Sunday, October 22, 2023

Leonhardt on investment

 David Leonhardt's pean to investment in the Sunday NY Times Magazine starts well:

A cross-country trip today typically takes more time than it did in the 1970s. The same is true of many trips within a region or a metropolitan area....Door to door, cross-country journeys often last 10 or even 12 hours.

Compare this stagnation with the progress of the previous century. The first transcontinental railroad was completed in 1869... revolutionizing a journey that had taken months. People could suddenly cross the country in a week. Next came commercial flight... Finally, the jet age arrived: The first regularly scheduled nonstop transcontinental flight occurred on Jan. 25, 1959, from Los Angeles to New York, on a new long-range Boeing jet, the 707....

In the more than 60 years since then, there has been no progress. Instead, the scheduled flight time between Los Angeles and New York has become about 30 minutes longer.  Aviation technology has not advanced in ways that speed the trip, and the skies have become so crowded that pilots reroute planes to avoid traffic. Nearly every other part of a cross-country trip, in airports and on local roads, also lasts longer. All told, a trip across the United States can take a few more hours today than in the 1970s

(If you want to skip to the snark, it's in "review" below. You may wonder why I bother fussing about a New York Times piece. I do because it starts so unusually well, but then falls apart at taking obvious inferences from useful facts. ) 

On the surface too, 

In 1969, Metroliner trains made two-and-a-half-hour nonstop trips between Washington and New York. Today, there are no nonstop trains on that route, and the fastest trip, on Acela trains, takes about 20 minutes longer than the Metroliner once did. Commuter railroads and subway lines in many places have also failed to become faster. When I ride the New York City subway, I don’t go from Point A to Point B much faster than my grandparents did in the 1940s. For drivers — a majority of American travelers — trip times have increased, because traffic has worsened. In the California metropolitan area that includes Silicon Valley, a typical rush-hour drive that would have taken 45 minutes in the early 1980s took nearly 60 minutes by 2019. 


Why has this happened? A central reason is that the United States, for all that we spend as a nation on transportation, has stopped meaningfully investing in it.... Historically, the most successful economic growth strategy has revolved around investment. It was true in ancient Rome, with its roads and aqueducts, and in 19th-century Britain, with its railroads. During the 20th century, it was true in the United States as well as Japan and Europe. 

The latter is not quite true. The most successful economic growth strategy is productivity, gained from new ideas embodied in new products and new companies. But it would be quite useful to get from place to place faster. 

Leonhardt makes a decent case for government investment in basic research and public goods: 

Investments are expensive for a private company, and only a fraction of the returns typically flows to the original investors and inventors. Despite patents, other people find ways to mimic the invention. Often, these imitators build on the original in ways that are perfectly legal but would not have been possible without the initial breakthrough. Johannes Gutenberg did not get rich from inventing the printing press, and neither did Tim Berners-Lee from creating the World Wide Web in 1989....

The earliest stages of scientific research are difficult for the private sector to support. In these stages, the commercial possibilities are often unclear. An automobile company, for example, will struggle to justify spending money on basic engineering research that may end up being useful only to an aerospace company. Yet such basic scientific research can bring enormous benefits for a society. It can allow people to live longer and better lives and can lay the groundwork for unforeseen commercial applications that are indeed profitable.

True but overstated. We might see a lot more private investment if we didn't tax its returns after all. A perfectly logical case for eliminating corporate income taxes and individual taxes on investment returns follows, but of course you won't hear it in the pages of the NYT.

He goes on to laud military spending for its speeding of technical progress. A perfectly logical case for much larger military spending also follows. 


Without a doubt, government officials make plenty of mistakes when choosing which projects to fund. They misjudge an idea’s potential or allow political considerations to influence decisions..

He excuses these, a bit too quickly I think:

Yet these failures tend to be cheap relative to the size of the federal budget, at least in the United States. (The risks of overinvestment are more serious in an authoritarian system like the old Soviet Union or contemporary China.) Even more important, a few big investment successes can produce returns, in economic growth and the resulting tax revenue, that cover the costs for dozens of failures. IBM and Google can pay for a lot of Solyndras.

Without a Cold War it is easy to throw immense down ratholes. More on that coming. 

Just as important, government can reduce its involvement as an industry matures and allow the market system to take over. After the government creates the initial demand for a new product, the sprawling private sector — with its reliance on market feedback and the wisdom of crowds — often does a better job allocating resources than any bureaucratic agency.

I'm grateful for the acknowledgement, but though the government can, will it do so? Car companies are headed down an infernal abyss of crony-capitalism. Energy subsides do not seem headed for free market Nirvana. Tech companies are becoming government controlled. 

Education also fits the definition of a program that requires spending money today mostly to improve the quality of life tomorrow. In the middle of the 20th century, education was the investment that turbocharged many other investments.

Yes. An eloquent case for education follows.  And education seems the poster child for how the government can send endless money down larger and larger ratholes to no effect. 

The stagnation of investment does not stem only from the size of government. It also reflects the priorities of modern government, as set by both Republicans and Democrats. The federal government has grown — but not the parts oriented toward the future and economic growth. Spending has surged on health care, Social Security, antipoverty programs, police and prisons. (Military spending has declined as a share of G.D.P. in recent decades.) All these programs are important. A decent society needs to care for its vulnerable and prevent disorder. But the United States has effectively starved programs focused on the future at the expense of those focused on the present.  ...

This great American stagnation has many causes, but the withering of investment is a major one.  



At this point, the essay could easily have segued straight in to a techno-optimist manifesto, like the eloquent one posted by Mark Andreesen. Certify supersonic planes! Hyperloop. A rapid push for self-driving cars. Repeal Davis-Bacon, and other measures that drive up costs. Reform zoning laws and environmental review. Sure, increase federal research and R&D spending, but reform it as well. Driving it all, get back to energy abundance with a vastly deregulated nuclear regulatory commission. Focus transportation on speed. (It's a tragedy that we build light rail and subway lines with no express trains, so they take longer than totally jammed freeways. Could it all be just for show?) 

It did not. Instead, too predictably for The New York Times, it went on to cheer "Bidenomics," 

President Biden has made investment the centerpiece of his economic strategy — even if that isn’t always obvious to outsiders. He has signed legislation authorizing hundreds of billions of dollars to rebuild the transportation system, subsidize semiconductor manufacturing and expand clean energy. These are precisely the kinds of programs the private sector tends not to do on its own. All told, Biden has overseen the largest increase in federal investment since the Eisenhower era. Notably, the infrastructure and semiconductor bill both passed with bipartisan support, a sign that parts of the Republican Party are coming to question the neoliberal consensus. As was the case during the 1950s, the threat from a foreign rival — China, this time — is focusing some policymakers on the value of government investment.

Just about every word of this epitomizes why we are in the sorry state we are. The Biden Administration's Federal Highway Administration declared (see previous blog post)  that none of the "infrastructure'' money would be used to expand road capacity, or, most scandalously, "have significant impacts to travel patterns!"  Rebuild, perhaps, but not if it solves any of the problems in the first paragraph. No, the private sector will not "subsidize semiconductor manufacturing." Wasn't that exactly the sort of activity that Leonhardt just said is best for the private sector to do? Semiconductor manufacturing is doing just fine abroad. The massive money is earmarked to bring it to the US, where we will do it more expensively. This is simple protectionism on steroids; do to chip manufacturing what the Jones Act did for the Merchant Marine and sugar subsidies do to them. "Expand clean energy" with mind-boggling subsidies and protection -- on the order of a Trillion dollars, largely for current generation battery powered electric cars, which save no carbon, and which China can also make more cheaply if you care about the environment. 

And most deeply, US chips and green energy subsidies don't make anything cheaper, faster, or better. They  just do what we already do in the US, at vastly greater cost, and in a different way. Even if electric cars did save carbon, they would not get you to the airport any faster. 

The problem with US public investment is not just lack of money. It is that the money we do spend goes down ratholes, so not spending is wise. Public teacher unions that deliver generations of children, mostly already disadvantaged, who cannot read or count. $4 billion dollar per mile subways. Leonhardt mentions other countries' success with high speed trains, without mentioning the poster child for all that is wrong with US public investment: the California railroad. 15 years and counting, $100+ billion dollars, not a mile of track laid yet. SNCF, the French state railroad company smelled so much rot it wouldn't touch the project.  

If it were not so perfectly obvious to voters that money will be wasted, they might support a lot more investment. 


  1. Great post. I thought the article was biased and left out alot of the thins you mentioned. Thanks

  2. Enjoyed this post, and I recognize that public education has many shortcomings.

    "Public teacher unions that deliver generations of children, mostly already disadvantaged, who cannot read or count." --JC

    But the desire and ability to learn comes from the student, not from the teacher. Asian students learn a lot in public schools.

    1. Poor black students learn a lot in charter schools, like the amazing results of Success Academy in NYC. Desire to learn and belief in education exists in many communities, not just Asian.

    2. "...Within the first three years, 18% of charters had closed, with many of those closures occurring within the first year. By the end of five years, 25% of charters had closed. By the ten year mark, 40% of charters had closed. Such closures are disruptive to everyone concerned.Jul 3, 2023

      Charter Schools fail and close every week - MR Online"


    3. Restaurants have similar or larger numbers. We don't read that as a failure of the restaurant industry, but rather as a sign of healthy innovation and competition. For every one that closes, new ones open. Same with schools. Industries where nobody ever fails tend to be stagnant and monopolistic.

    4. When I came to this country in 1991 I was told that PBS was the poor man’s Discovery channel. With almost perfect competition, the world of TV was a test case for private enterprise. I’m sorry to say that it isn’t working (Discovery shows 'naked and afraid' while PBS does cutting edge documentaries and Downton Abbey!). For schools, with spatial monopolies and massive capital costs, I doubt it will beat a US public school system that has produced the majority of Nobel laureates, innovators, poets, writers, disproportionately more than the rest of the world combined sometimes (with <4% of the world's population)! Let’s celebrate that then bemoaning about an impossible, untested world of perfect competition and zero regulation. I wouldn’t trust IBM to run the Supreme Court. Would you?

      Sometimes cooperatives like American democracy and the justice system works better than the East India company. No? (Capitalist East India company turned a 30% world GDP country in 1750 into a 2% one by 1850)

    5. While the East India company could be blamed for a lot of evil, what turned India from 30% world GDP to 2% is the Industrial revolution in Europe.

    6. India was the most industrialized country then and Britain banned all industry after they took over and forced Indians to export raw materials only ...

    7. Let’s make a maximum voting age of 55. Something tells me Medicare and social security may take on different importance. Free up money for other things.

      This was a good post.

    8. The psychic cost of learning is very real but a very touchy subject. No demographic wants to be labeled as impaired or a standard deviation below the mean of 100.

  3. Shades of Ayn Rand?

  4. I can see the day when freight trains and all big ships are powered by small nuclear engines. just fund the research.

  5. As a Californian, I took pride in the fact that we were bring a better rail technology to the state. It disheartens me to think that we have fumbled the ball since its inception. When I think of investment, I don't immediately go towards economic return, but also an intangible return of patriotism and pride. It has been far too long since major public works projects were accomplished, that the whole nation could look towards with pride (Rushmore, Hoover Dam, etc). The intangible returns of patriotism (cohesion and compromise) would yield very high economic returns.

    The private sector just won funding for a bullet train from LA to Vegas (Brightline West). We will see how much better they fair than our LA-SF route.

    1. San Francisco and Los Angeles are both Communist garbage dumps so why would anyone want to go from one of these hellholes to the other one at all - never mind by rail.

      The telling transport story of California is that Gavin Newsome became U Haul salesman of the year when California ran out of U Hauls. Now that is impressive.

  6. Dictionary -- Definitions from Oxford Languages ·
    pe·an /pēn/
    noun - HERALDRY
    Meaning: · fur resembling ermine but with gold spots on a black ground.
    TIP: Similar-sounding words -- pean is sometimes confused with peon, paean and paeon.

  7. My commute is infinitely faster than that of my parents -- I've been 100% WFH for a long time. This also means I have no need to live in a congested metro area. Most of my shopping trips are infinitely faster than theirs were too -- since Amazon, et al drop packages at my front door. Like everybody else, my trips to the video store, library, and bookstores have likewise dropped to zero. When it comes to traveling, work-from-home also means work-from-anywhere. This makes it possible to travel on non-congested weekdays and work while en route or at our destination.

    Unfortunately, I don't expect the US to solve its dysfunction, but fortunately the 21st century offers ways to, literally, route around the damage.

  8. All societies proceed by fits and starts. The Black Death wiped out 1/3rd of Europe's population. The upshot? -- labor became more expensive, and capital innovated to reduce labor costs. Spain discovered that the Americas contained vast resources of gold and silver. The upshot? -- luxury became the occupation of the Spanish elite and manufacturing in Spain declined. In the 18th century, Great Britain and its 13 colonies on the eastern seaboard of the North American continent defeated France in the Western Hemisphere. The upshot? -- Britain lost its 13 colonies to revolution that created, with the help of France, the U.S.A. By the 1890s Great Britain had passed its peak and entered a long period of decline that has not finished. Upshot? -- the U.S.A. replaced Great Britain as the leading military power in the world and the leading financial power globally.

    What goes around, eventually comes around. This is the current situation with the U.S. today. Innovate, or decline. Education is both a source of American strength and a cause of American weakness. The automobile industry is suffering from excess of regulation brought on by an excessive concern for environmental issues. How does it continue as an industry if the government is intent on putting it out of business in the name of saving the 'climate'? Subsidies by government simply amount to a form of compensation for government created negative externalities that will doom the industry in time. Criticize the subsidies if you will, but understand why the subsidies exist. Social security and medicare/medicaid are intended to cover certain costs that would otherwise doom part of the population to grinding poverty. The programs are not appropriately funded, and have become too expansive, in part because certain factions seek to use the programs as vehicles to introduce universal single-payor health care and universal single-payor income support for the entire population. The goals are not feasible, as may be understood by examining those countries that have adopted such policies -- Canada, the EU, UK, etc. What is spent on universal programs is not spent on their own defense needs. And, so on. What solves the U.S. problems? Good question, not answered in this blog post.

  9. The long-run data record suggests that with the exceptions of a hand-full of periods, federal current-period receipts (adjusted for CPI inflation) have consistently run below federal current-period expenditures (adjusted for CPI inflation).
    See the following chart for details (note that the data is plotted on semi-logarithm axes: natural log of the inflation-adjusted receipts and expenditures on the ordinate, arithmetic calendar date on the abscissa).

    From 2015:Q3 thru 2020:Q3 the inflation adjusted federal receipts are essentially flat (i.e., no growth, contrary to political assertions). From the end of 2020:Q3 thru 2022:Q1, inflation adjusted federal receipts grew by 18.6%. From the end of 2022:Q1 thru 2023:Q1, inflation adjusted federal receipts dropped by 11.2%; over the period from the end of 2015:Q3 thru 2023:Q1 inflation adjusted federal receipts grew by 6.52% for an average annual compund growth rate of 0.846%.

    The U.S. has an inflation adjusted federal current-period receipts problem, in addition to its chronic inflation adjusted current period federal expenditure problem. The federal current period receipts problem can be best addressed by adoption of a modest federal goods and services tax (with targeted exemptions and means-tested tax rebates).

    The federal expenditures problem is the more intractable challenge, but must go hand in hand with solution to the federal receipts problem.

    As both problems are political in origin and the political situation is partisan in the extreme, the solution to both problems must wait on the emergence of a severe fiscal crisis or series of crises.

  10. AEA Paper: Aghion, Philippe, Antonin Bergeaud, and John Van Reenen. 2023. "The Impact of Regulation on Innovation." American Economic Review, 113 (11): 2894-2936.
    DOI: 10.1257/aer.20210107

    We present a framework that can be used to assess the equilibrium impact of regulation on endogenous innovation with heterogeneous firms. We implement this model using French firm-level panel data, where there is a sharp increase in the burden of labor regulations on companies with 50 or more employees. Consistent with the model's qualitative predictions, we find a fall in the fraction of innovating firms just to the left of the regulatory threshold. Furthermore, we find a reduction in the innovation response of firms to demand shocks just below the threshold. Regulation reduces aggregate innovation by 5.7 percent.

    The paper focuses on regulation of commercial firms by firm size in France. The application of the authors' results and conclusion is limited by the ideosyncratic nature of French regulation of the firms' organizational structure which raises administrative costs but does not improve organizational effectiveness (i.e., the dead-weight cost of government regulation). A study that focuses on American government regulation, not nec. by labor force size, but along some other equally important dimensions affecting commercial firm innovation and growth, would be worthwhile given the current administration's ESG imperatives.

  11. Does the provision of health services by government in competition with private health care providers improve or worsen outcomes for retirees requiring ambulance services? The authors examine health care outcomes for veterans using VA hospital services vs. veterans using private (for profit/non-profit) hospitals. The authors find that VA hospital services obtain higher outcomes at lower cost compared to private hospitals for the same demographic category of veterans requiring ambulance services.

    Chan, David C., David Card, and Lowell Taylor. 2023. "Is There a VA Advantage? Evidence from Dually Eligible Veterans." American Economic Review, 113 (11): 3003-43.
    DOI: 10.1257/aer.20211638

    We study public versus private provision of health care for veterans aged 65 and older who may receive care provided by the US Department of Veterans Affairs (VA) and in private hospitals financed by Medicare. Utilizing the ambulance design of Doyle et al. (2015), we find that the VA reduces 28-day mortality by 46 percent (4.5 percentage points) and that these survival gains are persistent. The VA also reduces 28-day spending by 21 percent and delivers strikingly different reported services relative to private hospitals. We find suggestive evidence of complementarities between continuity of care, health IT, and integrated care.

    Government innovation is often said to be an oxymoron, but innovation does not need to be motivated by rent-seeking proclivities. Government employees are as capable of innovation as private firm employees, if called upon to innovate government service delivery. The nature of the government organization will determine, in part, the degree of innovation and the success of innovative outcomes.

  12. Two big issues with innovation have to do with: 1. The relative inability to internationally enforce of patent law. And 2: The PTAB in the US has become a great place to have tech invalidated by the PTAB so that Big Tech can acquire IP that's cheaper to acquire with lawsuits vs. paying royalties. I'm personally living this reality and I have to be "creative" in not only dealing with the legal side, but putting guardrails in the tech to mitigate activities by potential bad actors. In some sense, it's really not all about the money, but mitigating externalities.

    Innovation sometimes crawls and then explodes and there's innovation at a faster rare. Kuhn is a good read right about now. Ha.


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