Infrastructure Or Infra-Stricture? The Democrats’ $3.5 Trillion Reconciliation Bill

16 Thursday Sep 2021

Posted by pnoetx in Big Government, Central Planning, infrastructure, Uncategorized

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Antonia Ocasio-Cortez, Bernie Sanders, Biden Administration, Budget Reconcilation Bill, Capital Gains, Civilian Climate Corps, Clean Energy, corporate income tax, dependency, Federal Reserve, Fossil fuels, Green Cards, infrastructure, Joe Manchin, Legal Permanent Residency, Paid Family Leave, Physical Investment, Productivity Growth, Social Infrastructure, Tax the Rich, Tragedy of the Commons, Universal Pre-School, Welfare State

The Socialist Party faithful once known as Democrats are pushing a $3.5 trillion piece of legislation they call an “infrastructure” bill. They hope to pass it via budget reconciliation rules with a simple majority in the Senate. The Dems came around to admitting that the bill is not about infrastructure in the sense in which we usually understand the term: physical installations like roads, bridges, sewer systems, power lines, canals, port facilities, and the like. These kinds of investments generally have a salutary impact on the nation’s productivity. Some “traditional” infrastructure, albeit with another hefty wallop of green subsidies, is covered in the $1.2 trillion “other” infrastructure bill already passed by the Senate but not the House. The reconciliation bill, however, addresses “social infrastructure”, which is to say it would authorize a massive expansion in the welfare state.

What Is Infrastructure?

Traditionally, public and private infrastructure are underlying assets that facilitate production or consumption in one way or another, consistent with the prefix “infra”, meaning below or within. For example, a new factory requires physical access by roads and/or rail, as well as sewer service, water, gas and/or electric supply. All of the underlying physical components that enable that factory to operate may be thought of as private infrastructure, which has largely private benefits. Therefore, it is often privately funded, though certainly not always.

Projects having many beneficiaries, such as highways, municipal sewers, water, gas and electrical trunk lines, canals, and ports may be classified as public infrastructure, though they can be provided and funded privately. Pure public infrastructure provides services that are non-rivalrous and non-excludable, but examples are sparse. Nevertheless, the greater the public nature of benefits, the greater the rationale for government involvement in their provision. In practice, a great deal of “public” infrastructure is funded by user fees. In fact, a failure to charge user fees for private benefits often leads to a tragedy of the commons, such as the overuse of free roads, imposing a heavier burden on taxpayers.

The use of the term “infrastructure” to describe forms of public support is not new, but the scope of government interventions to which the term is applied has mushroomed during the Biden Administration. Just about any spending program you can think of is likely to be labeled “infrastructure” by so-called progressives. The locution is borrowed somewhat questionably, seemingly motivated by the underlying structure of political incentives. More bluntly, it sounds good as a sales tactic!

$3.5 Trillion and Chains

Among other questionable items, the so-called budget reconciliation “infrastructure” bill allocates funds toward meeting:

“… the President’s climate change goals of 80% clean electricity and 50% economy-wide carbon emissions by 2030, while advancing environmental justice and American manufacturing. The framework would fund:
• Clean Energy Standard
• Clean Energy and Vehicle Tax Incentives
• Civilian Climate Corps
• Climate Smart Agriculture, Wildfire Prevention and Forestry
• Federal procurement of clean technologies
• Weatherization and Electrification of Buildings
• Clean Energy Accelerator”

The resolution would also institute “methane reduction and polluter import fees”. Thus, we must be prepared for a complete reconfiguration of our energy sector toward a portfolio of immature and uneconomic technologies. This amounts to an economic straightjacket.

Next we have a series of generous programs and expansions that would encourage dependence on government:

“• Universal Pre-K for 3 and 4-year old children
• High quality and affordable Child Care
• [free] Community College, HBCUs and MSIs, and Pell Grants
• Paid Family and Medical Leave
• Nutrition Assistance
• Affordable Housing”

If anything, pre-school seems to have cognitive drawbacks for children. Several of these items, most obviously the family leave mandate, would entail significant regulatory and cost burdens on private businesses.

There are more generous provisions on the health care front, which are good for further increasing the federal government’s role in directing, regulating, and funding medical care:

“• new Dental, Vision, and Hearing benefit to Medicare
• Home and Community-Based Services expansion
• Extend the Affordable Care Act Expansion from the ARP
• Close the Medicaid “Coverage Gap” in the States that refused to expand
• Reduced patient spending on prescription drugs”

Finally, we have a series of categories intended to “help workers and communities across the country recover from the COVID-19 pandemic and reverse trends of economic inequality.”

“• Housing Investments
• Innovation and R & D Upgrades
• American Manufacturing and Supply Chains Funding
• LPRs for Immigrants and Border Mangt. • Pro-Worker Incentives and Penalties • Investment in Workers and Communities • Small Business Support

I might suggest that a recovery from the pandemic would be better served by getting the federal government out of everyone’s business. The list includes greater largess and more intrusions by the federal government. The fourth item above, grants of legal permanent residency (LPR) or green cards, would legalize up to 8 million immigrants, allowing them to qualify for a range of federal benefits. It would obviously legitimize otherwise illegal border crossings and prevent any possibility of eventual deportation.

Screwing the Pooch

How many of those measures really sound like infrastructure? This bill goes on for more than 10,000 pages, so the chance that lawmakers will have an opportunity to rationally assess all of its provisions is about nil! And the reconciliation bill doesn’t stop at $3.5T. There are a few budget gimmicks being leveraged that could add as much as $2T of non-infrastructure spending to the package. One cute trick is to add certain provisions affecting revenue or spending years from now in order to cut the bill’s stated price tag.

A number of the bill’s generous giveaways will have negative effects on productive incentives. It’s also clear that some items in the bill will supplement the far Left’s educational agenda, which is seeped in critical theory. And the bill will increase the dominance of the federal government over not only the private sector, but state and local sovereignty as well. This is another stage in the metastasis of the federal bureaucracy and the dependency fostered by the welfare state.

Taxing the Golden Goose

But here’s the really big rub: the whole mess has to be paid for. The flip side of our growing dependency on government is the huge obligation to fund it. Check this out:

“American ‘consumer units,’ as BLS calls them, spent a net total of $17,211.12 on taxes last year while spending only $16,839.89 on food, clothing, healthcare and entertainment combined,”

Democrats continue to dicker over the tax provisions of the bill, but the most recent iteration of their plan is to cover about $2.9 trillion of the cost via tax hikes. Naturally, the major emphasis is on penalizing corporations and “the rich”. The latest plan includes:

increasing the corporate income tax from 21% to 26.8%;
increasing the top tax rate on capital gains from 20% to 25%;
an increase in the tax rate for incomes greater than $400,000 ($450,000 if married filing jointly)
adding a 3% tax surcharge for those with adjusted gross incomes in excess of $5 million;
Higher taxes on tobacco and nicotine products;
halving the estate and gift tax exemption;
limiting deductions for executive compensation;
changes in rules for carried interest and crypto assets.

There are a few offsets, including the promise of tax reductions for individuals earning less than $200,000 and businesses earning less than $400,000. We’ll see about that. Those cuts would expire by 2027, which reduces their “cost” to the government, but it will be controversial when the time comes.

The Dem sell job includes the notion that corporate income belongs to the “rich”, but as I’ve noted before, the burden of the corporate income tax falls largely on corporate workers and consumers. Lower wages and higher prices are almost sure to follow. This would deepen the blade of the Democrats’ political hari-kari, but they pin their hopes on the power of alms. Once bestowed, however, those will be difficult if not impossible to revoke, and the Dems know this all too well.

The assault on the “rich” in the reconciliation bill is both ill-advised and unlikely to yield the levels of revenue projected by Democrats. Like it or not, the wealthy provide the capital for most productive investment. Taxing their returns and their wealth more heavily can only reduce incentive to do so. Those investors will seek out more tax-advantaged uses for their funds. That includes investments in non-productive but federally-subsidized alternatives. Capital gains can often be deferred, of course. These penalties also ensure that more resources will be consumed in compliance and tax-avoidance efforts. The solutions offered by armies of accountants and tax attorneys will tend to direct funds to uses that are suboptimal in terms of growth in economic capacity.

What isn’t funded by new taxes will be borrowed by the federal government or simply printed by the Federal Reserve. Thus, the federal government will not only compete with the private sector for additional resources, but the monetary authority will provide fuel for more inflation.

Fracturing Support?

Fortunately, a few moderate Democrats in both the House and the Senate are balking at the exorbitance of the reconciliation bill. Senator Joe Manchin of West Virginia has said he would like to see a package of no more than $1.5 trillion. That still represents a huge expansion of government, but at least Manchin has offered a whiff of sanity. Equally welcome are threats from radical Democrats like Senator Bernie Sanders and Rep. Antonia Ocasio-Cortez that a failure to pass the full reconciliation package will mean a loss of their support for the original $1.2 trillion infrastructure bill, much of which is wasteful. We should be so lucky! But that’s a lot of pork for politicians to walk away from.

Infra-Shackles

The so-called infrastructure investments in the reconciliation bill represent a range of constraints on economic growth and consumer well being. Increasing the government’s dominance is never a good prescription for productivity, whether due to regulatory and compliance costs, bureaucratization of decision-making, minimizing the role of price signals, pure waste through bad incentives and graft, and public vs. private competition for resources. The destructive tax incentives for funding the bill are an additional layer of constraints on growth. Let’s hope the moderate Democrats hold firm, or even better, that the tantrum-prone radical Democrats are forced to make good on their threats.

HyperBoondoggle

06 Wednesday Nov 2019

Posted by pnoetx in infrastructure

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Delmar Loop, Dubai, Elon Musk, G-Force, Hyperloop, I-70 Rights-of-Way, Innovation Origins, Last-Mile Problem, Loop Trolley, Magnetic Levitation, Missouri Hyperloop, Passenger Throughput, Richard Branson, Vacuum Tube, Virgin One, Virginia Postrel, Willis Eschenbach

The hyperloop: if you think the Delmar Loop Trolley in St. Louis, MO was a boondoggle, just wait till the state starts hemorrhaging cash for the proposed hyperloop test track, and later a possible route connecting St. Louis, Columbia, and Kansas City. The hyperloop would rely on magnetic levitation (maglev) technology that has been used for trains in some parts of the world, though always on relatively short routes. For a hyperloop, however, the maglev system keeps carrier “pods” suspended in a near-vacuum tube extending the length of the route, eliminating friction and air resistance. Proponents say the pods will move at top speeds of 700 miles an hour, traversing the state in about 30 minutes. And they say it will be a very green machine.

Richard Branson’s Virgin Hyperloop One wants to build the 15-mile test track, which is projected to cost $300 – $500 million. That range is centered just a bit higher than the cost of the Loop Trolley on a per-mile basis, and for a project with major technological uncertainties, that leaves me just a bit wary. The 250-mile cross-state route is now pegged at between $7.3 and $10.4 billion, according to the recent report issued by the state’s “Blue-Ribbon Panel on Hyperloop”. It’s likely to cost much more by the time they get around to building it, if they do at all, and if it actually works.

Hyperbole?

My skepticism about hyperloops is based in part on the hucksterism that often characterizes appeals for public funding of large projects, and hyperloop hucksterism has already taken place. For example, in 2013 Elon Musk estimated that a Hyperloop system would cost about $11.5 million per mile. By 2016, the mid-point estimate for a route in the San Francisco Bay Area was over $100 million per mile. A friendlier route in Dubai is expected to cost $52 million per mile. So to be conservative, we saw 5x to 10x higher costs in a matter of three years. But now, Virgin One says it can construct a route in Missouri for less than the per-mile cost of the Dubai line. Well, the state Department of Transportation already owns the rights of way over significant stretches of the route (but not everywhere because the tube must be straighter than the highway).

The hyperbolic claims for hyperloop technology include speed, projected passenger fares, and ridership. According to Innovation Origins, the so-called feasibility study for the Missouri hyperloop did not assess the technology or even address the fact that no working hyperloop has ever been built or proven at full scale over any distance longer than a kilometer or so. The consultants who prepared the “study” merely assumed it would work. No test pod within a vacuum tube has achieved more than a fraction of the promised speed. The tubes were not long enough to achieve top speeds, they say, but that raises another issue: creating near-vacuum conditions in a sizable tube over very long distances. At the Innovation Origin link above, they estimate that the Missouri tube would occupy over 1 million cubic meters of space, which is at least 30 times larger than the most expansive man-made vacuum space now in existence.

The Ride

As for the passenger experience, 30 minutes to traverse the state of Missouri would be impressive, but what about comfort? First, expanding the tube’s circumference and the girth of the pods would have a disproportionate impact on cost, so conditions might either be more cramped than the promotional photos would have you believe, or the number of passenger seats per pod might be reduced. Second, rapid acceleration from zero to 700 mph would subject humans to fairly large G-forces over several minutes. Deceleration at the end of the trip might be even worse. Negotiating even mild curves would also require reduced speed and subsequent re-acceleration to avoid uncomfortably high radial G-forces. All that means the ride could be a bit uncomfortable. That also means the average speed between Kansas City and St. Louis would be significantly less than 700 mph, especially with a stop in Columbia. G-forces might not be much of a concern for freight traffic, unless it’s fresh produce.

Safety

Then there’s the vulnerability of the system. Willis Eschenbach goes into detail on some technical problems that make the hyperloop risky, such as the pressure on the tubes themselves. It would be about 20,000 pounds per square meter of tube surface, all subject to significant thermal expansion and contraction over the course of a day, with large pods racing through joints and rounding curves. Any fault or crack at any point in the tube surface would cause catastrophic deceleration of pods along the entire length of the tube. The integrity of the pressurized pods themselves is also a safety issue. And what about an earthquake? Or a loss of control and fiery pile-up of vehicles traveling on I-70 near the tubes. Or any number of other foolish or intentional sources of damage to the tube along its route?

Throughput

One of Eschenbach’s most interesting critiques has to do with passenger throughput. Musk’s original plan called for 28-passenger pods departing every 30 seconds: 3,300 passengers per hour. That would represent a substantial addition to total cross-state transportation capacity. At full utilization (which of course is unlikely), that would exceed current estimated totals for daily travel between St. Louis, Columbia, and Kansas City. And while that capacity might reduce pressure to expand other modes, such as adding an extra lane to I-70, it would not offer an excuse to eliminate highway, rail, or airport infrastructure, nor would it eliminate the need to maintain it.

Musks’s assumption might be too optimistic, however: for safety, the time between pod departures might have to be longer. than 30 seconds. Eschenbach asserts 80 that seconds would be more reasonable, which would slash capacity by about 60% relative to Musk’s estimate. And that doesn’t account for potential bottlenecks at stops where pods must be depressurized and repressurized. And if substantially heavier freight pods are intermingled with passenger pods, as anticipated, the required intervals between departures might have to be longer.

Economics

Few large transportation projects are self-funding. Typically, user fees fail to cover operating costs, let alone capital costs. The projected fares quoted by proponents of the Missouri hyperloop are low: “cheaper than the price of gas to drive” cross-state. Perhaps we could say about $25, based on that statement. That won’t make much of a dent in the cost of construction.

The hyperloop’s economic viability for freight traffic is questionable as well, though freight traffic seems to be a fallback position among boosters when confronted with the uncertainties of passenger travel via hyperloop. The Blue-Ribbon report says the expected cost of freight via hyperloop might range from $1.40 per mile to $2.80 on the high end, putting the mid-point well above the $1.69 per mile average cost of shipping by truck. Will speed make the hyperloop a competitive alternative for shippers? In fact, freight via hyperloop might be much worse than rail or truck in solving the “last mile” problem. That’s because the speeds that are its presumed advantage also mean fewer terminals are possible. The system would have to rely as heavily on integration with other modes of transportation as any other form of long-distance carriage, and perhaps more.

The last-mile problem eats into hyperloop’s presumed environmental advantages, which are not as clear cut as its enthusiasts would have you believe. Maintaining a vacuum in a gargantuan tube will not be a low-energy proposition, nor will powering the magnetic levitation/propulsion system, with or without a vacuum. Pressurized, climate-controlled pods will require still more power, and that’s to say nothing of the energy required to fabricate one-inch thick steel cylinders, huge magnets, and the rest of the support infrastructure. Reassurances that hyperloop will be powered exclusively by “green” technologies should be taken with a grain of salt.

Virginia Postrel believes that regulation might be the biggest threat to the success of hyperloop, though she seems a bit optimistic about the actual economics of the technology. Safety will be a major concern for regulators. The technology will be subject to common carrier rules, and there will be other hurdles at the federal, state and local levels. And what of the health effects of prolonged exposure to those powerful magnetic forces? They may be insignificant, but the question will come up and possibly litigated.

Conclusion

A hyperloop cannot be built and operated without a significant and ongoing investment of public funds. The hoped-for public-private partnership needed to build the system would require major investors, and brave investors. Promoters say the project is not unlike efforts to build the railroads in the 19th century, which must have seemed like a daunting task at the time, and one involving huge financial risk. Fair enough, but the railroads stood to benefit in that age from a huge pent-up desire to exploit distant resources. The Missouri hyperloop is not quite comparable in that respect. It might be attractive mainly as a novelty, much like the Loop Trolley. Moreover, it didn’t take long for the railroads to become desperate rent-seekers, unable to profit from their heavily-subsidized investments without further public intervention on their behalf.

The hyperloop is a truly seductive idea. It’s the sort of thing that even small government types find irresistible, but there is little doubt that taxpayers will pay dearly. It’s not clear to me that the project will create meaningful social benefits or address compelling social risks. Therefore, let’s be cautious about making huge public commitments until this technology is farther along in development and the benefits can be estimated with greater certainty.

The Fast Trains That Can’t

17 Sunday Feb 2019

Posted by pnoetx in Air Travel, infrastructure

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capital costs, Cost Per Passenger Mile, Elon Musk, eminent domain, Environmental Costs, Freight Traffic, High speed rail, Hyperloop, infrastructure, Megan McArdle, Rolling Resistance, Warren Meyer

High-speed rail will remain a pipe-dream in the U.S. except for the development of a few limited routes. However, statists continue to push for large-scale adoption. That would represent a triumph of big government, if realized, and it is very appealing to the public imagination. But high-speed rail (HSR) is something of a fraud. Projected fares do not include the massive capital costs required to build it, which must be funded by taxpayers. Like most big public projects, HSR presents ample opportunities for graft by privileged insiders. And apparently it’s easy to rationalize HSR by repeating the questionable mantra that it is environmentally superior to autos or even air travel.

California recently confronted the harsh reality of HSR costs by scaling back its ambitious plans to a single line traversing a portion of the central valley. Now, the federal government has acknowledged that the state has violated the terms of past federal grants, essentially for non-performance. Those grants totaled $2.5 billion, and another grant of almost $1 billion might be withheld. Better not to throw good money after bad.

Megan McArdle wisely debunks the viability of HSR in the U.S. based on four potent factors: distance, wealth, legal obstacles, and cost. Unlike Europe, Japan and even the eastern Chinese seaboard, the distances involved in the U.S. make widespread development of HSR infrastructure quite challenging. Even on shorter routes, the U.S. has too much valuable property in and between population centers that would have to be repurposed for placement of relatively straight-line routes to facilitate high speeds. An authoritarian government can commandeer property, but wresting property from private owners in the U.S. is not straightforward, even when obtrusive bureaucrats attempt to invoke eminent domain. McArdle says:

“… the U.S. legal system offers citizens an unparalleled number of veto points at which they can attempt to block government projects. Any infrastructure project bigger than painting a schoolhouse thus has to either fight out the reviews and court cases for years, or buy off the opponents, or more likely, both.”

Another downside for HSR: the cost of installing and operating U.S. infrastructure is inflated by a number of factors, including high U.S. wage levels, unions, overlapping regulatory agencies, and the distances and other cost factors discussed earlier. Even worse, the extensive planning and lengthy time lines of such a project virtually assure cost overruns, as California has learned the hard way. So high-speed rail has a lot going against it.

Warren Meyer raises another issue: rail in the U.S. is dominated by freight, and it is very difficult for freight and passenger traffic to share the same system. That means freight traffic cannot be used to help defray the cost of installing HSR. Meyer makes an interesting comparison between the efficiency of passenger trains relative to freight: much more energy is needed to pull a heavy passenger train car than to pull the actual passengers inside. In contrast, the cargo inside a typical freight car weighs far more than the car itself. But the efficiency of freight transportation in the U.S. seems to have no allure for many critics of U.S. transportation policy.

“Freight is boring and un-sexy. Its not a government function in the US. So intellectuals tend to ignore it, even though it is the far more important, from and energy and environmental standpoint, portion of transport to put on the rails. … We have had huge revolutions in transportation over the last decades during the same period that European nations were sinking billions of dollars into pretty high-speed passenger rails systems for wealthy business travelers.”

Comparisons of efficiency across modes of passenger transportation are typically limited to operating costs, including energy costs, per passenger mile. That narrow focus yields a distorted view of the relative advantages of different passenger modes. In particular, the massive incremental capital costs of HSR are often ignored. Moreover, weight must be assigned to the very real economic costs of passenger time, not to mention the external costs imposed on the viability of farmland, nearby property owners, and wildlife.

In the long-term, all modes of transportation have infrastructure costs, but HSR lines don’t yet exist in this country. It is therefore relevant to ask whether the cost comparison is intended to address an ongoing transportation need or an incremental need. HSR is often promoted as a replacement for other modes of transportation, so the lack of an installed base of infrastructure is a huge incremental cost relative to modes already in place.

Air travel has some obvious advantages over high-speed trains. First, it requires much less support infrastructure, and a significant base of that capital is already installed. Again, the massive, up-front infrastructure costs of HSR are incremental. Also, airports tend to be well-integrated with local transportation options. New passenger train terminals would require additional investment in local ground transportation such as light rail or subway extensions, highway access, and the like. In addition, planes require less passenger time than trains over lengthy routes.

How about autos vs. HSR? Autos have the pre-installed base of road infrastructure. They provide hard-to-value flexibility for the traveler as well, but parking costs must be dealt with, and cars have extremely high accident rates. Travel time is a disadvantage for autos relative to HSR, even at moderate distances. In terms of operating costs, however, autos are not necessarily at a disadvantage: they weigh much less per passenger than trains, but that advantage is offset by trains’ low “rolling resistance” and other factors. The best choice for travelers would vary with the value they place on their time, specific plans at the destination, preference for flexibility, and the operating costs of their vehicle relative to the high-speed train fare.

Supporters of HSR contend that it is less costly to the environment than other modes of transportation. That case is easier to make if you focus solely on operating costs and exclude the impact of generating the electricity needed to power trains, which will require emissions of greenhouse gases for many years to come. A second fundamental omission is the environmental cost of the rail infrastructure itself. It’s very existence is disruptive to local environments, but perhaps most importantly, producing and installing the steel, concrete, and other materials needed for HSR will carry a steep environmental cost.

HSR is unlikely to achieve widespread adoption in the U.S. The distances of many routes and high infrastructure costs are obstacles that will be nearly impossible to overcome. Projected fares would be outrageously high were they to cover the full cost of the infrastructure. A typical argument is that taxpayers should fund the infrastructure due to the social benefits that rail is presumed to confer, but that presumption is far-fetched given the impact of producing the infrastructure itself, as well as the power needed to run the trains. I don’t expect adherents of rail to put aside their dreams quickly, however: there is something so romantic about the notion of having the state provide a massive rail network that the idea will never die the death it deserves. And don’t be fooled by Elon Musk’s hyperloop. It remains a distant technological hope and it too will have enormous resource costs along with an attendant call for public subsidies (a call which has already begun). After all, public subsidies are a hallmark of most of Musk’s business ventures.

Rural Broadband and Federal Intrusion

06 Tuesday Feb 2018

Posted by pnoetx in infrastructure, Technology

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5G Wireless, Ajit Pai, Brian Whitacre, Broadband service, Digital Divide, Download Speed, FCC, Fiber, Fixed Wireless, Michael O'Reilly, Net Neutrality, Nick Gillespie, Rural Infrastructure, Satellite Service, Telecom Infrastructure, Universal Service Fund

Rural telecommunications service is often inferior in speed and quality to what is available in urban areas. This is one basis of the so-called “digital divide” in the U.S., the gaps that exist between various groups in terms of access to broadband telecom service. The urban rural “divide” is actually much smaller than the gaps that exist within urban areas, but much of the attention in public policy debates seems to focus on rural broadband availability. Telecom infrastructure is far more expensive to provide in the hinterlands due to the distances and occasional natural barriers that must be traversed. This was true before the revolution in wireless technology and still is, though wireless has reduced the severity of the tradeoff. Given the cost differential, it strikes me as unreasonable for rural users to expect the same levels of service at the same cost as urbanites. They can either pay the higher cost of provision to receive high-end service, make do with service levels that can be delivered at rates they are willing to pay, or go without. Or, if a high level of service is critical and the user is unwilling to pay the cost, they can move to a place at which it is available at lower cost.

For many years, however, public policy has been premised on the notion that rural telecom users deserve subsidies from the general user population, or from taxpayers, in order to promote equal access to basic telephony and, more recently, broadband access. The Universal Service Fund, to which telecom users pay a fee on their bills every month, is based on this premise. Its extension to broadband is a classic example of first-world luxury made necessity, now asserted to be an obligation owed by society to every individual. It is the philosophical underpinning for a huge allocation of federal funds for rural telecom spending that is now expected as part of President Trump’s infrastructure plan.

Broadband Availability

The quality of telecom service includes speed and other factors (such as latency, which refers to data delays). Here, I’ll confine the discussion to the speed at which data can be downloaded (upload speeds are always a bit slower). Minimum speeds of 5 – 8 Mbps are required to stream HD video, according to the FCC. Higher speeds are necessary for heavy users with several devices or “running more than one high-demand application at the same time.”

Broadband speeds vary tremendously across the U.S., but it’s important to remember that speeds are increasing dramatically over time. Small towns are undoubtedly concentrated at the lower end of the distribution of speed availability at any point in time. Today, the gap between the availability of speeds in urban and rural areas is minimal up to about 10 Mbps, but it widens above that level. In fact, the speeds available via certain wireline technologies can vary significantly even within one small town (to say nothing of the significant variation within urban areas). Away from town, the availability of wireline broadband is much more limited. Fixed wireless broadband service (point-to-point) can often be deployed at speeds comparable to wireline service, and those speeds and their availability will increase with the rollout of new (5G) wireless technology. Still, that might not be an option in many isolated communities and remote locales without additional facilities like relay stations. Satellite service is often available at speeds up to 25 Mbps, in-town or out, but like wireless, it has some reliability issues.

Nevertheless, to one degree or another, broadband service is often available in rural areas, or can be available if customers are open to a range of alternative technologies (and again, available speeds are increasing). Obviously, some technologies are better suited to reaching particular areas, depending on distances and terrain. Many rural communities are finding affordable solutions that combine technologies that best leverage existing infrastructure and the natural features of the landscape.

Alms or Unfettered Choice

A reality of life in a hard-to-serve location is that broadband service will be costly… for someone. Enter the interventionists, who view “rurals” with paternalistic sympathy. Rural customers, and certain solutions for broadband delivery discussed above, are already subsidized by the federal government in some instances. And again, the Trump Administration is ready to throw more federal money at rural telecom infrastructure. These subsidies are questionable from a public finance perspective because they presume that rural areas are “underserved” on a cost-benefit basis, a case that is often dubious.

The biggest rub is that most people who live in rural areas do so by choice, a point recently articulated by Nick Gillespie. He recounts the experiences of his ancestors, who came from poor European villages to America to seek a better life. By comparison, today’s American rural population is highly privileged. Few are mired in circumstances beyond their control, contrary to the popular view. Gillespie notes that rural median income is only about 3.5% less than urban income (including suburbs), while rural homeownership rates are higher and poverty rates are lower than in urban areas. Indeed, it’s no secret that many urban elites purchase rural property to escape congested city life. Those are some of the would-be recipients of federally-funded rural broadband infrastructure.

In the end, Americans tend to live where they do by choice. Alternatives not acted upon generally reveal a preference for staying put. Some people prefer the amenities of small town or country life for any number of reasons, including a generally low cost of living. They accept the disadvantages of a rural life such as the lack of proximity to advanced emergency treatment facilities and, at least historically, less connectedness to media. Obviously, city dwellers tend to prefer urban amenities and accept the disadvantages of city or suburban life, like congestion. Those who wish to move from country to city, or vice versa, are free to do so, but they must pay the cost of the move. Likewise, it’s reasonable to expect that those desiring to transform the amenities of a place to their liking should pay the cost. Bringing almost any form of broadband infrastructure to areas with low population density is a costly proposition, but today’s rural consumers have more choices than ever before, and the speed and quality of broadband will continue to improve there without federal intervention.

Rural vs. Urban Adoption Gaps

The rural population is older on average, and it is less educated on average, so rural adoption rates are always likely to be lower. This point has been emphasized by Brian Whitacre, who has stated that the urban-rural “digital divide” might always exist to some extent. But this phenomenon is not unique to rural areas. Adoption rates within urban areas are highly variable, and the intra-urban broadband gaps by race, age, and income dwarf the urban-rural gap. That too is unlikely to change any time soon.

Federal Cash for Cronies & Conferees

Last year, FCC Commissioner Michael O’Reilly warned of the dangers of direct federal involvement in broadband infrastructure investment. These include the market distortions caused by picking winners and losers among providers based on non-market assessments, the graft that such a process invites, discrimination in favor of high-cost fiber technology, poor coordination across government bureaucracies, and insufficient oversight leading to chronic overpayments. Sadly, however, even Ajit Pai, Chairman of the FCC and a man whose opposition to network neutrality I have applauded, has proposed more federal spending on rural telecom infrastructure. The big telecom recipients of the buildout funds don’t mind the subsidies, of course. The rural recipients of new services at artificially low cost can’t mind too much. But federal taxpayers and broadband ratepayers should question this activity. I’m hopeful that there will be a silver lining: it is likely to be private infrastructure.

5G Wireless: The NSA Wants You On Its Plan

30 Tuesday Jan 2018

Posted by pnoetx in infrastructure, National Security, Privacy, Uncategorized

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5G Wireless, Ajit Pai, central planning, FCC, incentives, Markets, National Security Council, Nationalized Wireless, Net Neutrality, NSA, Privacy, Scott Shackford, Wireless Infrastructure

Please no, Mr. President, do not even flirt with putting the federal government in charge of building and operating a new 5G wireless network! Sure, you’ll hate to disappoint the hawks on the National Security Council (NSC), but please let this remain outside the scope of your infrastructure plan!! For one thing, the private sector already has it underway, and the task is not straightforward. Excessive government involvement would almost surely botch the job. Let’s face it: while shrill calls for central planning of one form or another are constantly heard from leftists and populists, the government is really lousy at it. But then good central economic planning is impossible, given the impossibility of knowing and tracking the vast and dynamic information flows necessary to get it done, not to mention knowing and executing the appropriate responses to that information. There is a better tool for that called “markets”.

Scott Shackford reports that the chairman of the FCC, Ajit Pai, reacted with swift condemnation to the 5G discussions taking place within the NSC. Do read the whole Shackford piece. Apparently, there are some in the NSC who imagine government being good at building, maintaining, and securing a wireless network. This despite the antiquated nature of the federal government’s information systems and, as Shackford notes, their poor security. There is also the potential threat that communications over such a network would be subject to monitoring by nosey law enforcement and other public officials. If national security always implies state control, I’ll take less, but I don’t believe that’s the case for a minute.

The government tends to be a poor custodian of infrastructure — really public assets in general, and there is a reason: incentives are lacking. Private communication networks keep improving thanks to private incentives, like the prices and profits that promote efficient behavior and the market pressures to offer data plans that private users value. The government, on the other hand, struggles even to maintain the interstate highway system, which is simple technology by comparison. But statists tend to view the lack of private incentives as a feature: it’s free! And as a consequence, it is over-utilized and under-maintained. Ultimately the taxpayer is on the hook for capital costs and any upkeep that can be mustered, not the user, but the user suffers the degraded quality of those assets. A nationalized wireless network and its users would suffer the same fate.

Private infrastructure like wireless networks is best encouraged by eliminating regulatory roadblocks to private construction and operation of those assets. That includes the welcome rollback of the stifling network neutrality rules. Low taxes also help, not to say special incentives for wireless carriers.

Infrastructure: Public Waste & Private Rationality

25 Tuesday Jul 2017

Posted by pnoetx in infrastructure, Privatization

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American Society of Civil Engineers, Border Wall, capital costs, Donald Trump, infrastructure, Infrastructure Tax Credits, Jeffrey Harding, Milton Friedman, P3s, Private Benefits, Public benefits, Public-Private Partnerships, Reason Foundation, Underpricing, User Charges

The exaggerated deterioration of American infrastructure is the basis of a perfect bipartisan spending coalition. Proposed public spending on capital such as roads, bridges, high-speed rail, locks, dams, and water and wastewater systems is of obvious value to those who would build it, but the benefits for the public are not always beyond question. As Jeffrey Harding notes at the link, the American Society of Civil Engineers (ASCE) rates U.S. infrastructure as seriously deficient, but it is in their interests to do so. The news media finds the kind of horror story promoted by ASCE hard to resist:

“What they don’t tell you is that if you look at transportation issues over time, things have been getting better, not worse. … The Reason Foundation’s studies on state-owned highways (they are widely recognized as being leaders in this field) and other studies on highways and bridges reveal that there have been significant improvements of infrastructure measures like road and bridge quality and fatalities over the past 20 or 30 years. The facts are that, on the state level, overall spending on highways doubled during that period, and overall measures of highway transportation have improved.“

The point of building new infrastructure is the future flow of service it can offer. Creating construction jobs is not the point. If it were, the government could hire workers to dig holes with spoons, to paraphrase Milton Friedman. Nor should the timing of infrastructure investment be dependent on employment conditions. Unworthy projects are not made worthy by high unemployment. Politicians often attempt to sell projects to the public on exactly that basis, yet as Harding points out, increases in public spending on infrastructure seldom happen in a timely manner, and they often fail to create jobs in any case. This is partly due to the regulatory morass that must be navigated to get approval for new infrastructure, and also because the skilled labor required to repair or add infrastructure is usually occupied already, even when the jobless rate is elevated. In addition, expensive infrastructure projects are vulnerable to graft, which is compounded by the many layers of approval that are typically required.

Harding questions the ASCE’s insistence that inadequacy of our infrastructure is inhibiting U.S. productivity growth. If there is any truth to this assertion, it is probably more strongly related to how infrastructure is priced to users than to the state of the facilities themselves. For example, road congestion in certain areas is a chronic problem that can only be solved via efficient pricing, not by endless attempts to expand capacity. Not only does efficient pricing ease congestion, it enhances the profitability of improvements as well as other modes of transportation. A proposal to add infrastructure that is destined to be mis-priced to users is a plan to waste resources.

Donald Trump conveniently bought into and re-sold the notion that America’s infrastructure is unsound, and he is likely to garner support for an infrastructure initiative on both sides of the aisle. He would undoubtedly include the proposed wall at the Mexican border as an infrastructural need, but we’ll leave the wisdom (and payback) of that project aside for purposes of this discussion. As I’ve discussed before on Sacred Cow Chips, President Trump has at least learned that infrastructure is not and should not be the exclusive domain of the public sector. Trump’s infrastructure proposal calls for tax credits for “public-private partnerships” (Harding’s acronym: P3s). As Harding says:

“P3s let private companies design, build, and operate new infrastructure projects. According to Bob Poole, the Reason Foundation’s expert on privatization, P3s will result in projects that will be more economically productive (no bridges to nowhere) and would be much more cost effective. … These projects would be based on privatized systems which generate an income stream, and are financed by revenue bonds. Thus, the risks of these projects are shifted to private companies rather than to taxpayers.“

P3s solve several problems: they allocate private resources toward facilities for which developers expect high demand and user willingness to pay; they avoid higher levels of general taxation, instead allocating costs to the cost causers (i.e., the users); they give users a more accurate measure of opportunity costs when considering alternatives; and they avoid overuse. Too often, users of public infrastructure pay nothing, or at most they pay enough to cover operating costs with very little contribution to capital costs. Ultimately, that makes the quality and service level delivered by the infrastructure unsustainable. Private developers are unlikely to invest in such boondoggles as long as taxpayers are not obliged to subsidize them.

The P3 tax credits in the Administration’s proposal would certainly represent a public contribution to the funding of a project, but the incentive provided by those credits helps avoid a much more substantial committment of public funds. Moreover, the credits do not create the degree of forced economic stimulus that publicly executed projects often do. Rather, the availability of credits means that projects will be initiated when and if they are economically viable and profitable to do so. We can therefore dispense with the nonsensical goal of “job creation” and focus on the real problems that infrastructure investment can solve.

Some would argue that many types of infrastructure are too public in nature to be left to P3s. In other words, projects with pure public benefits would be under-provided by P3s due an unwillingness to pay by users of “the commons”. Yet there is no rule limiting the public role in the design of a public-private partnership, whether that refers to physical development, operation, or funding. Presumably, the more “public” (and non-exclusive) the benefits, the greater the share of development and maintenance costs that should be funded by government. Whether a piece of true public infrastructure should be funded is a standard question of public finance. Assuming it should, there is likely to be a significant role for private builders and operators. Finally, P3’s do not eliminate the potential for graft. Public review and ongoing regulation would still be demanded. In a sense, P3s are all formalized corporatist efforts, but a key difference relative to current practice is the use and risk of private capital rather than public funds. Ultimately, that won’t matter if failed developments are bailed out by public “partners”. The assets of a failed infrastructure project must be sold off to the highest bidder, presumably at a steep discount.

The standard narrative is that America suffers from substandard infrastructure is highly misleading. There are certainly needs that should be met, many with urgency, and there will always be a series of worthwhile repairs and replacements that require funding. Using P3s to accomplish these objectives demands recognition that 1) users typically derive significant private benefits from infrastructure; and 2) use is often underpriced, especially with respect to allocating capital costs. Infrastructure development can be encouraged by inducing private firms to put “skin in the game”. High-risk but potentially valuable projects might have trouble attracting private funds, of course, and that is as it should be. Politicians might ask taxpayers to fund such a project rather than shopping it to private developers. It therefore behooves voter/taxpayers to evaluate the benefits and sustainability of the project with the utmost skepticism.

Postscript: The image at the top of this post prompts me to reflect on whether a starship is infrastructure. It is certainly a transportation system. Is it a public good? In a large sense, the diversification offered by spreading humanity across multiple worlds can be viewed as a benefit to mankind in the future. But rides on the starship would offer private benefits, depending on one’s sense of adventure as well as the prospects for the home planet. Those private benefits, and the voluntary payments they induce, just might get it done.

Private Incentives and Infrastructure

10 Tuesday Jan 2017

Posted by pnoetx in infrastructure, Markets

≈ 2 Comments

Tags

central planning, Donald Trump, Exclusivity of Benefits, infrastructure, Infrastructure Tax Credit, Lawrence Summers, Material Infrastructure, Private Infrastructure, Public goods, Public-Private Partnership, Randall O'Toole, Trump Infrastructure Plan, Tyler Cowen, User Fees, Walter Buhr

motorway-to-hell

Material infrastructure is fixed plant and equipment providing services considered basic to the functioning of society. That definition leaves plenty of room for interpretation, however. For example, it does not limit the meaning of “infrastructure” to facilities necessary for the provision of “public goods”, for which benefits are non-exclusive. And it encompasses facilities used by firms in certain competitive markets, such as some forms of telecommunication. The character of infrastructure tends to change over time, as new technologies lead to changes in our way of life (e.g., the cellular network). That’s even more evident when infrastructure is defined more broadly, as Walter Buhr does in “What Is Infrastructure?” His definition of material infrastructure encompasses all facilities enabling “the activation or mobilization of the economic agents’ potentialities.”

Infrastructure ≠ Government

There is a popular fallacy that infrastructure is the exclusive province of government. Infrastructure often does provide some public, non-exclusive benefits, but the willingness of users to pay is the key test of private benefits. As it happens, most infrastructure needs can be met privately and partly, if not fully, supported by user fees. That follows from the high degree of exclusivity of benefits yielded by the infrastructure. Today, privately-owned infrastructure includes communication networks, power generation and distribution, some water and sewer systems, toll roads, ports, and landfills. The presumed monopolistic nature of some infrastructural services probably encourages the notion that infrastructure must be public, but that view is largely unjustified: the services may be “monopolized” only to the extent that the relevant market is defined narrowly, such as road travel, rather than transportation. Indeed, certain kinds of infrastructure functions in markets that are fairly competitive (e.g., wireless networks).

The great thing about most private infrastructure is that owner-operators have an incentive to put it up and keep it up. So it kind of takes care of itself. I say “kind of” because there is always a degree of public involvement, from land use and environmental approval to construction permits, to licensing, to spectrum auctions, to rate regulation, and many other varieties of oversight. Aside from those considerations, if there is a need for infrastructure that is commercially-viable, the project is likely to be proposed by private interests. The funds necessary to pay for construction can be raised from private investors, rather than taxpayers. It’s not at all strange to say that private infrastructure is highly advantageous from a public finance perspective.

There are risks to private infrastructure developers, but those risks are too often borne publicly. A new facility, be it a water treatment plant or a road, might not prove to be profitable once a new revenue stream or reduction in operating costs is realized. Given those circumstances, private interests might seek additional incentives from public authorities to ensure profitbility. To the extent that the shortfall is due to an error in pricing administered by a public regulatory authority, it might be reasonable to make adjustments in the owner-operator’s favor. However, to the extent that demand falls short of the owner-operator’s expectations, it might be better to let the firm fail. That would allow the assets to be sold at a discount to a new operator who can make the cheaper investment profitable. No bailouts!

Trumpian Infrastructure Incentives

The coming Trump Administration is known to have certain steps in mind for encouraging infrastructure development. While the tax plan that has been discussed has a few questionable features, any policy that reduces corporate tax rates would increase the return to existing and prospective private infrastructure, and the profitability of private operation of public infrastructure. In addition, a proposal mentioned explicitly by Trump is a corporate tax credit for infrastructure development.

Here is where a more precise definition of infrastructure would be helpful. Would traditional categories of infrastructure investment by power, telecommunication, and water treatment companies qualify automatically? Moreover, the long timelines required in the planning and installation of most infrastructure might make it difficult to distinguish between new plans and those already in the works. Will the administration establish a bright line between infrastructure investment and run-of-the-mill corporate spending on new plant and equipment? Perhaps any form of corporate investment will qualify. These are questions that remain unanswered as we await Trump’s inauguration.

There is another public-finance dimension of the Trump infrastructure credit. Public infrastructure projects, such as roads, are frequently difficult for governments to fund because they face limits on the debt they can issue. This is emphasized by Randall O’Toole in a recent piece on the Trump credit. Instead of issuing its own debt, a government can take advantage of a large private road builder’s ability to raise funds in the capital market, agreeing to compensate the contractor over time. Thus, taxpayers will be obligated to pay-off the contractor’s debt. The term “Public-Private Partnership” has been invoked in this connection.

Private Incentives Or Central Planning?

I am never averse to reduced tax rates to the extent that taxation always distorts economic incentives. However, selective targeting of tax benefits at certain industries, specific forms of business organization (like corporations), or specific activities like capital investment is overt central planning. Overriding market incentives in this way is not desirable. (Neither are proposals to subsidize exporters and penalize importers. Tyler Cowen at the Marginal Revolution provides some salient quotes from Lawrence Summers on this point.) At this stage, Trump’s tax plan looks like central planning gone berserk.

Ideally, private investment and private infrastructure should be judged on its real merits, not on the prejudices of a central authority. To that end, I believe the Trump Administration’s intent to roll back regulatory distortions is commendable. A case in point is nuclear power generation. Despite the constant outcry against the burning of fossil fuels, there has been little emphasis on encouraging investment in new nuclear capacity. The lengthy approval process and costly regulatory requirements discourage this zero-carbon form of energy production relative to other forms of energy investment.

Users Are the Cost-Causers

I should note that O’Toole speaks favorably of “targeting” certain kinds of public infrastructure, but I think his point is that private operation of infrastructure, if not ownership, will allow markets to do the targeting more efficiently than government ever could. In particular, he notes that politicians tend to prefer new projects to the maintenance and repair of existing infrastructure, independent of the actual merit. Would relying on private operation and user fees encourage better maintenance?

“Unlike infrastructure paid for out of tax dollars, user-fee-funded projects tend to be well maintained because the agencies that manage them know they have to keep them in good shape to continue earning revenues.“

The cartoon above satirizes the consequences of providing free access to a costly facility. User fees encourage more rational patterns of use. For example, it is folly to think that projects like light rail can be financially viable when free alternatives exist. Specific highway routes under high demand must be priced in order for commuters to make rational decisions about the alternatives available to them, and for providers of transportation facilities, whether public or private, to rationally balance the resources dedicated to supporting various modes of travel.

Lower tax and regulatory burdens under the Trump infrastructure plan offer some encouragement for private development and operation of infrastructure projects. As a by-product, the plan might encourage greater reliance on user fees as a method of defraying the costs of infrastructure and promoting a more efficient allocation of resources toward infrastructure needs. However, there are unanswered questions about the details of the plan, and some of its heavy-handy features should be dispensed with.

Politicians and Infra-Hucksters

05 Thursday Jan 2017

Posted by pnoetx in Government, infrastructure, Technology

≈ 2 Comments

Tags

Border Wall, Congestion, Donald Trump, Dynamic Message Boards, economic stimulus, Efficient Pricing, Elon Musk, eminent domain, Heritage Foundation, High speed rail, Hyperloop, infrastructure, Jerry L. Jordan, Job Creation, Keystone Pipeline, Michael Sargent, Private Infrastructure, Reason Foundation, Solar Roads, St. Louis MO, Steven Horowitz, T. Norman Van Cott, Trolleys, Tunnel Boring, User Fees

We’ll soon have a new president and already we’ve heard new promises of infrastructure investment. Once again, a chorus of politicians and pundits decries the woeful state of America’s road, bridges, sewers and airport terminals. Then, there are hosannas in adoration of the economic stimulus and job creation promised by large public works projects. And of course there are proposals to integrate politically-favored technologies with new infrastructure. All three rationales for a publicly-financed infrastructure program are flawed. Our infrastructure is not as inadequate as many believe; it is bad public policy to justify infrastructure decisions on the basis of the construction jobs required; and new infrastructure should not be treated as a vehicle for large-scale deployment of unproven technologies.

Ownership

Much of our nation’s infrastructure is privately owned. This includes, but is not limited to, power generation and the power grid, communication networks, many water systems and sewer systems, most rail lines, some toll roads and bridges, and some river, sea and space ports. Maintenance and upgrades to private facilities, and to some public facilities, depend on the adequacy of the rates or fees charged to users. On the other hand, the quantity and quality of publicly-owned and operated infrastructure is often left up to taxpayers rather than users. Proposals for federal infrastructure investment are largely about these public facilities, but they might also involve subsidies for the development of private infrastructure.

Crisis or Crock?

In a Heritage Foundation research report, Michael Sargent notes that the poor state of the country’s public infrastructure is wildly exaggerated:

“The notion that America’s infrastructure is ‘crumbling’ and in uniquely poor condition is not supported by data. The percentage of the nation’s bridges deemed ‘structurally deficient (not necessarily unsafe, but requiring extensive maintenance) has declined annually since 1990 and now sits at under 10 percent, well under half of what it was 25 years ago. Similarly, analyses of highway pavement quality conclude that the nation’s major roads have been steadily improving in quality and are likely in their best shape ever. Our airports and airways safely move more people and goods than those of any other nation. Overall, the U.S. ranks near the top of G-7 nations for infrastructure quality.“

The usual poster child of the infrastructure “crisis” is the nation’s transportation system, but this report from the Reason Foundation shows that those troubles are something of a myth.

Nevertheless, there are always repairs, maintenance and replacement projects to be considered, as well as possible expansion and new facilities. Infrastructural shortfalls and expansion must be prioritized, but as Sargent emphasizes, an even larger number of projects should and probably would be handled privately if not for burdensome federal regulations. In addition, an irrational mistrust of privately-operated facilities among some segments of the public creates pressure to burden taxpayers with costs, rather than users. Complaints about congestion on roads offer a case in point: the best solutions involve efficient (and positive) pricing of existing capacity, rather than continued expansion of a “free” good. The avoidance of rational solutions like efficient pricing underscores the extent to which demands for increased public investment in infrastructure are driven by hyperbole, rather than sound analysis.

It’s About the Infrastructure, Not the Jobs

Public infrastructure projects are also pitched as effective engines of economic stimulus and job creation. Both of those claims are questionable. Most importantly, the real rationale for infrastructure investment is the value of the infrastructure itself and the needs it serves going forward. The public expense and the jobs required to produce it are cost items! This point was made recently by economist T. Norman Van Cott, who rightfully asserts that a given output is of greater benefit when its costs are low and when it requires less labor input. (Van Cott’s piece uses the Keystone pipeline as an example, a controversial private project that I find objectionable for its dependence on eminent domain actions.) The sharp distinction between creating value and creating jobs is also made here by Jerry L. Jordon and here by Steven Horowitz. Here is Horowitz:

“Creating jobs is easy; it’s creating value that’s hard. We could create millions of jobs quite easily by destroying every piece of machinery on U.S. farms. The question is whether we are actually better off by creating those jobs—and the answer is a definite no.“

Yet this is how so many infrastructure projects are pitched at the national, state and local levels. It’s also puzzling that economic stimulus is used as a rationale even when the economy is operating near its potential output. Even by the standards of traditional Keynesian economic analysis, that is the wrong time for stimulus. Infrastructure projects should be evaluated on their own merits, not on how many construction workers must be hired, or on how much of their paychecks those workers will spend. Many of them must be bid away from competing projects anyway.

The Public Investment Trough

Here’s a brief anecdote from my own experience with an “advanced” public infrastructure project. Some years ago in the region around my city, St. Louis, Missouri, transportation agencies began to install a network of electronic highway message boards to convey real-time information to drivers on road conditions, congestion, and various public service announcements. The 100+ signs in the area today are connected to operators in a central office via fiber optic cable. This type of system is used elsewhere, and it is partly funded by the federal government.

I seriously question the benefits of this system relative to cost. The signs themselves cost well in excess of $100,000 each. The fiber network is undoubtedly costly, and there are other fixed and variable system costs. The signs have an anachronistic look, vaguely the quality of old high school scoreboards. The information they provide generally adds little to what I already know (“12 minutes to I-270”). The signs are in fixed positions, so the occasional report of an accident or congestion usually comes too late to give motorists decent alternatives. The information the signs provide on road conditions is obvious. Missives such as “buckle up” are of questionable value. Before I depart on a commute, or if I have a passenger, we can consult maps and other apps on cell phones to avail ourselves of far better information. Other, more flexible technologies were outpacing the message boards even before they could be fully deployed, and the boards are still being deployed. This is a project that might have sounded brilliant to highway engineers 20 years ago, but it represented something of a luxury relative to other needs, and it still got funded. Today, it looks like waste.

The politics of infrastructure often means that the enabling legislation gets loaded with poorly-planned projects and shiny jewels to dangle before home constituencies. Legislators are so eager to demonstrate their sophistication that they fall over themselves to approve taxpayer funds for unproven but politically-favored technologies. For example, a recent post by Warren Meyer notes the technical folly of solar roads. These are unlikely to attract much private money because they represent such a monumentally stupid idea. Proponents will go after tax money instead. The same is true of ideas like Elon Musk’s tunnel boring project, for which he hopes to collect massive taxpayer subsidies. Musk claims that tunnels will eliminate road congestion, but efficient pricing would do much to eliminate this problem without tunnels, and other technologies like automated vehicles are likely to reduce congestion by the time Musk over-invests tax money in tunnel-boring equipment, roads and hyper-loops inside tunnels.

In general, taxpayers should be wary of “green infrastructure” proposals. A large number of bike lanes, pedestrian bridges and greenways sound wonderful, but they are serious cost inflators. Federal dollars are regularly squandered on charming but wasteful projects such as trolleys. Even worse are ongoing efforts to subsidize the construction of high-speed rail systems. All of these bright ideas should be resisted.

Let’s Be Rational

The country certainly has infrastructural needs, but claims that we face a crisis are greatly exaggerated. With a new administration and what are likely to be supporting majorities in both houses of Congress, the danger of rushing into big funding commitments is heightened. The sponsors of this kind of legislation will herald massive job creation, but that is incidental to the cost side of the ledger. The benefits of individual projects should be evaluated carefully in comparison to costs. Then they can be prioritized if deemed of sufficient value. Finally, large scale deployment of unproven technologies should be avoided on the public dime.

I haven’t even mentioned one very large infrastructure project that has been proposed by President-Elect Donald Trump: the border wall. I suspect that it would be easier and less expensive to solve the problem of border security using more advanced and flexible technologies, but the permanence and symbolism of a wall appeals to many of Mr. Trump’s supporters. The benefits of a wall in terms of border security and control of immigration flows are difficult if not impossible to evaluate, as are the costs to taxpayers, with Trump promising to extract some form of payment from Mexico. The wall, however, is being “sold” to the American public in emotional terms. Come to think of it, that’s how too many other infrastructure proposals are sold by politicians!

There are promising opportunities to improve the nation’s infrastructure through the private sector, where the value of projects is subject to evaluation by parties who must put “skin in the game”. This will be addressed in my next post.

Pricing Wizards Baffle Public Officials

22 Wednesday Jul 2015

Posted by pnoetx in infrastructure

≈ Leave a comment

Tags

Congestion pricing, e21, Highway spending, Hillary Clinton, infrastructure, Infrastructure bank, Market pricing, Mass Transit, Mis-allocation of resources, Reihan Salam, robert Krol

When government invests in physical infrastructure, voters are led to believe that the resources invested will enhance their well being and safety as well as the productivity of the nation’s economy. In any particular instance, however, there is a strong chance that confidence in such assurances is misplaced. Allocation of public monies is always subject to a high likelihood of mismanagement, not least because decision-making in this arena is highly politicized. Government efficiency is always compromised because its actions are not guided by a profit motive. And it is well known that politicians and bureaucrats often act on their own private motives, rather than as purely disinterested public servants.

Another primary shortcoming of government infrastructure investment is that it is mis-priced. Highways are a perfect example. They are often congested because they are free. A weak objection to the last statement is that “pricing” is accomplished through gas taxes, which should provide incentives for curtailing the use of automobiles, but that is true only in the most general sense. The marginal cost to a driver of using a specific route is zero all day long. This leads to greater congestion, higher maintenance costs and, invariably, calls for expanding highway infrastructure.

Robert Krol has an excellent essay on the e21 website in which he lays out the strong case for congestion pricing:

“Although current federal law prohibits charging tolls on existing interstates, states may apply for permission to charge tolls on new lanes. This has occurred on a limited basis in Southern California. Variable tolls have been used outside the United States to successfully reduce congested highways. Before we spend more on highways, we need to change how we price highways. …

… the revenues could be used for highway maintenance and construction. Most importantly, by pricing roads correctly, we may actually find that we don’t need to spend more on highways. …

Economists Gilles Duranton and Matthew Turner have shown that building more highway capacity in U.S. cities results in residents driving more, greater commercial traffic, and population in-migration. Congestion remains, resulting in wasted time. A recent estimate from the Texas A&M Transportation Institute shows that these delays cost drivers $121 billion per year. Congestion also increases air pollution in neighborhoods near the congested highways.“

Public transit proposals are almost always boondoggles, including light rail. These systems usually generate fare revenue that falls short of operating costs (with zero contribution to capital costs). But at least fares are non-zero! The ability of mass transit systems to charge fares that pay for themselves is seriously undermined by the ongoing expansion of “free” urban highways.

Reihan Salam reinforces these points in a post about Hillary Clinton’s infrastructure proposals. Clinton pushes the general idea that more infrastructure spending is a must, going so far as to promote a public / private “infrastructure bank” for a wide range of projects that quite possibly are unnecessary, given more rational pricing. She doesn’t promote the latter and she probably doesn’t even think about it, or whether scarcity should be priced.

“If new infrastructure is to be financed with private capital, investors are going to expect spending discipline and, eventually, a meaningful return. Will this return be extracted from taxpayers or from users of the infrastructure service in question? The Obama administration, to its credit, supports allowing state government to collect tolls on their Interstate highway segments if they choose. Would Clinton favor giving states the freedom to make greater use of user fees? ….

I don’t think our main problem is that we’re not spending enough on highways, as Clinton seems to believe. If anything, I think our highway system is overbuilt. … The chief problem with our airports is not … that they’re not as sleek and modern as the vast white elephants you’ll find in East Asia. Rather, it is that they are congested, and the reason they are congested is that the federal government doesn’t provide for market-rate pricing for take-off and landing slots. This straightforward reform would greatly increase the productivity, not to mention the pleasantness, of our aviation system. Yet it doesn’t involve spending billions of dollars and cutting ribbons, so politicians are by and large not interested.“

Voters should not grant free points to politicians who merely utter the I-word: infrastructure. A more creative approach involves efficient, market pricing of highways and other public assets. The technology to price highways efficiently is now available. That may involve some loss of privacy, as it requires detecting the presence of individual vehicles on the roads, but privacy could be protected to some extent by using private firms to manage billing.

High-Speed Third Rail For Taxpayers

15 Friday May 2015

Posted by pnoetx in Big Government, infrastructure, Taxes

≈ 3 Comments

Tags

Amtrak, Bullet trains, California, capital costs, Carbon Emissions, fare revenue, Frederic Bastiat, High speed rail, infrastructure, Malinvestment, Megabus, operating costs, Privatization, profitability, Public benefits, Public boondoggles, Randall O'Toole, Sean Davis, The Federalist, Transit subsidies

Public boondoggles come in many forms, including sports stadiums and entertainment venues, convention centers, local trolly lines, light rail, superhighways, “gold-plated” public offices, and even subsidies for politically-favored (as opposed to market-favored) industries. Anything involving “infrastructure” has an almost perverse political appeal. The many varieties of boondoggles have much in common from a public finance perspective: ultimately, they are almost always funded by taxpayers; when they confer benefits to private parties (and they usually do), they are underpriced to those users. Taxpayers are often lucky if these projects cover their operating costs, let alone capital costs, via direct revenue generation. Taxpayers are usually on the hook for the bonds. Pure public benefits might offer some justication for this burden, but those cited by project proponents are often unconvincing on that basis. Let’s face it: projects are seldom evaluated against something approximating the true opportunity costs faced by the public or taxpayers.

A prominent example of such a project that seems to capture the political imagination is high-speed rail (HSR). My friend John Crawford emailed the following link: “Doing the math on California’s bullet train fares“. John provided this summary:

“Not surprisingly, today’s fare estimate has risen 72% over the estimate that was cited during planning. That’s telling but probably not surprising to anyone, even those that tried to change opinions by citing the $50 fare. What I think is most interesting follows.

CA-HSR price of 86 is about 20c/mile. Comparable prices are 22c for a Chinese train that everybody agrees to be subsidized, 54c for a French train that is profitable and 50c for the Amtrak corridor on the East coast, which is probably profitable; 46c in Germany. Somehow, they think they can do what nobody else in the world can do…profit at 20c/mile.“

The California authority is either spectacularly arrogant or stupid. Probably the former, because they are doing what self-interested bureaucrats and politicians always do. They want the project to get done, thus creating an empire, kicking a can-full of fare increases and taxpayer liabilities down the road, beyond the time when anyone will hold them accountable for the malinvestment. But the true extent of the malinvestment will never be obvious, because the counter-factual will remain in the unseen world of lost opportunity.

Something I find exasperating about articles like this are references to “profitability”, as in “… state officials say the system will quickly become profitable“, when the meaning is not actual profitability. My friend John did it too, but I forgive him because he knew the score, and because he’ll forgive me for being a pedant (I hope). But this is important! What the California officials mean by “profitability” (and it is a misuse of the term) is fare revenue in excess of operating costs. The latter do not include initial capital costs, so these officials are not making claims about actual profitability. Profitability means that revenue exceeds ALL costs, including capital costs. Many observers consider the California authority’s estimates of operating costs to be suspect, so it’s not even clear that revenue will cover the future costs of capital replacement, let alone the initial installation costs. Construction and planning costs are expected to be $68 billion for Phase 1 only, and you can safely bet on significant additional overruns by the projected completion of Phase 1 in 2029.

Fares calibrated to cover operating costs are not defensible in terms of long-run marginal cost pricing. While an incremental rider does not cause the capital cost of the system to increase in the short run, incremental riders absolutely do have an impact on long-run capital costs. In any case, there are many incremental riders at start-up. The long run is now. Yet, like many public projects, the burden of uncovered costs is justified in terms of other benefits of a supposedly public nature. Here is a vague description of such benefits from the CA HSR Authority:

“California high-speed rail will connect the mega-regions of the state, contribute to economic development and a cleaner environment, create jobs and preserve agricultural and protected lands.“

Let’s take these one at a time:

connecting “mega-regions”, if that is a real benefit of HSR relative to alternative modes of transportation, will largely accrue to riders, not the general public.
Economic development benefits are possible along the route or near stations, but that is hardly a pure public benefit, and it is likely to come at the expense of development elsewhere.
The trains will be powered, at least in part, by energy from fossil fuels. If HSR produces less carbon than equivalent airplanes, autos and other alternatives, that might represent a pure public benefit (according to the carbonphobic), but this is a costly way to achieve a minor reduction in carbon emissions. It is of value only to the extent that HSR brings real substitution away from other, higher carbon modes.
Construction jobs are part of the cost of the project, but this is a common ploy and very handy way to sell the project. Gains for the workers are certainly not a pure public benefit. To paraphrase Bastiat, calling construction jobs from malinvested capital a “public benefit” is like calling a broken window beneficial because it provides work for the glazier.
As for preserving agricultural and public lands, I do not believe that HSR will make much of a dent in future, land-gobbling highway construction (and if it did, it would offset those vaunted HSR job gains).

The public should always view large public projects like HSR with skepticism and insist that private benefits should be paid privately. There are always alternative uses of taxpayer funds, including the possibility that taxpayers should keep them. Too many public projects become funding disasters. In many cases, private parties would not be willing to buy the facilities for more than 10 cents on the dollar.of original cost. Without access to tax revenue, only a low purchase price would allow them to operate at a profit.

At the national level, this week’s tragic Amtrak crash near Philadelphia was the context for misguided calls to provide additional funding to the rail service. Sean Davis in The Federalist has a more logical proposal, even if it is a bit radical: not only should Amtrak be privatized, its assets should be given away! And how could anyone reach such a conclusion?

“Amtrak lost nearly $1.3 billion in 2013. Since its creation, Amtrak has racked up over $31 billion in accumulated losses. And every penny of those losses has been covered by federal taxpayers.

… Hand over the entire enterprise to whichever rail company wants it. ‘But that’s crazy!’ you might say. ‘Giving it away for free makes no cents [sic]!’

Well, neither does keeping it on the taxpayers’ books. The status quo costs taxpayers at least a billion dollars each year.“

Davis makes a fair point, though a give-away might attract multiple takers. Ultimately, bidding just might be necessary! Or, perhaps it would be necessary to PAY a private rail operator to take Amtrak off the federal government’s hands. A fairly high payment would still be worthwhile to taxpayers.

Randall O’Toole provides this excellent discussion of privatizing transit in a video of approximately 17 minutes. He discusses trends in ridership, the inefficiencies inherent in public transportation systems, and compares various market structures and types of private transportation systems, including private intercity buses (Megabus). He also addresses concerns that private transportation systems will not meet the needs of the poor by proposing the substitution of “transit stamps” for the huge subsidies currently paid into transportation bureaucracies.