Tuesday, September 13, 2016

Glaeser and Summers on Infrastructure

Ed Glaeser has a superb essay on infrastructure at City Journal, titled "If you Build It.." I have a few excerpts, but do go and enjoy the whole thing. Larry Summers also has a new blog post on infrastructure, with some fascinating bits if you read carefully. I wrote about some of these issues in the WSJ and recent post, but not with Ed's clarity and erudition, nor Larry's imprimatur.

Glaeser starts with a clear summary paragraph:

While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes inefficiencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollars
Ed documents well my own doubts that infrastructure spending will do much for the economy as a whole, especially in the short run. Buy the infrastructure for the infrastructure, at lowest possible cost -- not for the "jobs" or on the idea this is the key to returning to growth. Annoying as they may be, there is no case that US GDP growth has been cut in half because there are too many potholes. The Hillary Clinton plan included a praiseworthy -- and  novel, considering her party's years of opposition to freeway building -- proposal to cut commuting times. But
What about the economic value of the shorter commuting times that new infrastructure can bring? ... it’s hard to see how substantially reducing time lost to traffic congestion will turbocharge the economy. Imagine that America gets its act together and cuts traffic time sufficiently to save $80 billion—a pretty miraculous improvement. That would still represent less than one-half of 1 percent of America’s $18 trillion GDP....Transportation infrastructure isn’t a solution for America’s lackluster growth rates
The idea of public works to boost the economy goes back, I think, to the Romans, but I'm glad to read just how fresh an idea it is in America:
The idea of using infrastructure building as a weapon against unemployment first entered American politics after the economic panic of 1893. Before that recession hit, in 1891, businessman and Ohio politician Jacob Coxey drafted his “Good Roads Bill.” Coxey wanted the government to spend at least $20 million per month building roads across America, paying workers “at least 80 percent above the going hourly rate.” This building campaign, he argued, would be financed by the printing press—Coxey was a pro-inflation Greenback Party member—and would hike government spending by 75 percent. 
Fiscal expansion financed by helicopter drops remains the cutting edge of Keynesian policy macroeconomics. Keynes once said that "Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." It sees instead that practical policy Keynesian economists who believe themselves a vanguard of intellectual influence are usually the slaves of some defunct politician! It's a more general problem when economics comes to the service of policies decided for other reasons.

On the stimulus aspect of infrastructure, I have long been suspicious. The Keynesian argument for stimulus works for wasted spending just as well as infrastructure. That you have to wrap it in something nice to get it past the rubes who will not believe that wasted spending is a good thing suggests faith in the idea is not as strong as it should be. Anyway, Ed takes this on with precision

... one should be wary of drawing infrastructure-related lessons from the 1930s for the twenty-first century. .. While a sensible anti-unemployment policy targets resources at areas that have high unemployment rates, many of those areas are today in long-term decline, and the last thing they need is new roads and bridges... 
...The relatively simple technology of infrastructure construction of the 1930s meant that the unskilled unemployed could easily be put to work building roads. Among the iconic images of the Great Depression are scores of men wielding shovels and picks. That isn’t how roads and bridges are built anymore, though. Big infrastructure requires fancy equipment and skilled engineers, who aren’t likely to be unemployed. The most at-risk Americans, if they’re working at all, usually toil in fast-food restaurants, where the average worker makes $22,000 a year. They’re typically not trained to labor on complex civil-construction projects. Subsidizing Big Mac consumption would be a more effective way to provide jobs for the temporarily unemployed than subsidizing airport renovation.
My emphasis because it's such a great quote. It also holds for the permanently unemployed, low-skilled or not construction union members.

The building process was also much quicker in the past, meaning that projects proposed during the Depression could be started and even finished during the Depression, making them more likely to fight temporary joblessness. Robert Moses built the Triborough Bridge complex, the construction of which got under way on Black Friday in October 1929, in just four years. Such speed is hard to imagine today. Boston’s Big Dig, to take one famous example, took 25 years from initial planning to its final completion in 2007. 
It took 6 years to build the transcontinental railroad in the 1860s. By hand.
Why have transportation projects become so much slower? Yes, they’re usually more technologically complicated, but much of the time, politics is also to blame. ... To erect the Triborough, Moses could just demolish the buildings that he needed to get out of the way—neighborhood complaints be damned. Such tactics are no longer politically acceptable, so the Big Dig and other large-scale undertakings needed painstakingly to avoid inconveniencing anybody, dramatically raising costs and delays. New Deal projects also didn’t face environmental-impact reviews, which can add years to a project timeline. Detroit’s Gordie Howe International Bridge’s review process took “four years of consultations, public hearings, traffic analyses, and environmental studies,” to take a recent example. The project should be finished around 2020—15 years after that review process began.
Ed closes with an important point. Just why are roads and bridges, today, financed by Federal tax money? Groceries are funded by the money of people who buy them. In the past, roads and bridges were public goods -- it was not practical to charge users. Now, electronics make real-time, congestion-contingent tolling practical on city streets.
Many tasks of government have nothing in common with private enterprise. Neither our military nor our courts should be in the business of extracting revenues from, respectively, foreign powers or litigants. Aid to the poor and to the elderly is meant to be money-losing. But infrastructure is different and has much more in common with ordinary businesses. After all, infrastructure provides valuable services, the use of which by one individual typically crowds out the use by someone else. E-ZPass technology has made it simple to charge for transportation. Why not, then, establish a business model for transportation infrastructure?
Back from Free-Market Nirvana, Larry Summers' latest blog post has a predictably strong argument for infrastructure investment along the lines of the Hilary Clinton plan, multiplied by about a factor of 10. But he has some wise and important words of caution as well:
How can we be sure investment is carried out efficiently? There is legitimate scepticism about this, and there is no silver bullet for this problem. ... progressive advocates of more investment should compromise with conservative sceptics and, in the context of increased spending, accept regulatory streamlining, as well as requirements that projects undergo cost-benefit analysis. Minimising cost should be the objective of infrastructure procurement.
This is a very important statement. Me, in the WSJ,
In return for more spending, Mrs. Clinton could have offered serious structural reforms: repeal of Davis-Bacon, time limits on environmental reviews, serious cost-benefit analysis, and so forth. Such a package would have been irresistible 
It's nice to agree. But minimizing cost is a breathaking proposition in American politics. A good acid test for infrastructure fans: Suppose a Chinese company offers to build your high speed train at half the cost. Do you say yes? If no, you're not really serious about infrastructure. Larry just said yes.

Larry also takes on the private sector issue,
What about the private sector? ...Policy frameworks that streamline regulatory decision-making and reduce uncertainty could spur investment in these sectors. There is a case for experimenting with mobilising private capital for use on infrastructure that has been a public-sector preserve, such as airports and roads. But, the reality that government borrowing costs are much lower than the returns demanded by private-sector infrastructure investors should lead to caution. It would be unfortunate if, in an effort to avoid deficits, large subsidies were given to private financial operators. Only when private-sector performance in building and operating infrastructure is likely to be better than what the public sector can do is there a compelling argument for privatisation.
Anytime someone uses a passive locution so convoluted as "experimenting with mobilising private capital," I suggest you react as you would to "Ladies and Gentlemen, a band of pickpockets has been discovered working the room." Precisely for the reasons laid out in Larry's last sentence: "Public-Private partnerships" usually mean public protection, private profits, and a piƱata for politicians.


  1. In Summers' defense, 'mobilising private capital' sounds much better than 'forcibly taking it from you and giving it to someone else'.

  2. The salient point in all if this was the one Glaeser made from the start. Why is it assumed that public works spending is going to cure long term unemployment and sclerotic growth?

    1. Especially when it's roads and trains (entire Glaeser piece was lovely). It would at least be nice to see the infrastructure crowd at least get more creative. I think there have to be some opportunities. Maybe LED streetlights, subsidized urban gardens, basketball courts and leagues hiring local teens to coach, hot spots and charging stations, natural gas buses, jogging / bike trails ...

    2. Yeah but think about what kind of rent seeking that would attract/public choice issues that would create. You could imagine apple sending a billion dollars down k street to insist every child needed an ipad to get better educated.

  3. It's not really that fresh an idea in America. The Federalists, and especially the Whigs, were strong advocates of "internal improvements," which was the late-18th-19th-century term for infrastructure. Lincoln gave a speech during his one term in Congress advocating internal improvements.

    In sum, the idea of government funded infrastructure has been an important force in American politics since the founding of the Republic.

    1. That really doesn't count. They were not arguing that such would primarily "stimulate" demand and provide employment. They wanted the infrastructure, badly needed at the time.

    2. There's a lovely youtube video of Tom Sargent talking about the founding of the US . In it, he discusses how the US government, after building up a good credit reputation, individual states decided to borrow and build infrastructure on the grounds that such improvements would inevitably pay for themselves. State default and painful recession following - its remarkable how this argument hasn't died yet.

  4. About the negative impact of delays, things are actually not so clear cut.

    In a standard New Keynesian model at ZLB, time to build delays can make demand effects actually stronger.

    See https://dl.dropboxusercontent.com/u/99438343/papers/TTB_ZLB_rev2.pdf

  5. The first instance of using public works to combat unemployment that I know of was in Ancient Greece about 2,500 years ago.

    Pericles set up a “government as employer of last resort” scheme. Plutarch’s book “The Lives of the Nobel Grecians and Romans” (p.192) says “….it being his desire and design that the undisciplined mechanic multitude that stayed at home should not go without their share of public salaries, and yet should not have them given them for sitting still and doing nothing, to that end he thought fit to bring in among them, with the approbation of the people, these vast projects of buildings and designs of work, that would be of some continuance before they were finished, and would give employment to numerous arts, so that the part of the people that stayed at home might, no less than those that were at sea or in garrisons or on expeditions, have a fair and just occasion of receiving the benefit and having their share of the public moneys.”

    Plutarch’s book is available on the internet.

    1. Which means that Pericles was the first Keynesian! Without even knowing it... he he :-) :-)
      Which makes me wonder if Ancient Greece had its Robert Lucas, too...

    2. Where, you might ask, did Pericles get the money for such expensive projects? After the Persian Wars, the islands around Asia Minor began paying Athens to defend them from Persia. This money was supposed to be used to build ships and to man a navy, or at least to be kept in reserve until it was needed. Pericles spent it on the Parthenon and other public buildings. It was a monumental (pun intended) misallocation of public funds. Athens' allies, who supplied the money, resented this. Some revolted against Athens, and, after a series of complications, you ended up with the Peloponnesian War, which lasted 27 years. I'm surprised that Thucydides didn't come up with Public Choice theory then and there.

  6. John, the sentence "Anytime someone uses a passive locution so convoluted as 'experimenting with mobilising private capital,' I suggest you react as you would to 'Ladies and Gentlemen, a band of pickpockets has been discovered working the room.'" was wonderfully crafted, and gave a good chuckle. Thanks.

    1. Thanks. Though in retrospect it was inaccurate -- not passive, but a great example of the subject-free sentence. (Or really, the hidden-subject sentence. Who is going to do this mobilising?)

  7. Why is infrastructure always crumbling? I understand that time wears down all things, but since I was a child I have been hearing the political classes tell us how imperative we rebuild our crumbling infrastructure, and that a near-terms disaster looms as our bridges and roads will all collapse.

    Then there was the ARRA (aka the Bush / Obama stimulus packages) that were suppose to give immediate funding to all "shovel ready projects." This backlog of deferred maintenance was all going to get rebuilt and repaired.
    The punch line was that not so many projects were actually "shovel ready."

    And now, 6 years later the call for more infrastructure spending is renewed.

  8. Problems with public private partnership are: The details and responsibility.

    Here in Germany waste disposal is organised both by public administration and by private companies. It depends on the municipality.

    In our rural municipality every 4/8 years (depends on the kind of waste) a call for bids is issued to conclude a contract with the next the waste disposal contractor.

    We had the circumstance that for a while only one contractor (sometimes two, but the second was just a daughter of the main contractor with small term adjustments) had a competitive price. So that one always got the contract.

    Then one guy from the administration took the time and insight to look into the calculation details and he reckognized that the main reason for the lack of competition were the waste containers.

    The existing contractor continued to used the already distributed waste containers (more than one per household / place of business) because the containers were in its property and part of the contract.

    Other contractors placing new bids had to consider the price of buying or leasing the new containers into their calculations (EU rules forbid speculative calculations in public calls for bids).

    Now the local municipality decided to invest some money and buy the waste containers into the municipalities property and take them out of the contract. The new contract is only about depleting the container and transport the waste to the dump.

    Suddenly there were 7,8 companies with competitive prices and the prices went down.

    If you one goes for PPP regular calls for bids (long-term service issues) are important. If the business case does not allow that, the whole thing should not be made by privates or it is has to be cut into little pieces that allow for a spread of contractors. Its all about the competition.

    Second it must be clear that the responsibility for the issue is on the public side. Often privatization is understood as way to get the accountability away from the public administration, but that is dead wrong.

    To enable the public administration to enforce its accountability legal certainty issues of the contractor must not be placed to much importance upon. If private companies totally fail to deliver, public services should be allowed and enabled to take part in the competition, sometimes that is necessary to produce working competition.

    And somebody on the public side must put his nose into the details and ask the interesting questions (also an accountability thing).

    If these fundamentals are accounted for PPP can work.


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