Tuesday, September 20, 2016

Infrastructure Investment

Politicians want to sell you infrastructure investment. Don’t buy it.

What is infrastructure anyway? It’s basically big capital projects that are kinda’ sorta’ public goods: bridges, roads, airports, and so on.

There’s a notion that in the U.S. our infrastructure is “crumbling”. Maybe. There is no very good way to measure this. One thing we do is talk about how old our infrastructure is. But that misses the “compared to what’ question you should always ask: how do we know a specific age is “old”?

The biggest name in urban economics is Ed Glaeser from Harvard (no one regards Glaeser as a supporter of political conservatives). He’s just published a piece in City Journal entitled “If You Build It …” that’s getting a lot of talk.

Why do politicians always tout infrastructure?

The progressive romance with infrastructure spending is based on three beliefs. First is that it supercharges economic growth. …  [Second], by putting people to work building needed things, infrastructure spending is an ideal government tool for fighting unemployment during recessions. [Third] Infrastructure should also be a national responsibility …

None of this is right. …

First, let’s The thing is, no one spending their own money would do stuff like this.

In 2009, [Glaeser] calculated a rough cost-benefit calculation for a (fictional) high-speed rail link between Houston and Dallas and found that costs outweighed benefits by an order of magnitude.

Note that when a scientist says “an order of magnitude” they mean something is multiplied by the base of log. Typically this is ten for casual use of order of magnitude, but e is probably a reasonable lower bound. Anyway, he’s saying the costs are several times the benefits. That’s not off by a little bit; it’s more like offering to pay $10 or $20 for every gallon of gas. And, if you’re not up on this stuff, Dallas to Houston is one of the corridors across the country that the infrastructure people are always proposing for high speed rail. So it’s not like he picked that example out of a hat.

And who are we trying to help with infrastructure spending anyway?

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.


I love that last sentence. That really gets to the heart of what progressives ought to be telling Americans. But if they did, we’d recognize how silly their ideas actually are.

It turns out that the Council of Economic Advisors has a number they’ve estimated for how much it costs the government to create a “job-year” (that’s one job lasting one year). It’s $92K. What that means is that if you can’t create a job that pays more than that per year, you shouldn’t bother. The thing is, income distribution data shows us that only 15-20% of jobs pay that much. So government is really only capable of economically creating jobs for the rich, but keeps telling us how good it is at creating jobs for the poor. Not so.

On the third point, I love this turn of phrase:

The most pressing problem with federal infrastructure spending is that it is hard to keep it from going to the wrong places. We seem to have spent more in the places that already had short commutes and less in the places with the most need. Federal transportation spending follows highway-apportionment formulas that have long favored places with lots of land but not so many people. …

Low-density areas are remarkably well-endowed with senators per capita, of course, and they unsurprisingly get a disproportionate share of spending from any nationwide program. [emphasis added]

In the end, Glaeser recommends basic economics: use newer technology (like EZ Pass) to get users to pay for the infrastructure they actually use.

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