealing with an increase in the federal fuel tax.

In real terms, fuel tax revenue is actually projected to decline as the nation’s motor vehicle fleet becomes more fuel efficient. It is safe to say that the fuel tax is like a marriage that dies long before divorce papers are filed.

At the same time, state and local government budgets are increasingly burdened with funding demands for education, fighting crime, better security against terrorist threats and a host of other deserving services. Roadway funding inevitability gets shortchanged which is relatively easy to do, since it takes a while for the impact to become apparent.

A new U.S. Department of Transportation “conditions and performance” report estimates that there is a $926 billion backlog of needed highway and transit infrastructure projects, and that many more billions more will be needed to keep up with demand over the next 20 years. The congressionally mandated biennial report identifies an $836 billion highway and bridge backlog.

The public can quibble about the size of these numbers, just as maritime historians do about the size of the iceberg that sank the Titanic. But their magnitude is so enormous that it scarcely matters whether the estimates are off by 5 or 10 percent. What matters is that the needs are enormous, and the longer you wait to address them, the worse they become.

Senate Democrats just unveiled a 10-year, $1 trillion infrastructure plan that includes $210 billion to repair “crumbling” roads and bridges, but they are vague about how to finance it other than through direct federal spending. During the campaign, President Trump also called for a $1 trillion infrastructure investment that proposed leveraging new revenues and using public-private partnerships to incentivize investment and spare taxpayers from bearing the burden.

At one end of the funding spectrum are people who think the public should pay for it via tolls. At the other end are those who argue that the benefits transportation infrastructure provides aren’t confined to users, so society as a whole should pay out of general tax revenues. Between these extremes lies a range of payment mechanisms.

But for a plan to be accepted by American motorists, it must be perceived to deliver superior travel service with appropriate regard for equity and environmental considerations. One thought is to pair any increase in taxes or user fees with a money-back performance guarantee so customers can rest assure that they will get guaranteed travel-time savings in return for paying for access to surface transportation such as highways. This gives the travelling public confidence that they are getting their money’s worth.

The rapid introduction of intelligent transportation technologies facilitates an efficient way to implement a money-back guarantee. The result would be a dramatically transformed approach to transportation infrastructure.

originally published: February 4, 2017

Automakers under pressure to reinvent the industry

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Automakers face unprecedented technological changes and market trends that will ultimately force them along with the Cleveland Browns and the Democratic Party to reinvent their business models. Sources of disruption include electric vehicles; connectivity; autonomous vehicles, including trucks; changing patterns of car ownership and use; and on-demand ride services.

Car companies face an array of new competitors. Besides their traditional rivals, new market entrants including Google, Apple, Tesla, Uber, and Lyft, are fielding new technology vehicles.

Technology is but one of the threats that connected, automated and autonomous driving are introducing to the industry. Connected vehicles are able to “talk” with one-another through radio frequency devices or cellular technology.

General Motors plans to have connected vehicles on the street by the end of the year. The 2017 Cadillac CTS sports sedan will offer technology that allows sharing information about driving conditions like weather, speed, sudden braking and more. Other automakers are expected to follow suit.

Automated and autonomous driving is more complicated. Automated cars use on-board sensors and systems to aid the driver, while autonomous vehicles actually do the driving. It is unclear whether fully autonomous vehicles are 10 or 15 years away.

Autonomous vehicles may get the attention, but the notion of cars talking to one another is the real deal. Vehicle connectivity has garnered great interest from the U.S. Department of Transportation. The Holy Grail of connectivity is vehicles talking with one another without human intervention. The feds have bet that such communication will prevent millions of crashes that result in thousands of fatalities. Last December, USDOT proposed rules requiring that all new cars and small trucks contain technology allowing them to broadcast data to other vehicles within a 984-foot radius about their speed, location and direction.

The proposed rules will standardize how one car talks to another and warns drivers, and eventually autonomous vehicles, about potential dangers. The car- maker determines what to do with the data, be it automated braking or a visual dashboard warning. At an intersection, vehicles would decide if you have enough time to make that right on red and who gets to go next at a four-way stop.

According to the National Highway Transportation Safety Administration, the vehicle-to-vehicle (V2V) equipment and supporting communications functions would cost about $350 per vehicle in 2020. If the rule is adopted, the feds say all new cars would have the technology in four years.

The rule would not require existing vehicles to be retrofitted. As technology evolves, automobiles will likely become more connected to people’s home and mobile devices, and integrated into the internet of things.

Deployment of V2V technologies faces a number of hurdles, such as data security and privacy concerns. If V2V communications get hacked, the possibilities for traffic accidents increases.

Then there is the question of the underlying technology that would enable V2V communication. The feds mandate the use of dedicated short-range communications (DSRC). Many believe DSRC is obsolete and that newer technologies, such as 5G cellular wireless to power smartphone communication, will be released before DSRC market penetration is achieved.

Moreover, critics argue that cellular has already built infrastructure in the form of cell towers, obviating the need to for state and local governments to roll out dedicated short-range receivers on roadside infrastructure.

The other half of the communication network is vehicle-to-infrastructure (V2I). USDOT plans to issue guidance on V2I communications, which in theory should help transportation planners integrate the technologies to allow vehicles to “talk” to roadway infrastructure such as traffic lights, stop signs, and work zones to improve mobility, reduce congestion, and improve safety.

No matter how the technology battle sorts out, the car of the future will be connected. Our transportation system is on the cusp of a transformation, with technology bridging the gap between vehicles and intelligent roadside infrastructure, creating a network that works like the internet and can prevent collisions, keep traffic moving and reduce environmental impacts.

Originally posted: January 21, 2017