Infrastructure (Biden, and the Keystone XL Project)

With a new administration, you're likely to hear a lot about infrastructure. Politicians love infrastructure spending.

Except when they don't.

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Infrastructure is the big stuff that makes developed economies rich. Think: construction projects. 

Infrastructure is sometimes funded and built by private firms, particularly when they regard it as a private good. 

When infrastructure is a public good, private firms are unlikely to invest in it because its returns will be lower than other projects they might undertake. In this case, it's often funded by the government, but typically still built by the private sector under contract.

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Why do politicians like infrastructure projects? Well ... if you're job is to spend other peoples' money, these projects are a way to go big. And jobs ... politicians are obsessed with jobs, although few realize they are making the basic accounting mistake of counting a cost as a benefit.†

They also leave behind an obvious, tangible, legacy of the actions you took.

And, politicians and the media tend to ignore this subtlety, but Keynesian macroeconomic theory does not say that any old government spending is beneficial. It's actually pretty specific to spending on things that are independent of income. Since most household spending is tightly linked to income, this means that government should choose to spend on stuff that people like you and I will never get around to. Clearly that also includes projects that are too big for individuals, households, and most firms. So infrastructure spending is part of the small fraction of government spending that we should really focus more on if we think government can and should help.‡

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So what the heck is infrastructure anyway? This has been covered on the blog before, and since I have upgraded search  capabilities this year, here's some links:

• "Infrastructure Investment" discusses the motivations towards the top of this post. Pay particular attention to the part in bold in the original: this is more or less exactly what we are doing in 2020-21 when the government sends out "COVID checks" to people.
  
• "Infrastructure" discusses the six main kinds of national infrastructure. Definitely click through the link and check out the interactive graphics. 
• "More Infrastructure" focuses more on power generation and transmission. Again, click through for great interactive graphics.
• "More On What Government Actually Does" discusses that in spite of the complaints of many that the government spends too much, it's actually doing less actual stuff than in a couple of generations ago.
  
• Of course, a big problem in the U.S. with infrastructure projects is that they always seem to be really expensive for what we get. In "Infrastructure: Why Does America Pay So Much for Stuff That's So Lousy" I explore this with reference to research on the costs of subway projects. It's not pretty.
  

Do note that our pipeline network, for water, sewer, storm runoff, oil, and gas is part of infrastructure.

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Which brings me to one of Biden's first executive orders: cancelling the permit to build the Keystone XL pipeline (running from the Canadian border in Montana southeastwards to Nebraska). 

Democrats hate this pipeline. I mean, really hate it. Like irrationally hate it.

Which is weird.  

• We have tons of pipelines already (as noted in the posts above), so why is one more a problem? If you're curious, all the gas you buy in Cedar City and St. George is delivered most of the way by pipeline.
• It's an infrastructure project. Near as I can figure, every politician loves every infrastructure project ... except this one. 
• It is the only infrastructure project picked on by the Biden White House on day one.
  
• The Keystone Pipeline is already complete from Alberta to the Gulf Coast. The XL pipeline is one additional part of it that should improve efficiency by "cutting a corner". The oil is already flowing.
  
• Canada is our friend and neighbor, and they're kinda' counting on this one. And Canada has been run for a while by a party that's politically simpatico with our Democrats.
• Five separate times career bureaucrats reported to the Obama administration that the pipeline was beneficial for climate policy. They killed it anyway.

Having said all that, there's a lot of interest group politics involved, so they're definitely trying to make their voting base happy. Fair enough.

The motivation for this project is worth knowing, because macroeconomically it's a win-win. 

Canada has lots of oil reserves. As prices rose, it became economical to put in the big fixed costs to start extracting from a huge pool of low quality tar sands in northeastern Alberta. Now that the hump of those fixed costs have been overcome, the marginal costs of getting that oil produced are economical. But the oil is lousy.

The U.S. has a well-developed oil refinery industry. This is dotted around the country, but has big concentrations in Texas. Further, while a lot of high quality crude oil comes out of the ground in Texas, those refineries down there are designed to handle low quality crude oil, mostly coming from Venezuela. But their exports of oil have plummeted over the last 20 years. So we have refiners that specialize in making dirty oil cleaner, with capacity to spare.

So, the Canadians improve their ability to export their production to their neighbor and friend. And the U.S. gets a feedstock for part of its refinery industry that's more politically stable. Win-win.

Lastly, let me note that most peoples' understanding of the end results if deeply flawed. Most stories about the pipeline present it as a binary: if there's no pipeline there's no risk from that oil. This is actually not the choice being made.

This is a good time for you to practice thinking like an economist. Oil is a legal product; the Canadian producers will sell it where they can, and American refiners will buy it where they can.. It is legal to transport it. And there are alternative ways to transport it. This means:

• The choice is not pipeline vs. no pipeline.
• The choice is pipeline vs. oil in tanker trucks (you know, in your rearview mirror on the interstate) and on tanker trains following essentially the same route. Here's a link to a page on a pro-environmental site explaining why pipelines are preferable.

The likely alternative from Biden's move is ten 100 tanker car trains arriving in Texas each day, taking 3 days to travel down from Alberta (so probably 30 spaced out on the tracks at all times), with a transportation cost that's at least double, and just under 5 times the risk of a spill. Oh ... and pipelines have stations with "off switches" when they start to spill, train derailments do not.

† I do think, at some level, that politicians actually get that they are mislabeling jobs as a benefit rather than a cost. I suspect they do this because they typical person consuming political rhetoric is making that mistake, and the politicians are just pandering to them. My reasoning is that if politicians really were interested in increasing jobs, they'd promote less efficient methods that shift work from capital and technology over to labor. Since they don't do this, I suggest that all their talk about jobs should get zero interest from you.

‡ It's been my unfortunate experience that people who are more interested in arguing that the government can help with the economy tend to also be more likely to ignore the inconvenience that the Keynesian theory they rely on is very clear that it isn't all government spending that helps, and in fact it's rather less than half.