There’s been a lot of recent talk about increasing federal spending on infrastructure. In my view this misses the point. There are two effective ways to get more infrastructure; cost control and increased saving. Here’s Matt Yglesias:

Mass transit construction costs in the United States appear to be far higher than what European countries pay for comparable projects.

The Second Avenue Subway in New York City, for example, is being built at a cost of nearly $1.7 billion per kilometer while new subway lines are being built in Paris, Copenhagen, and Berlin for about $250 million per kilometer.

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Unlike many pundits on the left, Yglesias draws the correct conclusion:

One popular school of thought holds that transit advocates essentially ought to circle the wagons and deny that there’s a problem here. The Second Avenue Subway may be ungodly expensive, but it is a really valuable and useful project. The United States wastes plenty of money on highways, too, and there always seems to be enough money for another cruise missile or stealth bomber, so why should we nickel-and-dime transit projects?

I’ve come to think that this is fundamentally misguided. The reality is that if you want to build a lot of transit projects, it’s really helpful to be able to build them at an affordable cost. Not only does that stretch a given pile of dollars further, but precisely because it lets you stretch further it means that your project touches more people’s lives and can garner a broader coalition of political support. Paris’s ability to build subways cheaply doesn’t mean Paris has become stingy on its transit projects — the ability to get a lot of bang for the buck is one reason they can do the enormous $25 billion Grand Paris Express expansion project.

Sir Roger Douglas and Robert MacCulloch have a very nice paper with a great title:

Welfare: Savings not Taxation

It describes how economies can be made more efficient by switching from mandatory taxation to mandatory savings accounts:

To our knowledge, showing how both a tax and welfare reform can be jointly designed to enable this transition to occur has not been done before. Our policy reform creates institutions that have features in common with Singaporean ones, especially for health-care. However there are also key differences. We present a new unified approach to the funding of health, retirement and risk-cover (for events like unemployment) through the establishment of a set of compulsory savings accounts. A case study of New Zealand is used as an illustration. The fiscal impact of our proposed reform on the government’s current and future budgets is reported, as well as its effect on low, middle and high income individuals.

Of course higher savings rates will also lead to more investment, including infrastructure. A recent post over at Free Exchange expresses worry that there is too much saving:

There is, now, too much capital. Ben Bernanke, then chair of the Federal Reserve, first described a global savings glut in 2005. It is a well-studied and well-known phenomenon; here is Lawrence Summers of Harvard summing it up last year. And, as predicted in both Samuelson and Mankiw, there are not enough investments to accommodate the world’s savings, and interest rates have dropped. Yields for both high-quality corporate bonds and long-term American federal debt are now lower than at any time since 1973 (see chart).

Members of Congress, however, seem to remember only that saving is good. As Washington considers rewriting the tax code, neither party is pushing to raise taxes on dividends, capital gains or estates, all of which could encourage more consumption now and drive down the total level of saving. Republicans have even signalled that they are considering a value-added tax, which discourages consumption.

This confuses several issues. The term ‘savings glut’ has no normative implications. It is simply a claim that long-term interest rates fell because of higher savings rates in Asia. Of course it’s possible to have too much of anything, but as of now public policy is strongly biased against saving—especially the tax code, but also programs like college assistance and Medicaid. Congress should be trying to re-write the tax code in such a way as to promote more saving and less current consumption.

Places like Singapore have nice infrastructure because they have pro-saving public policies and effective cost controls on construction projects. America has neither. As long as this is the state of affairs, we will not have top-notch infrastructure, no matter how much money the federal government throws at the problem.

PS. When I say “pro-saving” tax policies, I actually mean eliminating anti-saving policies, and switching to a neutral tax regime.