Tag Archives: Private Infrastructure

Sell the Interstates and Poof — Get a Universal Basic Income

11 Tuesday Jul 2017

Posted by in Automation, Universal Basic Income

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Proposals for a universal basic income (UBI) seem to come up again and again. Many observers uncritically accept the notion that robots and automation will eliminate labor as a factor of production in the not-too-distant future. As a result, they cannot imagine how traditional wage earners, and even many salary earners, will get along in life without the helping hand of government. Those who own capital assets — machines, buildings and land — will have to be taxed to support UBI payments, according to this logic.

Even with artificial intelligence added to the mix, I view robot anxiety as overblown, but it makes for great headlines. The threat is likely no greater than the substitution of capital for labor that’s been ongoing since the start of the industrial revolution, and which ultimately led to the creation of more jobs in occupations that were never before imagined. See below for more on my skepticism for robot dystopia. For now, I’ll stipulate that human obsolescence will happen someday, or that a great many workers will be displaced by automation over an extended period. How will society manage with minimal rewards for labor? The question of distributing goods and services will depend more exclusively on the ownership of capital, or else it will be charity and/or government redistribution.

The UBI, as typically framed, is an example of the latter. However, a UBI needn’t require government to tax and redistribute income on an ongoing basis. Nobel Prize winner Vernon Smith suggests that the government owns salable assets sufficient to fund a permanent UBI. He suggests privatizing the interstate highway system and selling off federal lands in the West. The proceeds could then be invested in a variety of assets to generate growth and income. Every American would receive a dividend check each year, under this plan.

Why a UBI?

Given the stipulation that human labor will become obsolete, the UBI is predicated on the presumption that the ownership of earning capital cannot diffuse through society to the working class in time to provide for them adequately. Working people who save are quite capable of accumulating assets, though government does them no favors via tax policy and manipulation of interest rates. But accumulating assets takes time, and it is fair to say that today’s distribution of capital would not support the current distribution of living standards without opportunities to earn labor income.

Still, a UBI might not be a good reason to auction public assets. That question depends more critically on the implicit return earned by those assets via government ownership relative to the gains from privatization, including the returns to alternative uses of the proceeds from a sale.

Objections to the UBI often center on the generally poor performance of government in managing programs, the danger of entrusting resources to the political process, and the corrosive effect of individual dependency. However, if government can do anything well at all, one might think it could at least cut checks. But even if we lay aside the simple issue of mismanagement, politics is a different matter. Over time, there is every chance that a UBI program will be modified as the political winds shift, that exceptions will be carved out, and that complex rules will be established. And that brings us back to the possibility of mismanagement. Even worse, it creates opportunities for rent seekers to skim funds or benefit indirectly from the program. In the end, these considerations might mean that the UBI will yield a poor return for society on the funds placed into the program, much as returns on major entitlements like Social Security are lousy.

Another area of concern is that policy should not discourage work effort while jobs still exist for humans. After all, working and saving is traditionally the most effective route to accumulating capital. Recipients of a UBI would not face the negative marginal work incentives associated with means-tested transfer payments because the UBI would not (should not) be dependent on income. It would go to the rich and poor alike. A UBI could still have a negative impact on labor supply via an income effect, however, depending on how individuals value incremental leisure versus consumption at a higher level of money income. On the whole, the UBI does not impart terrible incentive effects, but that is hardly a rationale for a UBI, let alone a reason to sell public assets.

Funding the UBI

We usually think of funding a UBI via taxes, and it’s well known that taxes harm productive incentives. If the trend toward automation is a natural response to a high return on capital, taxes on capital will retard the transition and might well inhibit the diffusion of capital ownership into lower economic strata. If your rationale for a UBI is truly related to automation and the obsolescence of labor, then funding a UBI should somehow take advantage of the returns to private capital short of taxing those returns away. This makes Smith’s idea more appealing as a funding mechanism.

Will there be a private investment appetite for highways and western land? Selling these assets would take time, of course, and it is difficult to know what bids they could attract. There is no question that toll roads can be profitable. Robert P. Murphy provides an informative discussion of private roads and takes issue with arguments against privatization, such as the presumptions of monopoly pricing and increased risk to drivers. Actually, privatization holds promise as a way of improving the efficiency of infrastructure use and upkeep. In fact, government mispricing of roads is a primary cause of congestion, and private operators have incentives to maintain and improve road safety and quality. Public land sales in the West are complex to the extent that existing mineral and grazing rights could be subject to dispute, and those sales might be unpopular with other landowners.

Once the assets are sold to investors, who will manage the UBI fund? Whether managed publicly or privately, the best arrangement would be no active trading management. Nevertheless, the appropriate mix of investments would be the subject of endless political debate. Every market downturn would bring new calls for conservatism. The level of distributions would also be a politically contentious issue. Dividend yields and price appreciation are not constant, and so it is necessary to determine a sustainable payout rate as well as if and when adjustments are needed. Furthermore, there must be some allowance to assure fund growth over time so that population growth, whatever the source, will not diminish the per capita payout.

Jesse Walker has a good retrospective on the history of “basic income” proposals and programs over time. He demonstrate that economic windfalls have frequently been the impetus for establishment of “rainy day” programs. Alaska, enabled by oil revenue, is unique in establishing a fund paying dividends to residents:

“From time to time a state will find itself awash in riches from natural resources. Some voices will suggest that the government not spend the new money at once but put some away for a rainy day. Some fraction of those voices will suggest it create a sovereign wealth fund to invest the windfall. And some fraction of that fraction will want the fund to pay dividends.

Now, there are all sorts of potential problems with government-run investment portfolios, as anyone who has followed California’s pension troubles can tell you. If you’re wary about mismanagement, you’ll be wary about states playing the market; they won’t all invest as conservatively as Alaska has.

Still, several states have such funds already—the most recent additions to the list are North Dakota and West Virginia—and the number may well grow. None has followed Juneau’s example and started paying dividends, but it is hardly unimaginable that someone else will eventually adopt an Alaska-style system.”

Human-Machine Collaboration

A world without human labor is unlikely to evolve. Automation, for the foreseeable future, can improve existing processes such as line tasks in manufacturing, order taking in fast food outlets, and even burger flipping. Declines in retail employment can also be viewed in this context, as internet sales have grown as a share of consumer spending. However, innovation itself cannot be automated. In today’s applications, the deployment and ongoing use of robots often requires human collaboration. Like earlier increases in capital intensity, automation today spurs the creation of new kinds of jobs. Operational technology now exists alongside information technology as an employment category.

I have addressed concerns about human obsolescence several times in the past (most recently here, and also here). Government must avoid policies that hasten automation, like drastic hikes in the minimum wage (see here and here). U.S. employment is at historic highs even though the process of automation has been underway in industry for a very long time. Today there are almost 6.4 million job vacancies in the U.S., so plenty of work is available. Again, new technologies certainly destroy some jobs, but they tend to create new jobs that were never before imagined and that often pay more than the jobs lost. Human augmentation will also provide an important means through which workers can add to their value in the future. And beyond the new technical opportunities, there will always be roles available in personal service. The human touch is often desired by consumers, and it might even be desirable on a social-psychological level.

Opportunity Costs

Finally, is a UBI the best use of the proceeds of public asset sales? That’s doubtful unless you truly believe that human labor will be obsolete. It might be far more beneficial to pay down the public debt. Doing so would reduce interest costs and allow taxpayer funds to flow to other programs (or allow tax reductions), and it would give the government greater borrowing capacity going forward. Another attractive alternative is to spend the the proceeds of asset sales on educational opportunities, especially vocational instruction that would enhance worker value in the new world of operational technology. Then again, the public assets in question have been funded by taxpayers over many years. Some would therefore argue that the proceeds of any asset sale should be returned to taxpayers immediately and, to the extent possible, in proportion to past taxes paid. The UBI just might rank last.

Private Incentives and Infrastructure

10 Tuesday Jan 2017

Posted by in infrastructure, Markets

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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 in Government, infrastructure, Technology

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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.