The infrastructure illusion
By Scott Sumner
In recent years, progressives have increasing advocated more spending on infrastructure as part of a broader strategy of fiscal stimulus. I’ve argued that their proposals are not well thought out, for a variety of reasons:
1. Fiscal stimulus would not be expansionary; it would simply lead the Fed to tighten money more aggressively, leaving the expected inflation rate in 2018 unchanged.
2. Keynesians often engage in “reasoning from a price change”, wrongly claiming that low interest rates are a justification for higher investment spending.
3. Keynesians overlook the fact that the US is not very good at building infrastructure and that our ability to do so is declining rapidly.
Larry Summers has been on the other side of this issue, a big proponent of more spending on infrastructure. Now he seems to be becoming more aware of the drawbacks:
I have an op-ed in the Boston Globe today on infrastructure, addressing the issue of quality rather than quantity of investment. Rachel Lipson, a graduate student at Harvard, and I describe the fiasco that has emerged from what should have been a routine maintenance project on the Anderson Memorial Bridge over the Charles River next to my office in Cambridge. Though the bridge took only 11 months to build in 1912, it will take close to five years to repair today at a huge cost in dollars and mass delays.
Investigating the reasons behind the bridge blunders have helped to illuminate an aspect of American sclerosis — a gaggle of regulators and veto players, each with the power to block or to delay, and each with their own parochial concerns. All the actors — the historical commission, the contractor, the environmental agencies, the advocacy groups, the state transportation department — are reasonable in their own terms, but the final result is wildly unreasonable.
At one level this explains why, despite the overwhelming case for infrastructure investment, there is so much resistance from those who think it will be carried out ineptly. The right response is to advocate for reforms in procurement policies, regulatory policies and government procedures to make the investment process more efficient and effective. This is all clear enough.
Because we are increasingly inept at building infrastructure, the investment schedule shifts to the left, and this reduces market interest rates. Low rates would only be an argument for more investment (public or private) if the low rates were caused by more saving.
In the past I’ve argued that we need to remove regulatory barriers to building infrastructure, and also allow the private sector to become much more involved (as in Europe.)
Alex Tabarrok has a new post advocating the abolition of historical preservation laws, and I’d argue the same for environmental impact statements. Instead, I’d suggest a 6-week period for any project that formerly required an environmental impact statement, a window of time where the government could purchase the property to protect whatever species was endangered, under the eminent domain laws. Requiring the government to actually compensate property holders explicitly, rather than simply taking away their property rights through regulation, would force policymakers to think much more clearly about the costs and benefits of environmental policies.
I’d also completely deregulate labor markets, including laws that favor unions. Thus the new East Side subway being built in New York should be constructed by Chinese firms using migrant Chinese labor that sleep in those crummy blue and white metal sheds they use in China for worker dorms, and paid Chinese wages. New York would then be able to build up a world-class transport system, on the cheap.
Of course none of this will happen, which is why I’m opposed to massive new fiscal stimulus programs aimed at infrastructure. The most likely outcome in the current environment would be white elephants like the proposed high speed rail in California, which will not be very effective, and will cost so much that other needed infrastructure in California will not be built.
I’m glad to see Summers coming around to the view that the public sector many not be the right people to build infrastructure:
At another level, though, our story may illustrate phenomena that go way beyond infrastructure. I’m a progressive, but it seems plausible to wonder if government can build a nation abroad, fight social decay, run schools, mandate the design of cars, run health insurance exchanges, or set proper sexual harassment policies on college campuses, if it can’t even fix a 232-foot bridge competently. Waiting in traffic over the Anderson Bridge, I’ve empathized with the two-thirds of Americans who distrust government.
Perhaps Summers could look at how they do things in Hong Kong, where a private company runs one of the most successful subway systems in the world:
The Mass Transit Railway (MTR) is the rapid transit railway system in Hong Kong. Opened in 1979, the system now includes 218.2 km (135.6 mi) of rail with 155 stations, including 87 railway stations and 68 light rail stops. The MTR system is operated by MTR Corporation Limited (MTRCL). It is one of the most profitable systems in the world, with a high farebox recovery ratio of 186%.
Under the government’s rail-led transport policy, the MTR system is a common mode of public transport in Hong Kong, with over five million trips made in an average weekday. It consistently achieves a 99.9% on-time rate on its train journeys. As of 2014, the MTR has a 48.1% market share of the franchised public transport market, making it the most popular transport option in Hong Kong.The integration of the Octopus smart card fare-payment technology into the MTR system in September 1997 has further enhanced the ease of commuting on the MTR.
. . .
As a successful railway operation, the MTR has served as a model for other newly built systems in the world, particularly in mainland China.
Hmm, I wonder why the Chinese don’t look to New York City for inspiration?
PS. Unlike New Yorkers, Singaporeans are smart. They use those cheap blue and white dorms for migrant workers building Singapore’s wonderful infrastructure:
This sort of “exploitation” also improves global equality, as Summers understood back in the days when he suggested dumping polluting industries on Africa. Ahhh, the good old days of 1990s neoliberalism. When will it return?