What Is Infrastructure?
By Pierre Lemieux
The $1-trillion infrastructure deal between Congressional Democrats and Republicans may at least help us answer the question: What is infrastructure? Economic definitions, when you can find them, are not enlightening. They often provide a mere list of what are supposed to be instances infrastructure without providing a key to their common features.
Criticizing the infrastructure deal, a Wall Street Journal editorial provides a list of its own of “traditional public works” (“A Not So Grand Infrastructure Deal,” July 29, 2021):
The U.S. could use more investment in roads, bridges, cyber-security and ports, as well as for drought, wildfire and flood mitigation.
The same editorial shows how different and wider is the list concocted by Democratic and Republican horse traders. Just a few quotes:
Rail has long been an obsession of President Biden, though he’s lately become fixated with electric cars. He scored $7.5 billion for a “national network” of electric-vehicle charging stations. Even FDR didn’t get a New Deal program to build gas stations.
Energy Secretary Jennifer Granholm is also a big winner. She’ll run a green venture capital fund rivaling Kleiner Perkins with tens of billions to throw around at carbon capture, hydrogen, electric flying taxis, buses and high-speed mass-transit hyperloop. She will also be in charge of creating a “smart” grid with no less than $73 billion for transmission lines and batteries to back up heavily subsidized wind and solar power.
One of the worst parts of the deal is the $65 billion government intrusion into broadband markets. States—i.e., politicians—will get $40 billion to build out broadband in “underserved” areas. The nation’s broadband networks have been built by private companies, which invest tens of billion dollars each year, including $67 billion in a government spectrum auction that Senators plan to use to pay for their deal. …
According to a White House summary, internet providers will have to abide by rules in Mr. Biden’s competition executive order. Could the return of Barack Obama’s net neutrality rules be coming by this back door?
Whatever list one likes, the first question is whether these infrastructures need to be financed by the government. In their article for the entry “Public Infrastructure” in the New Palgrave Dictionary of Economics, Teresa Garcia-Milà and Therese J. McGuire define it as
the stock of publicly provided physical capital comprising highways, sewage and sanitation systems, water systems, school buildings, hospitals and so forth.
Other authors limit infrastructure to public capital that produces public goods or services in the technical sense, that is, goods or services that are both non-rival in consumption and excludable, which of course drastically reduces the extension of the concept. Others would insist that network effects are a necessary feature of infrastructure: for example, the longer the internet penetration, the more useful it is. But Garcia-Milà and McGuire are right to give a more general definition because it corresponds better to what laymen, politicians, and bureaucrats think: infrastructure is simply capital equipment financed by taxpayers and operated or controlled by governments.
Reviewing the economic literature, the two authors conclude that public infrastructure is not very economically productive, except for certain region of industries that benefit for the displacement effect of government intervention. They write:
Based on the aggregate analysis, we can conclude very little. The most credible aggregate production-function estimates of the impact of public infrastructure on private output hover around zero, as do estimates of the net social benefit of public infrastructure investment.
A different approach would be to define infrastructure as any public spending that favors free and mutually beneficial exchange among individuals, like say the commercial fairs in the Middle Ages or, very generally, the peace and order and protection of property rights ideally provided by government. This could be made consistent with James Buchanan’s illuminating phrase (in James M. Buchanan and Richard A. Musgrave, Public Finance and Public Choice: Two Contrasting Visions of the State [Cambridge MA and London UK: MIT Press, 1999], p. 245):
If I observe someone with apples and somebody else with oranges, I don’t want to try to say a particular allocation of oranges and apples in a final position is better than in the other allocation. If I observe them trading without defrauding each other, whatever emerges, emerges, and that is the way I define what is efficient.
But note two caveats. First, promoting exchange by eliminating some transaction costs might be promoting inefficient exchange, trades that provide benefits lower than their costs. Second, an exchange-based definition of infrastructure is not consistent with how governments themselves use the term. A large part of their activities consists in prohibiting acts of exchange that they do not approve of. They regulate or prohibit mutually-determined hiring conditions (with minimum wage laws and trade union privileges); terms of exchange with foreigners; trade in, and consumption of, many goods and services (alcohol, tobacco, foie gras, plastic bags in grocery stores, certain drugs, guns, sex, etc.); a host of mutually agreeable financial transactions; and so on and so forth. Infrastructure is not a simple economic term but rather a concept in the economic analysis of politics or public-choice analysis.
I thus propose the following definition: Infrastructure is whatever the government wants to pay for because it benefits from the expenditure. “Government” is defined as politicians, bureaucrats, and occasionally a majority of voters who approve a bundled package of complex measures that have unknown future consequences and that the ordinary voter is not motivated to study and understand anyway.
This definition has the benefit of explaining what governments do in practice, instead of speculating on what their infrastructure spending would be in the Garden of Eden where everything is good and free.