Ask Commentarama

Today on Ask Commentarama, we respond to a question from Scott about infrastructure.

Q. Is government spending on infrastructure a good idea?

Yes. . . if it’s done right.

Let’s begin by defining infrastructure. Infrastructure projects involve the creation of fixed assets of the type that are needed to operate or organize society or to make an economy function. These are projects like roads, harbors, hospitals, airports, power grids, etc.

Free market economic theory tells us that government spending is always more wasteful than private sector spending (which is true). Thus, many argue that infrastructure spending is inherently wasteful and should be left to the private sector. These people argue that if people truly value a road, they would be willing to pay tolls to allow a private company to build the road.

But there are two flaws with this theory that I accept. First, this theory assumes that the private sector has perfect knowledge and the perfect ability to act. But that’s not always true. In other words, the fact that people want a road does not mean that a private company will be ready, willing or able to build the road.

This is particularly true where you have a chicken and egg problem. For example, I am an advocate of converting from gasoline powered cars to natural gas powered cars (for a variety of reasons that would need a separate post). But, gas stations won’t put in natural gas pumps until there are more natural gas vehicles on the road. . . but car companies won’t make more natural gas vehicles until people are willing to buy them. . . but people won't buy them until they can fill them anywhere in the nation ("and we can't make our video until we get Eddie Van Halen"). This is one of those instances where the government should step in because market mechanisms won’t work. Thus, “infrastructure spending” that encourages the creation of natural gas pumps and natural gas vehicles makes sense.

The other problem arises in the allocation of the costs and benefits. A road may have many more benefits to society than a private company could capture. Indeed, highways made most of our modern economy and cities a reality, but there was no way for a highway maker to fully collect that benefit. Therefore, from a cost-benefit analysis, the private company would not undertake the project because it did not appear to be a worthwhile project even though the benefits to society far outweighed the costs. Thus, again, the only way to get it done would be with government involvement.

Consequently, in my opinion, government infrastructure spending makes sense when a project will produce a social good that justifies its price, but no private sector company can/will undertake the project.

Infrastructure projects also make sense where requiring user fees would be inefficient. For example, suppose that every road in America were suddenly a toll road -- right down to the road in front of your house. The loss in time and gas to our economy as drivers constantly need to stop to pay tolls would be too great to the rest of our economy (not to mention the cost of building hundreds of millions of toll booths and enforcing tolls). A similar problem arises if you eliminated police forces and left it up to private citizens to find ways to protect themselves -- the duplication of effort would be far too wasteful to society. Likewise, society benefits from a well-educated workforce. But private schools can't tap into that benefit. Instead, they can only assess fees against students. Thus, if only private schools existed, society would free-ride on the tuition paid by those students. This would result in fewer kids going to school and a less-educated work force and all of the associated problems with that (increased poverty, crime, etc.),

Thus, infrastructure spending also is good when it prevents wasteful duplication of "public services" or when it eliminates significant barriers to the use of publicly beneficial services.

So does infrastructure spending create jobs? That depends. One of the problems with the jobs claim is that "job-creation proponents" are relying on simple Keynesian theory, which says that every dollar you spend creates five jobs because the bridge workers you hire will need hotdogs, and the new hotdog vendors that appear will need equipment and the equipment makers need houses. . . etc. But this theory ignores the fact that the money comes from somewhere, and the taxes needed to build the bridge will have a nearly equal negative effect elsewhere in the economy. Thus, while the bridge workers need hotdogs, the car salesman across town who pays the taxes so the bridge can be built can no longer afford hotdogs. Thus, his vendor goes out of business.

The real question is whether or not the project has an overall net economic benefit to society. If the economic benefits of the project outweigh the costs, then yes, it will generate jobs. But if the economic benefits don't outweigh the costs, then it will lose more jobs than it creates.

Finally, is there anything that can be done to decrease the chance of waste? Absolutely. The construction and operation of all such projects should be contracted out to private sector companies after competitive bidding (rather than hiring government workers, as was done in the FDR era). Moreover, we need to eliminate laws like the Davis Bacon Act, which requires government contractors to pay “the prevailing wage” (i.e. union rates) for labor. And, lastly, we need to privatize these industries whenever possible without running afoul of the problems identified above. For example, once a harbor is built, there is no reason it couldn't be sold to private interests.

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That's it for this week. Remember to post your questions for next time or to e-mail them to me at Commentarama@yahoo.com.