Infrastructure: Public Waste & Private Rationality

25 Tuesday Jul 2017

Posted by pnuetz 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.

Mobility, Safety Nets & Sticky Webs

23 Thursday Jun 2016

Posted by pnuetz in Big Government, Welfare State

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Affordable Care Act, Andrei Schleifer, Basic Income Guarantee, Christopher Jencks, Curley Effect, David Henderson, Dependent Class, Don Boudreaux, Earned Income Tax Credit, Edward Glaeser, Employment Incentives, Extreme Poverty, Henry Hazlitt, Kathryn Edin, Labor Force Participation, Luke Shaefer, Marginal Revolution, Medicaid expansion, Michael Tanner, Milton Friedman, Mises Wire, Obamacare, Social Safety Net, Tyler Cowan, Universal Basic Income, Veronique de Rugy, War on Poverty, Welfare State, work incentives

We’re unlikely to reduce the share of the U.S. population living in economic dependency under the current policy regime. So many aspects of tax law, regulation and aid programs are designed as if to perpetuate or perhaps even worsen the situation. I’ve discussed this topic before on Sacred Cow Chips in “Degrees of Poverty and the Social Safety Trap“, and “Minority Politics and the Redistributionist Honey Trap“.

Many supporters of aggressive anti-poverty efforts take umbrage at any suggestion that government aid might discourage the poor from engaging in productive activities. They imagine an implication that the poor are “lazy”, perfidious or otherwise undeserving of assistance. Whether that is a misunderstanding or merely rhetorical bite-back, the fact is that it is rational to respond to incentives and there is no shame in doing so. Unfortunately, many assistance programs contain incentive traps or income “cliffs” that discourage work effort. This applies to food stamps, rent subsidies, Obamacare subsidies, and many more of the 120+ federal aid programs and other state and local programs.

Here’s a new example from a research abstract posted at Marginal Revolution: The Medicaid expansion had very negative effects on labor force participation. The funding for Medicaid expansion at the state level was authorized by the Affordable Care Act (ACA) — aka Obamacare, but only about half the states went along with it. From the abstract:

“I find a significant negative relationship between Medicaid expansion and labor force participation, in which expanding Medicaid is associated with 1.5 to 3 percentage point drop in labor force participation.“

The direction of impact is hardly unique, and as Tyler Cowen notes at the link:

“Work is good for most people, and it is even better for their future selves, and their future children too.“

The negative impact of Obamacare is more massive than the estimate above might suggest. Veronique de Rugy at Reason.com discusses how “Federal Programs Keep People Poor“. While most of her article is about the negative impact of high marginal tax rates on the employment prospects of the poor, she also recalls an ugly CBO estimate of the ACA’s impact:

“In 2014, the Congressional Budget Office—Congress’ official fiscal scorekeeper—revised its original estimate to report that because of the law, by 2024 the equivalent of 2.5 million Americans who were otherwise willing and able to work will have exited the labor force.“

There are several different channels through which the negative effects of the ACA operate: Small employers are incented to limit their hiring and the hours of employees, and federal subsidies (and sometimes state benefits) are available to individuals only so long as they remain below certain income thresholds. Again, this is typical of many government aid programs (the Earned Income Tax Credit (EITC) being an exception). More from de Rugy:

“When the government takes away a person’s benefits as his income goes up, it has the same effect as a direct tax. And remember, when you tax something, you usually get less of it. That means these programs can actually hinder income mobility: In order to continue receiving their government cash, individuals are forced to limit the amount they earn. Thus, they have an incentive not to try to climb the income ladder by putting in extra hours or signing up for job training and educational programs.“

Mises Wire recently carried a reprint of an essay by the great Henry Hazlitt, “How To Cure Poverty“. The gist of Hazlitt’s argument is that government largess simply cannot create wealth for society, but only diminish it. The mere process of redistributing the current “pie” consumes resources, but that is minor compared to the future reduction in the size of the pie brought on by the terrible incentives inherent in income taxation and many government benefit programs:

“The problem of curing poverty is difficult and two-sided. It is to mitigate the penalties of misfortune and failure without undermining the incentives to effort and success. … The way to cure poverty is … through … the adoption of a system of private property, freer trade, free markets, and free enterprise. It was largely because we adopted this system more fully than any other country that we became the most productive and hence the richest nation on the face of the globe. Through this system more has been done to wipe out poverty in the last two centuries than in all previous history.“

Harvard professors Edward Glaeser and Andrei Schleifer have written about “The Curley Effect: The Economics of Shaping the Electorate“, which posits that redistributive policies that are harmful to constituents can be rewarding to politicians. The paper deals with policies that encourage emigration of affluent voters away from cities, but which nevertheless reward politicians by increasing the proportion of their political base in the remaining constituency. It seems to apply very well to many major cities in the U.S. However, it certainly applies more broadly, across states and nations, when affluent people and their capital are mobile while the less affluent are not, especially when benefits are at stake. It’s no secret that promises of benefits are often attractive to voters in the short run, even if they are harmful and unsustainable in the long run.

The welfare state appears to have helped to sustain many of the poor at an improved standard of living after accounting for benefits, or it has prevented them from falling into “deep poverty”. However, it hasn’t succeeded in lifting the poor out of dependency on the state. Pre-benefit poverty rates are about the same as they were the late 1960s. In addition, Christopher Jencks observes that the “Very Poor” have in fact become poorer. That’s discussed in his review of “$2.00 a Day: Living on Almost Nothing in America” by Kathryn Edin and Luke Shaefer. Jencks presents statistics showing that those in the lowest two percentiles of the income distribution have suffered a fairly sharp decline in income since 1999. Many of these extremely poor individuals do not avail themselves of benefits for which they could qualify. In addition, the EITC requires earned income. A job loss is a wage loss and, if it goes on, a loss of EITC benefits. Unfortunately, work requirements are more difficult to meet in the presence of wage floors and other distortions imposed by heavy-handed regulation.

A guaranteed national income has become a hot topic recently. Michael Tanner weighs in on “The Pros and Cons…” of such a program. There are many things to like about the idea inasmuch as it could sweep away many of the wasteful programs piled upon each other over the years. It is possible to construct a sliding-scale guarantee that would retain positive incentives for all, as Milton Friedman demonstrated years ago with his negative income tax concept. However, as Tanner points out, there are many details to work out, and the benefits of the switch would depend upon the incentive structure built into the guarantee. As a political plaything, it could still be dangerous to the health of the economy and an impediment to income mobility. Don Boudreaux has registered objections to a guaranteed income, one of which is based on strengthening the wrongheaded argument that we derive all rights from government. Even more interesting is David Henderson’s take on a basic income guarantee. He finds that the budgetary impact of a $10,000 guarantee would equate to a 30% increase in government spending, and that assumes that it replaces all other assistance programs! Henderson also discusses the public choice aspects of income guarantees, as well as moral objections, and he concludes that there are strong reasons to reject the idea on libertarian grounds.

The economy is riddled with too many subsidies, penalties and bad incentives that distort the behavior of various groups. The well-to-do often benefit from subsidies that are every bit as distortionary as those inherent in many public assistance programs. They should all be swept away to restore a dynamic economy with the potential to lift even more out of poverty. There could be a role for a guaranteed income on the grounds that it is better than what we’ve got. But we should recall the words of Hazlitt, who reminded us that we’ve come so far on the strength of property rights, private initiative, and free trade. Left unfettered, those things can take us much farther than the ugly pairing of beneficence and coercion of the government behemoth.

Wanna Help People? End the Drug War!

03 Tuesday Nov 2015

Posted by pnuetz in War On Drugs

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Black Markets, Colorado Legalization, Colorado Pot Legalization, Drug Abuse, Drug Cartels, Gangland Violence, Individual Liberty, Jacob Sullum, Milton Friedman, Prohibition, Prostitution, Victimless Crimes, War on Drugs

We’re taught that illegal drugs are a scourge on humanity, that their use is immoral and that legalization is out of the question. Yet far more of us, our friends, and our loved ones have been intimate with the destructive effects of alcohol and dependency on legal drugs than on illegal drugs. Pharmacologically, the “worst effects” of illegal drugs are no worse than the well-known effects of alcohol abuse. In fact, the “worst effects” have more to do with prohibition than with the illegal drugs themselves.

Rules are codified into law successfully when widespread agreement exists among the citizenry that a rule is sensible. This should trouble drug prohibitionists: a substantial proportion of the population has used illegal drugs as adults, indicating a strong lack of consensus that recreational drugs should be illegal. For this reason alone, drug prohibition is and always will be ineffectual.

The great economist Milton Friedman was a long-time critic of the drug war. Several of his articles on the topic are linked at this site. One of the links is this interview from 1992, which is lengthy but sticks primarily to the issue of the drug war. I’m not sure that all of the facts Friedman cites have held up over time, especially with respect to trends in alcohol consumption. Nevertheless, it is a great interview:

“There are [sic] an enormous number of innocent victims now. You’ve got the people whose purses are stolen, who are bashed over the head by people trying to get enough money for their next fix. You’ve got the people killed in the random drug wars. You’ve got the corruption of the legal establishment. You’ve got the innocent victims who are taxpayers who have to pay for more and more prisons, and more and more prisoners, and more and more police. You’ve got the rest of us who don’t get decent law enforcement because all the law enforcement officials are busy trying to do the impossible.“

Here is a brief list of the pernicious effects of drug prohibition:

Prices are driven upward by the legal risk inherent in black market trade;
High prices lead to more crime as heavy users seek means of payment;
Impure and more dangerous variants are traded in attempts to stretch quantities and increase potency;
Dealers advance “samples” to gain trust and cultivate dependency among users;
Addiction is stubbornly resistant to legal barriers;
Unnecessary deaths from impure and excessively potent drug varieties;
Black market trade leads to violent crime as underworld elements seek to control markets and enforce discipline in their organizations;
Unnecessary deaths from gangland violence;
Arrest, imprisonment and ruined lives for victimless crimes;
A huge burden on taxpayers;
A huge burden on the criminal justice system;
Inevitable corruption in law enforcement as officials face hefty rewards for protecting the drug trade;
Innocent people become casualties of violence instigated by gangs and sometimes by police actions.

A fascinating dynamic of the black market in drugs is the tendency toward monopolization at the top: Large cartels dominate the importation of supplies due to the risk and expense of such operations. As Friedman noted, the war on drugs contributes to the difficulty of entering into competition with established players. At the same time, the drug war guarantees huge rewards to the cartels by inflating drug prices:

“What more could a monopolist want? He’s got a government who makes it very hard for all his competitors and who keeps the price of his products high.“

The drug war creates greater danger for users. In “Prohibition Kills“, Jacob Sullum discusses four recent examples of more dangerous and even deadly drug variants that have been developed as a direct consequence of prohibition. Friedman is often quoted as saying that crack cocaine was a direct consequence of the drug war. Sullum asks whether this could be an intentional strategy by drug warriors for discouraging consumption. I’m not convinced they are quite so nefarious, but it’s something to ponder.

More dangerous varieties of drugs would not vanish overnight if drugs were legalized, though the incentive to develop them would diminish. Of course, if legalization brings prices and risks down, as we’d expect, it would encourage greater recreational use. That should not be viewed as a “bad” any more than better access to cocktails at happy hour. Abuse is unlikely to increase because problem users tend to be undeterred by prohibition. And as unsavory as an increase in recreational drug use might seem to the temperance faction, it would still represent only a small fraction of the real costs of ruined lives imposed by prohibition and the drug war.

Legalization would bring other complexities, as Colorado’s experience with marijuana shows. For example, rules with respect to driving under the influence must be updated, as well as laws prohibiting possession by minors. Colorado went so far as to regulate packaging, and tax treatment of the drug trade will stoke debate, as governments will hope for something of a tax bonanza. But the more that government attempts to regulate and tax drugs, the more that problems similar to those associated with drug prohibition will persist, albeit on a smaller scale.

Economically, legalization should eliminate a burden on taxpayers. It would free up law enforcement resources to battle real crime and should make more funds available for treatment programs. It would also help to improve lives and safety in inner cities and other areas ravaged by black market drug trade and the violence it foments. And of course, legalization would put an end to the ruin of lives caused by the arrest of individuals for victimless crimes.

Prohibition of drugs belongs to a larger class of social problems brought on by efforts to bring the police power of government to bear on private behavior. I already mentioned that alcohol prohibition had similar consequences. To lesser degrees, similar harmful consequences are associated with laws against prostitution, large soft drink containers, sugary foods, and practicing almost any commercial art without a license. The same can be said for price regulations like rent control and the minimum wage. The former has led to the destruction of vast quantities of housing; the latter harms low-skilled workers along non-wage dimensions and makes it difficult for unskilled workers to gain valuable experience in the job market. Government interference with individual liberty might well restrain certain activities deemed “undesirable” by busybodies, but it it also leads to higher prices, greater risk, black market activity, violence, unnecessary legal actions against individuals, and greater expense for society.

Rhett Butler and the War on Drugs

01 Monday Sep 2014

Posted by pnuetz in Uncategorized

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Art Carden, Drug Potency, Foundation for Economic Education, Milton Friedman, Prohibition, Rhett Butler Effect, War on Drugs

Prohibiting the consumption of any good is always likely to have undesirable effects. One typically unintended consequence is the tendency for less costly varieties of the good to disappear in favor of expensive variants, which provide rewards to suppliers that better compensate for the legal risks inherent in their trade. Some have dubbed this the “Rhett Butler effect,” after the dashing blockade runner in Gone With The Wind. This effect is discussed in “Why Rhett Butler’s Weed Is So Strong“,:

“… in the context of the North’s blockades against the South, blockade runners could profit more from delivering smaller and lighter-weight luxuries to Confederate ports. The South thus found itself flush with things like ‘bonnet ribbon, playing cards, corset stays and . . . all kinds of personal items.’”

In the context of alcohol prohibition and, more recently, the so-called war on drugs, prohibition has created a systematic tendency for the potency of contraband to increase. Art Carden quotes Milton Friedman on this point: “crack would never have existed…if you had not had drug prohibition.” The unfortunate result is that drugs become more powerful and often more dangerous and addicting. The cost also rises on average, which may create incentives for desperate users to engage in other nefarious activities.

Is Community Service So Praiseworthy?

05 Thursday Jun 2014

Posted by pnuetz in Uncategorized

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Arnold Kling, Community service, Milton Friedman, William Buckley

Community service is always praised as an honorable activity, at least when it isn’t assigned in court, but should it be given extra emphasis by schools in admission decisions? Should schools (or society) expect some minimum level of community service of college applicants (or anyone)? Should it be viewed as experientially or ethically superior to time spent developing one’s talents? Time spent gaining job experience? Time spent earning income? Arnold Kling takes a hard line on this question, arguing that community service deserves no more praise than other endeavors. He believes the topic is worthy of a high school graduation speech.

One commenter on Kling’s post noted that Milton Friedman once asked William Buckley (who advocated national service) whether cleaning the toilet in a public school does more to serve the community than cleaning the toilet in a McDonalds. I’m inclined to agree with Kling that there are many activities that have at least as much value as community service. He says:

“If you judge people by how their life’s work contributed to better lives for people and less poverty in the world, then I will gladly stack up the Henry Fords and Thomas Edisons against the Mother Theresas. Collectively, the capitalists and entrepreneurs have a much better claim on our gratitude than do the icons of community service.”

But I also assert that it all depends on the nature of the activity, which should be self-evident. Community service might also reflect on the breadth of an individual’s experiences, or their “well-roundedness.” Still, even “having fun” has value, sometimes great value. If you like your work, your productivity and enjoyment count for a lot. Like Kling, I have strong reservations about conferring special status to time spent doing community service activity. It can be good or it can be of less value than other choices. It can even be a fraud.