Infrastructure: Public Waste & Private Rationality

25 Tuesday Jul 2017

Posted by pnuetz in infrastructure, Privatization

Tags

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.

Politicians and Infra-Hucksters

05 Thursday Jan 2017

Posted by pnuetz 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.

Parks, Prisons and Profits

30 Friday Sep 2016

Posted by pnuetz in Government, Profit Motive

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Tags

Ann Althouse, Bernie Sanders, Coyote Blog, Cronyism, Hillary Clinton, incentives, Morality of Profit, Netflix, Occupancy Guarantees, Orange Is the New Black, Private Operators, Private Park Operations, Private Prisons, Profit Motive, Reason Foundation, Sasha Volokh, The Volokh Conspiracy, Warren Meyer

One of my favorite pastimes is tallying the economic and social death wishes espoused by leftists, populists and other statists. A frequent theme of their entreaties is the presumed ugliness of profits sought by private businesses. Their expressed distaste is usually couched in terms suggesting that profits are a certainty, which of course they are not. Profits are always at risk unless protected by government. The critics are sometimes focused on lines of business that involve public assets or a supposed public purpose, such as education. Two other examples of that nature recently came up in my news feed: privately-operated prisons and private management of public parks.

The complaints heard about these kinds of business operations are based on ill-founded notions about the function of profit: that it is appropriate for resources to earn rewards only in some endeavors and not others, regardless of the property invested and the risks assumed by the enterprise. Another fallacy is that somehow, as if by magic, the motives and competence of public employees are beyond question. In fact, the ineffective and sometimes perverse incentives faced by public institutions and employees tend to undermine effective performance. That’s the underlying reason why privatization of services is often in the public interest. The detractors of profit usually rely on anecdotal evidence of poor performance by private managers without any objective basis of comparison.

Warren Meyer at Coyote Blog discusses the common misconception held by many regarding the relative morality of profits and wages. His comments are in the context of the company he owns and manages, which operates public parks under contract with the US Forest Service (USFS) and other public agencies, collecting revenue via entry and camping fees. Meyer (and I) find it astonishing that the aversion to private park operations is so common:

“The most typical statement I hear from USFS employees that summarizes this opposition — and it is quite common to hear it — is that ‘It is wrong to make a profit on public lands.’ …. This general distaste for profit, which is seen as “dirty” in contrast to wages which are relatively ‘clean’ (at least up to some number beyond which they are dirty again), is not limited to the USFS or even to government agencies in general, but permeates much of the public.“

Meyer goes on to describe a conversation he had with a USFS District Ranger. I provide a few excerpts below:

“Me: If you think it’s wrong to make money on public lands, I assume you must volunteer, else you too would be making money on public lands.
Ranger: No, of course I get paid.
Me: Well, I know what I make for profit in your District, and I have a good guess what your salary probably is, and I can assure you that you make at least twice as much as me on these public lands.
Ranger: But that is totally different.
Me: How? … My profit is similar to your wage in that it is the way I get paid for my effort on this land — efforts that are generally entirely in harmony with yours as we are both trying to serve visitors and protect the natural resources here. But unlike your wage, my profit is also a return on the investment I have made. Every truck, uniform, and tool we use comes out of my profit, whereas you get all the tools you need paid for by your employer above and beyond your salary. Further, your salary is virtually guaranteed to you, short of some staggering malfeasance. Even if you do a bad job you likely would just get shunted to a less interesting staff position at the same salary, rather than fired. On the other hand if I do a bad job, or if one of my employees slips up, or even if some absolutely random occurrence entirely outside my control occurs (like, say, a flood that closes our operations) my profit can completely evaporate, or even turn into a loss. So like you, I get paid for my efforts here on public lands, but I have to take risk and make investments that aren’t required of you. So what about that makes my profit less honorable than your wage?
Ranger: Working on public lands should be a public service, not for profit
Me: Well, I think you are starting to make the argument again that you should be volunteering and not taking a salary. But leaving that aside, why is profit inconsistent with service to the public?”

Privatization is not inconsistent with service to the public except under one circumstance highlighted by Meyer in a postscript. The ranger might have asked:

“How do we know your profits are not just the rents from a corrupt, cronyist government contracting process?“

Of course, if that were true, it would not necessarily be worse than a park operated exclusively by a public agency with no incentive to operate efficiently. The key here is to have effective review of the contracting process and good performance incentives in place. Meyer notes that his company serves millions of visitors each year at high service levels for a cost that is low relative to government-operated parks, and the company receives excellent reviews. More power to him! Profits are not synonymous with graft. Unfortunately, the purely emotional “feeling” that profits are immoral or dishonorable is amplified by the public nature of park assets, and that idea won’t ever be purged from the populist mind.

Ann Althouse brought similar thoughts to mind in describing Hillary Clinton’s weakly-reasoned condemnation of privately-operated prisons. Here’s Hillary at the first presidential debate early this week, after expressing approval of the Obama Administration’s decision to phase out most privately-operated federal prisons:

“You shouldn’t have a profit motivation to fill prison cells with young Americans.“

You can almost hear Althouse, a law professor at the University of Wisconsin, laughing at the idea that operators of private correctional facilities have any ability “to fill prison cells”. That’s not how our justice system works, Hillary! Some argue that “occupancy guarantees” in private prison contracts give prosecutors an incentive to seek harsh sentences, but that is a tenuous argument, especially with prisons generally over-crowded as they are. And it isn’t as if private prisons are free of oversight. Althouse contends that Hillary Clinton’s position is a concession to the left made necessary by earlier outrage that the Clinton campaign had accepted contributions from the private prison industry, itself prompted by a Bernie Sanders’ attack on that point.

Reason Magazine commented on Sanders’ condemnation of private prisons last year, which then housed only about 12 percent of the federal prison population. Reason noted that closing private federal prisons would contribute to over-crowding at publicly-operated facilities. Sanders also proposed forcing state and local governments to close private prisons under their jurisdictions within two years. Not only would that action ignore objective measures of performance and cost, it would violate established contracts and constitute an outrageous overreach of federal authority.

The Administration’s decision to phase out private prisons was subjected to an even-handed critique by Sasha Volokh (younger brother of Eugene) in August. Volokh covers the evidence on costs and quality of private versus publicly-operated prisons. He finds that the DOJ memo announcing the decision to phase out private operators exaggerates cost and quality differences that favor government operations, and discounts evidence that favors private prisons. Reminiscent of Warren Meyer’s notes on privately-operated parks, Volokh stresses the importance of creating appropriate incentives for operators. Current quality incentives are weak, and he believes there is vast room for improvement:

“It might seem surprising, but private prisons have almost never been evaluated on their performance and compensated on that basis. …. In light of that, maybe it’s even surprising that private prisons have done as well as they have in the comparative studies. Be that as it may, the advent of performance-based contracting could open up possibilities for substantial quality improvements. This could work in the public sector too (bonus payments for public prison wardens?), but the private sector is probably better situated to take advantage of monetary incentives.“

The Reason Foundation published a report earlier this year entitled “Private Prisons: Quality Corrections at a Lower Cost“. The study reveals the leftist critique of private prisons to be a sham. Here are the two major takeaways:

“Private prisons save money-10 to 15 percent average savings on operations costs, based on fourteen independent cost comparison studies.

Private prisons provide at least the same quality services that government prisons do-based on six independent quality comparison studies, rates of American Correctional Association accreditation, recidivism comparison studies, contract terminations, and prisoner and correctional officer lawsuits.“

People often get their “facts” from questionable sources. As to privately-operated correctional facilities, I’ve heard critics state that people should watch the fictional Netflix serial “Orange Is the New Black” to gain a proper understanding of the horrors of private prisons. And many seem eager to accept that narrative without any knowledge of the facts. That’s probably because they have been taught that profits are “dirty”, that public purposes like the operations of parks and prisons are so pure of public purpose that private operators can have no legitimate role, and that government operation can be counted upon for quality and efficiency. Now doesn’t that sound oxymoronic?