I wrote last week about the ever-expanding burden of government spending in California.
And that was after writing two columns last year (here and here) about the state’s economic decline.
But sometimes a specific story is more compelling than broad economic trends. So here’s a tweet that caught my eye. It tells us a lot about the nature of government contracting, inefficiency, and cost overruns.
But it also tells us a lot about California (sort of like this story from 2021).
By the way, I don’t know if the above numbers are correct. But even if they are only half right, they are a damning indictment of California budgeting.
As you might expect, bad budgeting and extravagant waste also mean high taxes.
And high taxes mean economic decline, and that’s the focus of today’s column.
In a recent column for the Washington Post, Henry Olsen offers a depressing assessment of the California’s future.
California’s…falling population coupled with its $22.5 billion budget deficit suggest it could experience a swift and wrenching decline. …California offers natural beauty…, but people decide how much they want to pay for these things just like other goods. The state’s…high taxes are a significant deterrent to living there, driving many people to flee. …That outward flow of people is turning into a flood. The state’s population dropped by more than 500,000 people between July 2020 and July 2022. Outmigration to other states fueled the decline: Almost 900,000 more people have moved to other states from California in the past three years than have moved in. …This exodus poses massive risks for the state’s finances because of its reliance on revenue from the rich. As of 2018, almost 35 percent of California’s personal income tax revenue came from the sliver of taxpayers earning $1 million or more. Nearly two-thirds come from those earning more than $200,000. That means a small change in these people’s residence can cost the state billions. …It could take a New York-style collapse to force significant change. Given the direction California is heading, that unhappy prospect is no longer unthinkable.
California’s net domestic outmigration ranks highest among the states…In fact, the biggest leavers by far are lower- and middle-income people. And middle-class losses have grown in the last five years to about 200,000 adult residents. Meantime, some 300,000 adult Californians from lower-income categories have also left in that time… Taxes don’t exist in a vacuum; they are one component of a governing philosophy. High taxes represent an approach that favors bigger, more pervasive government, which takes many other forms besides taxes: a tendency to greater regulation and differing spending priorities than those of lower-taxed states, for example. …Fueled by its taxes on high earners and on businesses, California has an enormous budget. Its general fund alone tops $200 billion. You might expect, for that money, top-notch services from government, but the opposite is true. …Advocates for higher taxes often argue that progressive tax systems like California’s are fairer because wealthier residents pay at higher rates. …And yet high-taxing states like California, New York, and New Jersey also have among the highest rates of outmigration. These states are so “fair” that a significant number of their lower- and middle-income residents can’t wait to leave.
The most important insight of Malanga’s column is that California politicians say that they are trying to punish the rich, but lower-income and middle-class people are suffering a lot of collateral damage.
I just returned from a trip to Hawaii, where I gave a couple of speeches about the desirability of strict annual limits on the growth of government spending.
But regular readers already have seen plenty of columns on the issue of TABOR-stylespending caps, so I’m using the trip as an excuse to highlight a couple of Hawaii-specific issues.
Yesterday’s column was about the Hawaii government’s foolish decision to subsidize home building in areas vulnerable to volcanic eruptions (basically, a state version of the federal government’s bone-headed flood insurance program).
Today, let’s investigate the decision to build a rail system in Honolulu.
I’ll start with the observation that governments do a lousy job with infrastructure.
And it is true with projects in the middle of the Pacific Ocean. Here are some details about Hawaii’s boondoggle, as explained by Keli’i Akina of the Grassroot Institute.
…the folks in charge of the Honolulu rail project have been relentlessly sunny in their projections. It was sold to the public on the promise that it would only cost about $4 billion, that it would be completed by 2019 and that the general excise tax surcharge associated with it would end by 2022. By the time the Federal Transit Administration got on board with an agreement to contribute $1.55 billion, the expected cost was $5.12 billion. Now, with the FTA still holding on to $744 million, the projected cost is approximately $12 billion. The last completion date we were given was 2031, and the GET surcharge has been extended to 2030. …my colleague Joe Kent at the Grassroot Institute…said the recovery plan has “overly optimistic assumptions about revenues, ridership and costs, and that this could saddle local taxpayers with unstated liabilities in the future.” He pointed out that, given its track record of ballooning budgets and delays, HART’s projections should be treated with extreme skepticism.
Reading the column, I think Hawaii taxpayers are lucky.
The inevitable cost overrun (at least so far) has “only” pushed the cost from $4 billion to $12 billion.
The best-case scenario is that a spending cap is very stringent (say, limiting annual spending increases to 2 percent annually). This level of fiscal restraint reduces the burden of government spending compared to the private sector (i.e., it fulfills fiscal policy’s Golden Rule).
The avoid-harm scenario is that a spending cap prevents government from becoming a bigger burden. Given dismal long-run fiscal forecasts (a consequence of demographic change and poorly designed entitlement programs), this actually would be an impressive achievement.
There are also some auxiliary benefits of a spending cap.
A new working paper from Italy’s central bank, authored by Anna Laura Mancini and Pietro Tommasino, considers whether spending caps can mitigate the problem of dishonest budgeting by politicians.
…policy-makers have an incentive to “plan to cheat”. That is, they promise an amount of expenditures higher than what they will actually deliver, because this allows them to cater to the demands of the various groups of voters, and at the same time they present overoptimistic revenue forecasts, in order to preserve the appearance of fiscal discipline. Once the extra revenues hoped for by the government fail to materialize, budgeted investment expenditures are downsized or abandoned altogether. In this context, caps on realized spending can contribute to more realistic ex ante spending plans. Indeed, politicians have less room to inflate planned expenditures, once there is a legal ceiling in place.
The authors crunch the numbers and conclude that spending caps result in a greater level of fiscal honesty.
In this paper, we provide evidence in favour of this theoretical intuition, exploiting a unique dataset including the ex-ante budget plans as well as ex-post budget outcomes of…a rule that constrains capital expenditures in municipalities with more than 5,000 residents. …Our analysis show that the municipalities subject to the new capital-spending rule significantly reduced their over-optimism in expenditure projections… Furthermore, in the new regime revenue projections are also more accurate (less over-optimistic). …The reform reduced the forecast error concerning capital expenditures… The effects is significant both statistically and in economic terms. …the introduction of the cap on investment reduced the forecast error on investment expenditures by almost €1 mln, or 35% of the pre-reform average error.
For wonky readers, Figure 1 shows some of relevant data.
For what it’s worth, we seem to have a different problem in the United States.
Rather than exaggerate potential spending on so-called public investment, as seems to have been the case in Italy, American politicians generally low-ball cost estimates for infrastructure projects.
The good news is that a spending cap solves both the Italian version of the problem and the American version of the problem.
As the authors found in their research, it removes the incentive for dishonest budgeting in Italy. And, if adopted in the United States, politicians would learn that it doesn’t help to produce laughably low cost estimates if a spending cap means there is no way of financing cost overruns in the future.
P.S. There is a spending limit in Hong Kong’s constitution, and it has generated very positive results. Given China’s increasing control, it’s unclear how effective it will be in the future.
P.P.S. There’s also a spending limit in Colorado’s constitution, known as the Taxpayers Bill of Rights. It has been very successful.
P.P.P.S. Last month, I wrote about research from both the IMF and the ECB about the benefits of spending caps.
Actually, there’s another thing everyone should understand. As illustrated by this summary from the Washington Post, it’s not really an infrastructure plan. It’s a spend-money-on-anything-and-everything plan, presumably to reward various interest groups.
Though I guess we have to give the Biden Administration points for consistency. The President’s COVID relief plan from earlier this year had very little to do with the pandemic, so we shouldn’t be surprised to see that the infrastructure plan has very little to do with infrastructure.
The Wall Street Journaleditorialized about this bait-and-switch scam.
Most Americans think of infrastructure as roads, highways, bridges and other traditional public works. That’s why it polls well… Yet this accounts for a mere $115 billion of Mr. Biden’s proposal. There’s another $25 billion for airports and $17 billion for ports and waterways that also fill a public purpose. The rest of the $620 billion earmarked for “transportation” are subsidies for green energy and payouts to unions for the jobs his climate regulation will kill. …The magnitude of spending is something to behold. There’s $85 billion for mass transit plus $80 billion for Amtrak, which is on top of the $70 billion that Congress appropriated for mass transit in three Covid spending bills. The money is essentially a bailout for unions… Then there’s $174 billion for electric vehicles, including money to build 500,000 charging stations and for consumer “incentives” on top of the current $7,500 federal tax credit to buy an EV. …Mr. Biden is also redefining infrastructure as social-justice policy and income redistribution. …His plan also includes $213 billion for affordable housing, $100 billion for retrofitting public schools, $25 billion for child-care facilities and $400 billion for increasing home-health care.
Michael Boskin, a professor at Stanford, is not optimistic that Biden’s plan will generate good results.
Joe Biden’s $2.3 trillion infrastructure plan would be many times larger than previous such bills, only about one-third of it would meet even a broad definition of “infrastructure.” …What could possibly go wrong? A lot. …federal spending would crowd out private and local government spending, with a substantial risk of boondoggles piling up along the way. …The Biden plan is rife with opportunities for earmarked pork-barrel projects (bridges to nowhere) and crony capitalist corporate welfare (next-generation Solyndras). Consider California High-Speed Rail, an infrastructure train wreck that will soon be begging for a bailout from the Biden administration. It originally used a grant from President Barack Obama’s 2009 “stimulus” package to pay, six years later, for a tiny initial rail line. Yet, because the project’s projected total San Francisco to Los Angeles cost has tripled to $100 billion.
And even if the plan was nothing but real infrastructure, that wouldn’t be a cause for optimism.
Kenneth Rogoff, a professor at Harvard, wrote late last year that governments have a terrible track record with cost overruns.
…perhaps the biggest obstacle to improving infrastructure in advanced economies is that any new project typically requires navigating difficult right-of-way issues, environmental concerns, and objections from apprehensive citizens… The “Big Dig” highway project in my hometown of Boston, Massachusetts was famously one of the most expensive infrastructure projects in US history. The scheme was originally projected to cost $2.6 billion, but the final tab swelled to more than $15 billion… The construction of New York City’s Second Avenue Subway was a similar experience, albeit on a slightly smaller scale. In Germany, the new Berlin Brandenburg Airport recently opened nine years behind schedule and at three times the initial estimated cost.
Amen. I wrote a column about the infamous Second Avenue Subway, and I’ve also repeatedlyopined about how government projects always wind up costing much more than initial projections.
Let’s wrap up by looking at an economic analysis of Biden’s plan by the University of Pennsylvania’s Penn Wharton Budget Model.
The overall macroeconomic effects of enacting the AJP, including both its spending and tax provisions, are shown in Table 4. …After the AJP’s new spending ends in 2029, however, its tax increases persist—as a result, federal debt ends up 6.4 percent lower by 2050, relative to the current law baseline. Despite the decline in government debt, the investment-disincentivizing effects of the AJP’s business tax provisions decrease the capital stock by 3 percent in 2031 and 2050. The decline in capital makes workers less productive despite the increase in productivity due to more infrastructure, dragging hourly wages down by 0.7 percent in 2031 and 0.8 percent in 2050. Overall, GDP is 0.9 percent lower in 2031 and 0.8 percent lower in 2050.
Here’s Table 4, which I’ve augmented by circling the two most important statistics.
The immediate lesson from all of this is that Biden’s plan is a boondoggle waiting to happen (just as would have been the case with Trump).
I’ve written over and over again about how European-sized welfare states require big tax burdens on poor and middle-income taxpayers.
Simply stated, there aren’t enough rich people to finance big government. Especially since they generally have the ability to avoid confiscatory tax burdens.
As a general rule, this means ordinary European taxpayers are suffocated with high payroll tax burdens, onerous value-added taxes on consumption, and income taxes that impose high rates on modest incomes.
But let’s also not forget that politicians in Europe also pillage motorists.
The Tax Foundation recently released a survey showing gas taxes in various European nations.
…the European Union requires EU countries to levy a minimum excise duty of €0.36 per liter (US $1.61 per gallon) on gas. …The Netherlands has the highest gas tax in the European Union, at €0.79 per liter ($3.53 per gallon). …All EU countries also levy a value-added tax (VAT) on gas and diesel.
Wow, this is like the perfect storm of bad European policy, with tax harmonization (minimum-tax requirement) and a version of double taxation (motorist pay both VAT and gas tax when they fill up).
No wonder French motorists launched a yellow vest protest after Macron proposed another tax hike.
Here’s the map, which should have shown the prices in dollars. Just keep in mind that the average European pays almost $2.50 in tax on every gallon of gas.
I’ll close by noting that Europeans don’t get better roads for all that money.
For all the sturm and drang about supposed problems with infrastructure in the United States, it’s worth noting that our gas taxes are much lower and we consistently get above-average scores in various infrastructure rankings.
Back in April, I observed that, “If you would have loudly condemned a policy under Obama but support a similar policy under Trump, you’re the problem.”
We now have a good test case.
The President already has demonstrated – repeatedly – that he likes to spend other people’s money.
But now he’s unleashing his inner Obama, having reached a tentative deal with Chuck Schumer and Nancy Pelosi for a $2 trillion infrastructure blowout.
Notwithstanding the GOP’s supposed belief in the Constitution and limits on the role of the federal government, there are plenty of Republicans on Capitol Hill (especially on the committees that will get to direct this money to various campaign contributors) who will gladly join this spending orgy.
The relevant question, though, is whether there are some good GOPers to stop this boondoggle.
The Washington Postreports that there are some holdouts.
A $2 trillion infrastructure deal outlined this week by President Trump and top Democrats is already losing momentum, as the president’s own chief of staff is telling people inside and outside the administration that the effort is too expensive… Democratic leaders in Congress…said they were pleasantly surprised by the president’s willingness to back a large-scale spending effort. …But the initiative has run into immediate opposition from Republicans who balk at the hefty price tag and from conservative allies who are pushing lawmakers to block it. …Earlier in the administration, Trump praised Sen. Elizabeth Warren (D-Mass.) — a potential 2020 foe — for her ideas because, in his view, she was determined to spend more than Republicans. He would tell aides to get a list of projects and “let’s just spend it,” in the words of one former administration official. …Trump always wanted to spend more. …raising fuel tax rates by 35 cents and pegging them to rise with inflation would generate only about a quarter of the necessary revenue over 10 years. …Getting the remaining $1.5 trillion would involve much more significant tax increases… But even fully reversing the corporate income tax cut, which dropped the rate from 35 percent to 21 percent, would not close the gap
One obvious takeaway from this article is that taxes eventually will increase if Republicans don’t get serious about spending restraint.
Indeed, I’ve already warned that Trump’s profligacy is making tax increases more likely.
The editors at National Reviewshare my concern about the plan for a bipartisan budget-busting package.
Some time ago, President Trump’s team produced a $1.5 trillion infrastructure plan, which was really a $200 billion infrastructure plan with some wishful thinking attached. …now the president has joined forced with Nancy Pelosi and Chuck Schumer on something new: a $2 trillion infrastructure plan, which also is composed mainly of wishful thinking. …What could possibly go wrong? You can tell this is backward by the fact that the triumvirate has settled on a price tag — an incomprehensibly large one — but is remarkably fuzzy on what’s to be bought with that $2 trillion. …We have been here before, with Barack Obama and his “shovel-ready” projects. The lesson of Obama’s failed stimulus bill — which was in considerable part an infrastructure program — is that doing things backwards does not work. …figuring out how to pay for this is at the bottom of the current agenda. …This is not a sane way to proceed. …The infrastructure scheme deserves to die an early and unlamented legislative death.
It should just “die an early an unlamented legislative death.” It never should have been born in the first place.
I’m not surprised that Trump is supporting a pork-filled budget plan for infrastructure. As I warned back before the 2016 election, he’s a big-government Republican.
What’s not clear, though, is how many GOP lawmakers will support his Greek-style approach to the transportation budget.
P.S. The correct infrastructure policy for Washington is to have no infrastructure policy. That’s because transportation should be handled by state and local government. Or, even better, the private sector. In my fantasy world, we’d shut down the Department of Transportation and repeal the federal gas tax.
There are some remarkable stories of the private sector showing initiative when governments fail to maintain infrastructure.
In response to dithering by government, residents and businesses in Hawaii put up $4 million to fix an important community road.
Smugglers in Russia repaired a road to facilitate untaxed trade between Russian and Belarus.
I also wrote about a guy in England who was fed up with the slow pace of road repairs and built a private toll road.
Regarding the final example, here’s a video on his project.
I’m particularly amused that this example of practical libertarianism (I’m guessing without the cost overruns that are inevitable with government) was made possible because zoning laws (normally an obstacle to sensible land use) basically allowed the organizer to ask for forgiveness afterward rather than permission beforehand.
To be sure, these isolated examples are hardly a sign that infrastructure is going to be privatized in the United States.
But maybe we can at least learn a lesson on whether we should have more centralization and control from Washington, versus more decentralization and private-sector involvement.
Regarding the former, Chris Edwards explained for FEE that the federal gas tax should not be increased since politicians impose taxes for the ostensible purpose of building and maintaining roads, but then they divert the money to other programs that buy more votes.
…a federal gas tax increase makes no sense. State governments own America’s highways, and they are free to raise their own gas taxes whenever they want. Indeed, 19 states have raised their gas taxes just since 2015, showing the states are entirely capable of raising funds for their own transportation needs. …Also consider that gas taxes used to be a more pure user charge for highways, but these days gas tax money is diverted to inefficient nonhighway uses such as transit. …About 20 percent of those funds (about $8 billion) are diverted to transit and other nonhighway uses. …In 2016, state governments raised $44 billion from fuel taxes, and they diverted 24 percent—14 percent to transit and 10 percent to other activities. …The states also raised $38 billion from vehicle fees. They diverted 34 percent of those funds—13 percent to transit and 21 percent to other activities.
Regarding the latter, the City Manager of Milford, Delaware, wrote a column for the Washington Post about benefiting from private financing for road repairs.
…when I heard that a Domino’s marketing campaign was paying municipalities to repair potholes in return for credit for the work, I quickly responded. …Our role was easy. In exchange for a $5,000 check, Domino’s wanted its logo and a tagline saying “Oh yes we did” in spray chalk on the road next to each repair. …In two weeks, they fixed more than 40 potholes of different sizes — about 20 to 25 percent of the potholes that appeared after the winter. …The program has elicited some complaints about what it means that a pizza chain is funding basic government projects. …But we saw this as a great idea for our community. …In many communities, there’s a constant competition between paying for police and paying for everything else. …if we demonstrate good stewardship of our resources, then hopefully fewer people will complain about paying taxes. …sometimes that means letting Domino’s pick up the tab.
Incidentally, sometimes “anarchists” decide to fix potholes without even waiting for permission.
Let’s close with some libertarian-themed humor.
Some people apparently thing that roads wouldn’t exist in the absence of government. This is an anti-empirical sentiment since many of the first main arteries in America were private roads. And we still have private highways being built today.
Not to mention plenty of neighborhood developments and office parks (or even stairs) that are examples of privately financed and privately maintained infrastructure.
Yet there are still doubters, so this sarcastic image is for them.
Speaking of sarcasm, this next image is a clever combination of two concepts.
First, politicians have an insatiable appetite to tax us over and over again.
Second, they don’t fulfill the responsibilities that they claim only government can handle.
The bottom line is that Washington should have no role in infrastructure. And even if you think infrastructure should be handled by state and local government, that definitely does not (or should not) imply a large public sector.
Time for third edition of this new tradition. It is the first day of the year and here are my good and bad expectations for 2019.
We’ll start with things I hope will happen in the coming year.
Hard Brexit – There is a very strong long-run argument for the United Kingdom to have a full break with the European Union. Unfortunately, the political establishment in both London and Brussels is conspiring to keep that from happening. But the silver lining to that dark cloud is that the deal they put together is so awful that Parliament may vote no. Under current law, that hopefully will lead to a no-deal Brexit that gives the U.K. the freedom to become more free and prosperous.
Supreme Court imposes limits of Washington’s power – I didn’t write about the fight over Brett Kavanaugh’s nomination to the Supreme Court because I don’t know if he believes in the limits on centralized power in Article 1, Section 8. But I’m semi-hopeful that his vote might make the difference in curtailing the power of the administrative state. And my fingers are crossed that he might vote with the Justices who want to restore the Constitution’s protection of economic liberty.
Gridlock – Some people think gridlock is a bad thing, but it is explicitly what our Founders wanted when they created America’s separation-of-powers system. And if the alternative to gridlock is politicians agreeing to bad policy, I will cheer for stalemate and division with great gusto. I will be perfectly content if Trump and House Democrats spend the next two years fighting with each other.
Maduro’s ouster – For the sake of the long-suffering people of Venezuela, I’m going to keep listing this item until it eventually happens.
Limits on the executive branch’s power to impose protectionism – Trade laws give a lot of unilateral power to the president. Ideally, the law should be changed so that any protectionist policies proposed by an administration don’t go into effect unless also approved by Congress.
Recession-induced statism – If there’s an economic downturn this year, then I fear we might get an Obama-style Keynesian spending orgy in addition to all the things I just mentioned.
More protectionism – Until and unless there are limits on the president’s unilateral power, there is a very real dangers that Trump could do further damage to global trade. I’m particularly concerned that he might pull the U.S. our of the very useful World Trade Organization and/or impose very punitive tariffs on auto imports.
Fake Brexit – This is the flip side of my hope for a hard Brexit. Regardless of the country, it’s not easy to prevail when big business and the political elite are lined up on the wrong side of an issue.
Sadly, I think my fears for 2019 are more likely than my hopes.
While folks on the left sometimes imply that libertarians are autistic dorks, we do have a sense of humor. Even about our own unusual traits.
But we also like to mock big government, and that’s why we have some new material for our collection of Libertarian humor.
We’ll start with this bit of satire. I don’t know if it accurately captures the preferences of feminists, but it definitely summarizes how we feel about government.
Speaking of “basic functions,” that presumably includes infrastructure.
However, I don’t want Washington to be in charge of such matters. Though that doesn’t mean I have great confidence that any government at any level will do a good job.
Which is the theme from these three images from Columbia University’s Xavier Sala-i-Martin.
We’ll start with some evidence of poor coordination by the bureaucrats in charge of street and the bureaucrats in charge of sidewalks.
I already knew governments had problems with lines on roadways, but this even surprises me.
And I’m not even sure how to describe this bit of road planning. Makes this sign seem like genius by comparison.
Last but not least, this item from Powerline is a perfect way to conclude today’s collection. Maybe John Stossel was right when he wrote that the private sector deserves a bigger role.
When I argue with my statist friends about the proper size and scope of government, they accuse me of not wanting public services.
My typical response is to explain that I am a strong supporter of markets as the method to get high-quality roads, schools, and healthcare.
But I’m wondering whether this answer pays too much attention to the trees and doesn’t focus on the forest.
After all, the debate isn’t whether we should be Liberland or Venezuela. It’s whether government should be bigger or smaller compared to what we have now.
So the next time I tussle with my left-leaning buddies, I’m going to share this chart (based on data from the IMF’s World Economic Outlook database) and ask them why we can’t be like the fast-growing, small-government nations of Asia.
For all intents and purposes, I want to focus the debate on how much government is necessary to get the things people want, sort of like I did in Paris back in 2013.
I asked the audience whether they thought that their government, which consumes 57 percent of GDP, gives them better services than Germany’s government, which consumes 45 percent of GDP. They said no. I then asked if they got better government than citizens of Canada, where government consumes 41 percent of GDP. They said no. And I concluded by asking them whether they got better government than the people of Switzerland, where government is only 34 percent of economic output… Once again, they said no.
I assume (hope) Americans also would say no given these choices. And hopefully they would say yes when asked if we should be like Hong Kong and Singapore.
Welfare reform – If my friends and contacts on Capitol Hill are feeding my accurate information, we may see a bigger and better version of the 1996 welfare reform in 2018. The core concept would be to abolish the dozens of means-tested programs (i.e., redistribution programs targeted at low-income people) in Washington and replace them with a “block grant.” This could be good news for federal taxpayers if the annual block grant is designed to grow slowly. And it could be good news for poor people since state government would then have the ability and flexibility to design policies that help liberate recipients from government dependency.
Collapse of Venezuela – Given the disastrous deterioration of the Venezuelan economy, it’s difficult to envision how the Maduro dictatorship can survive the year. Yes, I know the regime is willing to use the military to suppress any uprising, but I suspect hungry and desperate people are more likely to take chances. My fingers are crossed that the corrupt government is overthrown and Venezuela becomes another Chile (hopefully without a transition period of military rule).
Here are two things I fear may happen in 2018.
Pulling out of NAFTA – America dodged a bullet in 2017. Given Trump’s protectionist instincts, I worried he would do something very dangerous on trade. But pain deferred is not the same thing as pain avoided. The President has made some very worrisome noises about NAFTA and it’s possible he may use executive authority to scrap a deal that has been good for the United States.
A bad version of Brexit – Given the statist mindset in Brussels and the continent’s awful demographics, voting to leave the European Union was the right decision for our British friends. Simply stated, it makes no sense to stay on a sinking ship, even if it sinking slowly. But the net benefits of Brexit depend on whether the United Kingdom seizes the moment and adopts pro-growth policies such as tax cuts and free-trade pacts. Sadly, those good reforms don’t appear likely and it appears instead that the feckless Tory leadership will choose to become a satellite member of the EU, which means living under the thumb of Brussels and paying for harmonization, bureaucratization, and centralization. The worst possible outcome in the short run, though at least the U.K. is better positioned to fully extricate itself in the future.
I’m adding a new feature to my hopes-and-fears column this year.
These are issues where I think it’s likely that something consequential may occur, but I can’t figure out whether I should be optimistic or pessimistic. I sort of did this last year, listing Obamacare reform and Italian fiscal crisis as both hopes and fears.
It turns out I was right to be afraid about what would happen with Obamacare and I was wrong (or too early) to think something would happen with Italy.
Here are three things that could be consequential in 2018, but I can’t figure out whether to be hopeful or fearful.
Infrastructure reform or boondoggle – I put an “infrastructure boondoggle” as one of my fears last year, but the President and Congress postponed dealing with the issue. But it will be addressed this year. I’m still afraid the result may be a traditional pile of pork-barrel spending, but it’s also possible that legislation could be a vehicle for market-based reform.
Normalization of monetary policy – I try to stay clear of monetary policy, but I also recognize that it’s a very important issue. Indeed, if I was to pick the greatest risk to the economy, it’s that easy-money policies (such as artificially low interest rates) have created a bubble. And bursting bubbles can be very messy, as we learned (or should have learned) in 2008. The Federal Reserve supposedly is in the process of “normalizing” monetary policy. I very much hope they can move in the right direction without rattling markets and/or bursting bubbles.
A China bubble – Speaking of macroeconomic risks, I’m very glad that China has partially liberalized and I’m ecstatic that reform has dramatically reduced severe poverty, but I also worry that the government plays far too large a role in the banking sector and interferes far too much in the allocation of capital. I’m guessing this eventually leads to some sort of hiccup (or worse) for the Chinese economy, and all I can do is cross my fingers and hope that the government responds with additional liberalization rather than the bad policies being advocated by the OECD and IMF.
By the way, I fully expect the Democrats to sweep the 2018 elections. And since the Party is now much farther to the left than it used to be, that could lead to very bad news in 2019 – particularly if Trump unleashes his inner Nixon.
In 2011, I wrote about how taxpayers were getting pillaged to finance a new metro line in Fairfax County, Virginia.
But you won’t be surprised to learn that California taxpayers are getting screwed even worse.
I’ve since learned, however, that the real experts at wasting money are in the Big Apple. Earlier this year, as part of a column on why the federal government shouldn’t be involved with infrastructure, I shared some depressing details about a far more expensive subway project in New York City.
And now the New York Times has a must-read report about how another big infrastructure project in NYC is an even more absurd boondoggle. The story starts with an anecdote
The budget showed that 900 workers were being paid to dig caverns for the platforms as part of a 3.5-mile tunnel connecting the historic station to the Long Island Rail Road. But the accountant could only identify about 700 jobs that needed to be done, according to three project supervisors. Officials could not find any reason for the other 200 people to be there. …“All we knew is they were each being paid about $1,000 every day.”
Nice “work” if you can get it, as the old saying goes. A pretend job that pays $1,000 per day.
Unfortunately, that anecdote is just the tip of the iceberg. The entire project is a monument to how money gets wasted in New York City.
The estimated cost of the Long Island Rail Road project, known as “East Side Access,” has ballooned to $12 billion, or nearly $3.5 billion for each new mile of track — seven times the average elsewhere in the world. …a host of factors have contributed to the transit authority’s exorbitant capital costs. …public officials have stood by as a small group of politically connected labor unions, construction companies and consulting firms have amassed large profits.
In other words, the story’s headline is no exaggeration.
The special deals for unions are jaw-dropping.
Trade unions, which have closely aligned themselves with Gov. Andrew M. Cuomo and other politicians, have secured deals requiring underground construction work to be staffed by as many as four times more laborers than elsewhere in the world, documents show. …Worker wages and labor conditions are determined through negotiations between the unions and the companies, none of whom have any incentive to control costs. The transit authority has made no attempt to intervene to contain the spending.
The featherbedding belies belief.
Mr. Roach, a California-based tunneling contractor, was…stunned by how many people were operating the machine churning through soil to create the tunnel. “I actually started counting because I was so surprised, and I counted 25 or 26 people,” he said. “That’s three times what I’m used to.” …documents reveal a dizzying maze of jobs, many of which do not exist on projects elsewhere. There are “nippers” to watch material being moved around and “hog house tenders” to supervise the break room. Each crane must have an “oiler,” a relic of a time when they needed frequent lubrication. Standby electricians and plumbers are to be on hand at all times, as is at least one “master mechanic.” Generators and elevators must have their own operators, even though they are automatic. …In New York, “underground construction employs approximately four times the number of personnel as in similar jobs in Asia, Australia, or Europe,” according to an internal report by Arup, a consulting firm that worked on…many similar projects around the world.
The international cost comparisons are the most persuasive part of the story.
Taxpayers in New York City are paying far more to get far less.
…transit construction is booming around the world. At least 150 projects have been initiated since 1990, according to a recent study by Yale University researcher David Schleicher. The approximate average cost of the projects — both in the U.S. and abroad — has been less than $500 million per track mile, the study concluded. “There was one glaring exception,” Mr. Schleicher said. “New York.”
If you want a partial explanation of why this staggering level of graft and corruption is allowed, this sentence is a good place to start.
The unions working on M.T.A. projects have donated more than $1 million combined to Mr. Cuomo during his administration, records show.
And I’m sure huge amounts of money have also been diverted to city politicians as well.
It’s almost as if the whole thing is a racket, with politicians and union bosses conspiring to rip off taxpayers.
“Almost”? I must be getting soft in my old age. Let me rephrase that sentence: It is a racket to rip off taxpayers.
But let’s be fair. I don’t want to imply that it’s all the fault of the unions. The contractors also buy off the politicians.
…the…main engineering firm: WSP USA, …has donated hundreds of thousands to politicians in recent years, and has hired so many transit officials that some in the system refer to it as “the M.T.A. retirement home.”
Speaking of the M.T.A., the bureaucrats also get a sweet deal, with the rest of us picking up the tab.
More than a dozen M.T.A. workers were fined for accepting gifts from contractors during that time, records show. …A Times analysis of the 25 M.T.A. agency presidents who have left over the past two decades found that at least 18 of them became consultants or went to work for authority contractors, including many who have worked on expansion projects. “Is it rigged? Yes,” said Charles G. Moerdler, who has served on the M.T.A. board since 2010.
There’s a lot more to read in the article, including details on how a big French infrastructure project is being built at far lower cost.
It’s basically a perfect example of what Milton Friedman said about what happens when you get to spend other people’s money.
For instance, the story also has grim data about cost overruns, which are a routine feature of government infrastructure scams, both in America and other nations.
But one thing that isn’t in the report is the degree to which Washington is subsidizing this wretched boondoggle.
This is the part that irks me. I wouldn’t get too upset if New York City politicians were conspiring with interest groups to rip off New York City taxpayers. Heck, I wouldn’t even care if they were ripping off taxpayers from elsewhere in the state.
But the fact that I’m also paying for this pork-barrel project is very distressing. And it helps to explain why I want to shut down the Department of Transportation in Washington. That’s the real moral of this story.
P.S. Trump’s infrastructure plan will be unveiled next year. I’m not overflowing with optimism, but hope springs eternal that maybe he’ll listen to my advice.
I’ve called for the abolition of the Department of Transportation. On more than one occasion.
So I was very excited to see this new video about infrastructure from Johan Norberg.
Very well put. As Johan says (channeling Bastiat), we should remember that jobs are destroyed when money is taken out of the private sector to build infrastructure.
So it behooves us to make sure that any new project isn’t a boondoggle and instead will increase the economy’s productive capacity.
Veronique de Rugy explains the issue in a column for Reason. She starts with some economic analysis.
Economists have long recognized that roads, bridges, airports, and canals are the conduits through which goods are exchanged, and as such, infrastructure can play a productive role in economic growth. But not all infrastructure spending is equal. Ample literature shows, in fact, that it’s a particularly bad vehicle for stimulus and does not, in practice, boost short-term jobs or economic growth. …Publicly funded infrastructure projects often aren’t good investments in the long term, either. Most spending orchestrated by the federal government suffers from terrible incentives that lead to malinvestment—resources wasted in inefficient ways and on low-priority efforts. Projects get approved for political reasons and are either totally unnecessary or harmed by cost overruns and corruption.
And she concludes by arguing for market forces rather than federal involvement.
[Trump] should put an end to the whole idea that infrastructure should be centrally planned, taxpayer-funded, and the responsibility of the federal (as opposed to state or local) government. The current system obliterates the discipline that comes from knowing a project needs to pay for itself to survive. User fees should become our preferred option for funding infrastructure. That change kills two birds with one stone: It lessens the need for massive federal expenditures, and it gives the private sector an incentive to spend money on crucial but not exactly sexy maintenance tasks. …If Trump wants the United States to have “world-class” infrastructure, the surest way is through market-based reforms that increase competition while reducing subsidies and regulations. Embrace real privatization, not federally directed private investments.
Writing for U.S. News & World Report, Tracy Miller similarly argues that decentralization is the best approach.
Highways as well as public transportation are currently funded with money from the federal Highway Trust Fund, and by state and local governments. …Money from the fund has strings attached that raise costs and limit state and local governments’ ability to choose which projects have priority. These strings include prevailing wage laws, which require contractors receiving federal money to pay unionized wages even if they could attract qualified workers willing to work for less. High-profile projects chosen by politically powerful congressmen can easily take priority over projects that would generate greater benefits for their constituents. From an administrative standpoint, it would not be very difficult to reduce or eliminate the federal government’s role in highway and transit funding. Instead of gas taxes going to the federal government before being returned to the states, as is presently the case, each state could collect all taxes on fuel sold within its borders and decide how best to spend it. This would make it possible to downsize the U.S. Department of Transportation, saving taxpayers billions of dollars.
He explains why reform will lead to better – and cheaper – transportation.
Local governments – with greater awareness of the local needs of metropolitan areas, small towns or rural areas – can do a better job of funding and managing roads, highways and public transportation that serve primarily local residents. State governments or private firms, meanwhile, can best manage interstate and other major highways that cater mostly to long-distance travelers, especially if they could cover expenses with user fees. …Many drivers object to the idea of paying tolls for the use of currently “free” interstate highways, whether they are managed by private firms or state governments. But highways aren’t free – the costs are hidden within our fuel taxes. If mileage-based user fees are applied to all highways and set at the correct levels, they can become a much more efficient (and ultimately cheaper) replacement for fuel taxes.
Professor Edward Glaeser of Harvard summarizes the issue nicely in an article for CNBC.
Our current system of federal funding for transportation means that taxpayers in New York fund highways in Montana and drivers in Utah pay for New York’s airports. If President Trump wants to seriously improve American infrastructure spending, he should champion a new federalism for transportation, in which infrastructure is funded by states, localities and especially the users themselves. …The best decisions are made when decision-makers bear the costs and reap the benefits. When companies invest, they agonize about whether future customers will pay enough to cover the production costs. …Having lived through Boston’s Big Dig, I am well aware of how the promise of federal funding skews local decision-making. Local leaders stop asking themselves whether the benefits cover the costs because it’s somebody else’s nickel. …Detroit would have never built its absurd People Mover Monorail without federal encouragement and funding.
He elaborates on some of the implications for different types of infrastructure.
If new automotive infrastructure is meant to be self-financing, then the decision to build is a straightforward business investment and there is little need for large-scale federal funding. …The beneficiaries of metro systems are the businesses and commuters within a state. They could be funded with local property or sales taxes. My favorite metro funding model is in Hong Kong, where the city’s private mass transit system funds itself by building high-rises atop new train stops. …More federal funding for dysfunctional airports just perpetuates the status quo. They would be far healthier if they were split apart from the larger agency and allowed to operate, compete and charge higher landing fees, either as independent self-funding public airports, as in the U.K., or as private entities.
Speaking of privatization, a column in the Wall Street Journal points out that this is the way to improve airports in America.
Why do American passengers pay so much to get so little? Because their airports, by global standards, are terribly managed. Cities from London to Buenos Aires have sold or leased their airports to private companies. To make a profit, these firms must hold down costs while enticing customers with lots of flights, competitive fares and appealing terminals. The firm that manages London’s Heathrow, currently eighth in the international ranking, was so intent on attracting passengers that it built a nonstop express train to the city’s center. It’s also seeking to add another runway, as is the rival firm running Gatwick Airport. American airports are typically run by politicians in conjunction with the dominant airlines, which help finance the terminals in return for long-term leases on gates and facilities. The airlines use their control to keep out competitors; the politicians use their share of the revenue to reward unionized airport workers. No one puts the passenger first.
The author cites the San Juan airport as an example of what can happen under privatization.
If you want to see how much better American airports could be, take a plane to Puerto Rico. Until four years ago, the main airport in San Juan was run, and neglected, by an unwieldy bureaucracy, the Puerto Rico Ports Authority. The terminal was a confusing jumble of dim corridors. On rainy days, the ceilings leaked; on hot days, the air conditioning faltered. The stores were tacky and the restaurants greasy spoons, often rented at bargain rates to politicians’ friends or relatives. …Airlines switched operations to other Caribbean hubs. In 2013 the Ports Authority leased the airport for 40 years to Aerostar, a partnership operating airports in Cancún and other Mexican cities. The new managers agreed to make capital improvements, reduce landing fees and pay the Ports Authority $1.2 billion—half up-front. The result, three years later, is an airport nobody would call Third World. The redesigned concourses are sleek and airy, and revenue from new retail and restaurants has doubled. …Airlines no longer control the gates, but they’re reaping other benefits. “We’re paying lower fees for a much better airport,” says Michael Luciano, who runs Delta’s operations in San Juan. “Almost every area has been renovated. You go into any restroom, and it’s bright and clean—things like that are really important to our customers.” Passenger volume has been growing 4% annually, well above the industry average.
I can personally vouch for this. Because of all my travel in the Caribbean, I’ve used the San Juan airport extensively over the years, including just last week for the Liberty International conference.
The difference between today’s airport and the dump that used to exist is like the difference between night and day.
By the way, let’s also dismiss the notion that there’s some sort of infrastructure crisis.
I’ve already shared data from the World Economic Forum’s Global Competitiveness Report, which shows that the United States actually ranks relatively high compared to other nations.
And I’ve also shared solid numbers making the same point from Chris Edwards, one of my colleagues at the Cato Institute. Michael Sargent of the Heritage Foundation has a tweet that nicely shows that there isn’t a crisis.
Oh, and let’s also consider the example of Japan, which thought infrastructure spending was some sort of economic elixir. That didn’t work so well, as pointed out by the Wall Street Journal.
The U.S. economy isn’t growing at merely 2% because of potholes or airports… The prime illustration is Japan, which since the 1980s has tried to build its way out of stagnation. The country now boasts perhaps the world’s most spectacular suspension bridges, maglev trains, elevated highways and man-made islands, but the cost was trillions of yen of debt (now 230% of GDP) and no better growth. Nor could a monorail save Detroit. Projects make economic sense only to the extent they clear rigorous cost-benefit tests.
And if you want to know the infrastructure that is least likely to pass a cost-benefit test, just look at mass transit.
A good place to start is the Wall Street Journal‘s recent editorial on a subway line in New York City.
New York City opened a new subway line—about a century after the project was proposed and merely decades after ground-breaking in 1972…by far the most expensive train track in the history of the world. The story is an example of what not to do… This first phase of the new line—amounting to 1.6 miles in a single neighborhood, with three new stations and a renovated stop—cost some $4.451 billion. …The next leg of the Second Avenue subway, which would extend the train 29 blocks north into Harlem starting in 2020, is projected to cost an astonishing $6 billion, and that is surely an underestimate.
Gabriel Roth, writing for the Washington Examiner, has the right idea.
…abolish the subsidies. The federal government forces road users to spend some $10 billion a year on non-road assets of little or no benefit to them. Those payments are not only wasteful in themselves; they also encourage states and local governments to squander money on mass transit, whose costs users are not prepared to cover — not even the operating costs. If local communities consider such expenditures important, they should pay for them themselves.
By the way, just to show my libertarian bona fides, I think decentralization is just part of the answer. In my fantasy world, the private sector plays a bigger role.
And the good news, as I wrote back in 2014, is that my fantasy is reality in some instances.
Their livelihood was being threatened, and they were tired of waiting for government help, so business owners and residents on Hawaii’s Kauai island pulled together and completed a $4 million repair job to a state park — for free. …The state Department of Land and Natural Resources had estimated that the damage would cost $4 million to fix, money the agency doesn’t have, according to a news release from department Chairwoman Laura Thielen. …So Slack, other business owners and residents made the decision not to sit on their hands and wait for state money that many expected would never come. Instead, they pulled together machinery and manpower and hit the ground running March 23. And after only eight days, all of the repairs were done, Pleas said. It was a shockingly quick fix to a problem that may have taken much longer if they waited for state money to funnel in. “We can wait around for the state or federal government to make this move, or we can go out and do our part,” Slack said. “Just like everyone’s sitting around waiting for a stimulus check, we were waiting for this but decided we couldn’t wait anymore.” …”We shouldn’t have to do this, but when it gets to a state level, it just gets so bureaucratic, something that took us eight days would have taken them years,” said Troy Martin of Martin Steel, who donated machinery and steel for the repairs. “So we got together — the community — and we got it done.”
Reminds me of the guy who built some stairs at a park for $550 because the Toronto government was taking too long and planned to spend $65,000 to do the same thing.
Portland Anarchist Road Care (PARC) is a community collaboration of skilled workers who volunteer their services to fix the damaged roads around Portland, Oregon. Citing concerns about governmental bureaucracy, the current political climate, a lack of funds and a seeming lack of care, the members of PARC decided to take things into their own very capable hands.
I have no idea whether these people are libertarian-minded anarcho-capitalists or deeply confused left-wing nihilist anarchists, but kudos to them for steeping up and doing a job cheaply and efficiently. The very opposite of what we expect from government.
P.S. Since Nazis are in the news and since I’m writing about infrastructure, here are some blurbs from an academic study on how Germany’s National Socialists used autobahn outlays to generate political support.
The idea that political support can effectively be bought has a long lineage – from the days of the Roman emperors to modern democracies, `bread and circus’ have been used to boost the popularity of politicians. A large literature in economics argues more generally that political support can be ‘bought’. …In this paper, we analyze the political benefits of building the worldʹs first nationwide highway network in Germany after 1933 – one of the canonical cases of government infrastructure investment. We show that building the Autobahn was highly effective in reducing opposition to the Hitler regime. …What accounts for the Autobahn’s success in winning “hearts and minds”? We discuss the economic and transport benefits. In the aggregate, these have been shown to be minimal (Ritschl 1998; Vahrenkamp 2010). …we argue that the motorways…increased support because they could be exploited by propaganda as powerful symbols of competent, energetic government. …Our results suggest that infrastructure spending can indeed create electoral support for a nascent dictatorship – it can win the “hearts and minds” of the populace. In the case of Germany, direct economic benefits of pork‐barrel spending in affected districts may have played a role.
Seems that politicians, whether motivated by evil or run-of-the-mill ambition, love spending other people’s money to build political support. Is it any wonder that we hold them in such low esteem?
So when I saw a column in the Atlantic, suggesting that America can learn from Canada, I was instantly intrigued.
But it turns out that the author, Jonathan Kay, was more interested in extolling the virtues of big government rather than boasting about his nation’s economic reforms.
He starts by grousing about sub-par infrastructure in America.
There hasn’t been a new major airport constructed in the United States since 1995. And the existing stock of terminals is badly in need of upgrades. Much of the surrounding road and rail infrastructure is in even worse shape (the trip from LaGuardia Airport to midtown Manhattan being particularly appalling). Washington, D.C.’s semi-functional subway system feels like a World’s Fair exhibit that someone forgot to close down. Detroit’s 90-year-old Ambassador Bridge—which carries close to $200 billion worth of goods across the Canada-U.S. border annually—has been operating beyond its engineering capacity for years.
I have little doubt that America has serious infrastructure problems, particularly in big cities (such as New York, Washington, and Detroit) where spending decisions are driven by a desire to line the pockets of unionized bureaucrats rather than to provide services to taxpayers.
But is the United States really some sort of third-world backwater compared to our northern cousins? A few years ago, I looked at data from the World Economic Forum’s Global Competitiveness Report to see how the United States was ranked for infrastructure and discovered America was in 12th place. Which was higher than Canada’s 15th-place ranking.
But maybe things have changed since 2014. So I perused the most recent rankings. Lo and behold, the United States actually jumped one spot, to #11, while Canada remained in 15th place.
I don’t want to imply that the United States has good infrastructure policy. As far as I’m concerned, increased federal involvement has caused our system to become somewhat dysfunctional.
But since Canada ranks even lower, perhaps Mr. Kay shouldn’t be throwing rocks in a glass house.
What makes his error noteworthy is that he then tries to argue that America’s supposedly inferior infrastructure is the result of inadequate taxation.
The United States is falling apart because—unlike Canada and other wealthy countries—the American public sector simply doesn’t have the funds required to keep the nation stitched together. …The Organization for Economic Co-Operation and Development (OECD), a group of 35 wealthy countries, ranks its members by overall tax burden—that is, total tax revenues at every level of government, added together and then expressed as a percentage of GDP—and in latest year for which data is available, 2014, the United States came in fourth to last. Its tax burden was 25.9 percent—substantially less than the OECD average, 34.2 percent. If the United States followed that mean OECD rate, there would be about an extra $1.5 trillion annually for governments to spend.
The obvious implication of Mr. Kay’s column is that a much bigger tax burden would lead to much better infrastructure.
Yet if that was the case, then why does the United States rank above Canada?
Heck, I also want to ask why Mr. Kay to explain why the l0w-tax outposts of Hong Kong and Singapore ranked #1 and #2 for infrastructure?
His entire column is a case study of sloppiness. He starts out with an easily falsifiable assertion about infrastructure and he then makes another easily falsifiable claim about taxes. Does the Atlantic not have any editors?
By the way, none of this is an attack on Canada. Indeed, if you look at Economic Freedom of the World, you will see that Canada has passed the United States and now has more economic liberty. Or perhaps it would be more accurate to say that America’s score dropped faster and farther than Canada’s score. In any event, Canada is now ranked #5 and the United States is #16.
In other words, there is much to admire in Canada. And much to copy.
But Mr. Kay apparently doesn’t want America to mimic pro-market reforms. Instead, he thinks the lesson to be learned is that there should be higher taxes in the United States.
Let’s look at two final excerpts from his column, starting with his observation about the joy of taxation.
It’s really quite simple: When Canadian governments need more money, they raise taxes. Canadians are not thrilled when this happens. But as Justice Oliver Wendell Holmes Jr. put it, taxes are the price paid “for civilized society.”
I can’t resist pointing out that Justice Holmes made his point about taxes and civilization back when the federal government only consumed about 5 percent of economic output. As I wrote in 2013, “I’ll gladly pay for that amount of civilization.”
And the final excerpt implies that the business community in Canada doesn’t mind taxes.
…when I recently interviewed Canadian business leaders about the challenges they perceive, the word taxes didn’t get mentioned much.
Since the federal corporate tax rate in Canada is 15 percent, far lower than the 35 percent federal corporate rate in the United States, I’m not surprised that Canada’s business leaders no longer think taxes are their biggest problem. So why doesn’t Mr. Kay argue we should copy that feature of the Canadian system?
Sigh. I joked back in 2012 that supporters of small government in the United States might want to escape to Canada because of all the market-oriented reform. These are the changes that Mr. Kay should be extolling.
P.S. I’m surprised Mr. Kay didn’t advocate that we copy Canada’s government-run health system. You know, the one that is so wonderful that a Canadian politician escaped to the U.S. for surgery while leaving ordinary Canadians stuck in long waiting lines.
Every so often, I run across a chart, cartoon, or story that captures the essence of an issue. And when that happens, I make it part of my “everything you need to know” series.
I don’t actually think those columns tell us everything we need to know, of course, but they do show something very important. At least I hope.
This story from Toronto truly is a powerful example of the difference between government action and private action.
A Toronto man who spent $550 building a set of stairs in his community park says he has no regrets, despite the city’s insistence that he should have waited for a $65,000 city project to handle the problem. …Retired mechanic Adi Astl says he took it upon himself to build the stairs after several neighbours fell down the steep path to a community garden in Tom Riley Park, in Etobicoke, Ont. Astl says his neighbours chipped in on the project, which only ended up costing $550 – a far cry from the $65,000-$150,000 price tag the city had estimated for the job. …Astl says he hired a homeless person to help him and built the eight steps in a matter of hours. …Astl says members of his gardening group have been thanking him for taking care of the project, especially after one of them broke her wrist falling down the slope last year.
There are actually two profound lessons to learn from this story.
Since I’m a fiscal wonk, the part that grabbed my attention was the $550 cost of private action compared to $65,000 for government. Or maybe $150,000. Heck, probably more considering government cost overruns.
Though we’re not actually talking about government action. God only knows how long it would have taken the bureaucracy to complete this task. So this is a story of inexpensive private action vs. costly government inaction.
But there’s another part of this story that also caught my eye. The bureaucracy is responding with spite.
The city is now threatening to tear down the stairs because they were not built to regulation standards. …City bylaw officers have taped off the stairs while officials make a decision on what to do with it. …Mayor John Tory…says that still doesn’t justify allowing private citizens to bypass city bylaws to build public structures themselves. …“We just can’t have people decide to go out to Home Depot and build a staircase in a park because that’s what they would like to have.”
But there is a silver lining. With infinite mercy, the government isn’t going to throw Mr. Astl in jail or make him pay a fine. At least not yet.
Astl has not been charged with any sort of violation.
Gee, how nice and thoughtful.
One woman has drawn the appropriate conclusion from this episode.
Area resident Dana Beamon told CTV Toronto she’s happy to have the stairs there, whether or not they are up to city standards. “We have far too much bureaucracy,” she said. “We don’t have enough self-initiative in our city, so I’m impressed.”
Which is the lesson I think everybody should take away. Private initiative works much faster – and much cheaper – than government.
P.S. Let’s also call this an example of super-federalism, or super-decentralization. Imagine how expensive it would have been for the national government in Ottawa to build the stairs? Or how long it would have taken? Probably millions of dollars and a couple of years.
Now imagine how costly and time-consuming it would have been if the Ontario provincial government was in charge? Perhaps not as bad, but still very expensive and time-consuming.
And we already know the cost (and inaction) of the city government. Reminds me of the $1 million bus stop in Arlington, VA.
But when actual users of the park take responsibility (both in terms of action and money), the stairs were built quickly and efficiently.
In other words, let’s have decentralization. But the most radical federalism is when private action replaces government.
We have reached the 50th full day of the Trump Presidency.
In that span of time, we’ve had lots of political wrangling between Trump and the media. We’ve been introduced to the concept of the “Deep State” (yes, there is a permanent bureaucracy that acts to protect its own interests, but it’s silly to call it a conspiracy). There have been some controversial executive orders. And Trump made his big speech to Congress.
Lots of noise, though, does not mean lots of action. The President hasn’t signed any big legislation to repeal Obamacare, or even any legislation to tinker with Obamacare. There haven’t been any big changes on fiscal policy, either with regards to spending or taxes.
Heck, Trump hasn’t even told us what he really thinks on some of these issues.
What does he really want to do on tax cuts and tax reform? His original plan is off the table, but otherwise we don’t know.
And regulation? I’m guessing a shift in the right direction, but this is another example where we don’t know how far or how fast.
In other words, the biggest takeaway after 50 days is that we still don’t know whether Trump is going to make government bigger or smaller.
I address some of these issues in two recent interviews. We’ll start with this discussion on the day of Trump’s Joint Address. I mostly focus on the need for entitlement reform and explain how Trump could do the right thing for America…if he wants to.
You’ll also notice, right at the end of the interview, that I made sure to sneak in a reference to fiscal policy’s Golden Rule. Gotta stay on message!
The bottom line is that we didn’t know before the election whether Trump wants to limit the burden of government, and we still don’t know today. My guess last year was that we’ll get the wrong answer, though I confess that the jury is still out.
When politicians create programs and announce projects, they routinely lie about the real costs. Their primary goal is to get initial approval for various boondoggles and they figure it will be too late to reverse path once it becomes apparent that something will cost for more than the initial low-ball estimates. Obamacare is a classic (and discouraging) example.
These “cost overruns” are very bad news for taxpayers, of course, but the system works very well for insiders. Bureaucrats get more money. Interest groups get more money. Government contractors get more money. Government consultants get more money. And some of that money gets funneled back to politicians in the form of campaign contributions, so they get more money as well.
This scam is particularly prevalent whenever politicians decide to build infrastructure. And there are lots of local examples in the Washington area.
But it’s definitely not limited to Washington. There are ridiculous examples of cost overruns elsewhere in the world.
And it goes without saying that places controlled by statists often produce the most absurd examples of wasteful boondoggles. Indeed, is there anyone in the world surprised to see this headline from a story in the Los Angeles Times?
A confidential Federal Railroad Administration risk analysis, obtained by The Times, projects that building bridges, viaducts, trenches and track from Merced to Shafter, just north of Bakersfield, could cost $9.5 billion to $10 billion, compared with the original budget of $6.4 billion. …The California High-Speed Rail Authority originally anticipated completing the Central Valley track by this year, but the federal risk analysis estimates that that won’t happen until 2024, placing the project seven years behind schedule.
Over budget and overdue? Gee, who could have predicted that would happen with a government infrastructure project (other than every single person with an IQ above room temperature).
What happens next is unclear. The federal bureaucracy that disburses grants presumably wants to keep the gravy train on the tracks (pun intended), though hopefully Congress will tell California there won’t be any more federal handouts.
The Federal Railroad Administration is tracking the project because it has extended $3.5 billion in two grants to help build the Central Valley segment. …Rep. Jeff Denham (R-Turlock), chairman of the House rail subcommittee, said Friday… “Despite past issues with funding this boondoggle, we were repeatedly assured in an August field hearing that construction costs were under control,” he said in a statement. “They continue to reaffirm my belief that this is a huge waste of taxpayer dollars.” …About 80% of all bullet train systems incur massive overruns in their construction, according to Bent Flyvbjerg, an infrastructure risk expert at the University of Oxford who has studied such rail projects all over the world.
Unsurprisingly, the various interest groups that are feasting on this boondoggle want it to continue, whether the money comes from federal taxpayers or state taxpayers.
The California system is being built by an independent authority that has never built anything and depends on a large network of consultants and contractors for advice. …Proponents of the project, including many veteran transportation experts, have said that California’s massive economy can handle higher costs for the project — even more than $100 billion — by increasing sales taxes.
For what it’s worth, I don’t particularly care if California voters want to squander their own money and hasten the state’s economic decline.
But I’m very much against the idea that my income should be forcibly redistributed to support this foolish bit of pork. And this is why I’m very nervous about Donald Trump’s infatuation with infrastructure. Though since he hasn’t provided many details, so we don’t know whether he wants a business-as-usual expansion of pork or a much-needed expansion of private-sector involvement. But I’m not optimistic.
Since yesterday’s column was a look back on the good and bad things of 2016, let’s now look forward and speculate about the good and bad things that may happen in 2017.
I’m not pretending any of this is a forecast, particularly since economists have a miserable track record in that regard. Instead, the following lists are simply things I hope may happen or fear may happen.
We’ll start with the things I want.
Reform of healthcare entitlements – Republicans in 2017 will control Congress and the White House, so they’ll have the power to fix our broken entitlement system and dramatically improve America’s long-run outlook. And since the House and Senate GOPers have voted for budgets that presume much-need structural changes to Medicare and Medicaid, that bodes well for reform. The wild card is Donald Trump. He said some rather irresponsible things about entitlements during the campaign, which suggests he will leave policy on autopilot (which is not a good idea when we’re heading for a fiscal iceberg). On the other hand, politicians oftentimes disregard their campaign commitments (remember Obama and “you can keep your doctor“?), especially when they get in power and finally take a hard look at budget numbers. Perhaps the most optimistic sign is that Trump has appointed Budget Committee Chairman Congressman Tom Price to be Secretary of the Department of Health and Human Services and Congressman Mick Mulvaney to be Director of the Office of Management and Budget. I very much hope Trump seriously addresses the health entitlements.
A lower corporate tax rate, “expensing,” and repeal of the death tax – During the campaign, Trump proposed a very large tax cut. With Republicans controlling both ends of Pennsylvania Avenue, some sort of significant tax cut should be feasible. It’s highly unlikely that Trump will get everything he wants, but the three items at the top of my wish list are lowering the corporate tax rate, ending the tax code’s bias against new investment by replacing punitive “depreciation” rules with “expensing,” and repeal of the death tax. Those reforms would have the strongest impact on long-run growth. And the icing on the cake would be a repeal of the state and local tax deduction, which subsidizes high-tax states such as California, Illinois, New York, and New Jersey (I’d also like to see repeal of the healthcare exclusion, but I’m focusing on things that might actually happen in 2017 rather than what’s on my fantasy list).
Regulatory reform – The tentacles of the regulatory octopus are stifling the American economy. There’s no single fix for this problem. The overall system for approving regulations should be changed (I will write on the “REINS Act” in a few days), but that’s a partial solution for future red tape. To deal with the existing burden of red tape, a different set of answers will be necessary, including sensible political appointees so that bureaucrats will have a harder time pushing for regulations that are needlessly expensive and misguided and instead will be charged with undoing existing red tape. In some cases (Dodd-Frank, Obamacare, etc), it will be necessary to change current law in order to roll back regulatory excess.
Italian default – I’m not hoping for Italy to face a fiscal crisis, but it almost certainly will happen in the near future. The nation’s demographic decline, combined with its bloated welfare state, are a horrible recipe. And while it’s theoretically possible to avert a mess by capping spending and fixing programs (just as it is still possible to fix the mess in Greece), I don’t think good policy is very likely. So Italy will soon face a fiscal crisis and the real question is whether there’s a good response. Ideally, if this happens in 2017, Italy will be allowed to default (presumably because Trump’s representative at the International Monetary Fund vetoes any sort of bailout). This will mean, a) the people and institutions who were silly enough to lend money to a profligate government will suffer losses, making them more prudent in the future, b) Italy will lose the ability to borrow more money, putting an end to additional red ink, c) Italian politicians will be forced to immediately balance the government’s budget, which hopefully means genuine budget cuts, and d) the Italian people will (hopefully) realize that a system based on looting and mooching can no longer be maintained.
Now here’s a list of things I’m afraid may happen.
Punting on entitlement Reform – As noted above, the wild card for any sort of genuine entitlement reform is Donald Trump. If he decides to to be President Santa Claus by appeasing various interest groups (like the previous GOPer in the White House), then reform will be dead. Simply stated, House and Senate Republicans will not push good changes without support from the White House. But that’s only a partial worst-case scenario. Trump may choose to be like the previous Republican President and actually expand entitlements (perhaps by borrowing a page from Elizabeth Warren’s playbook and expanding Social Security). If Trump decides to punt (or, gulp, make things worse), that has very grim implications. Reform will be dead for at least eight years (either because Trump gets reelected or because he’s replaced by a Democrat who also opposes reform) and the longer we wait to address the problem, the harder it will be to save America from a Greek fiscal future.
A “Poison Pill” in tax reform – While there is a great opportunity to fix some of the biggest warts in the internal revenue code, I worry that lawmakers will include some bad revenue raisers to help “pay for” the good provisions. I don’t think there’s any danger (at least for 2017) of a value-added tax, but the plan from House Republicans includes a “border adjustable”/”destination based” tax on imports (known as a DBCFT) that is not only protectionist, but could eventually morph into a VAT. A smaller tax cut without a DBCFT would be better than a bigger tax cut with a DBCFT.
An infrastructure boondoggle – It appears that some sort of infrastructure plan will be approved in 2017. I wrote last year to suggest three guidelines for the incoming Trump Administration on this issue, but I fear that this initiative will become a typical DC feeding frenzy. Lots of spending with no accountability.
Italian bailout – If the inevitable Italian fiscal crisis occurs in 2017, the worst possible outcome would be a Greek-style bailout. That approach has several undesirable implications. It will a) exacerbate moral hazard by rewarding the investors who bought Italian bonds, b) it will enable Italian politicians to incur more debt, and c) it will enable the Italian people to continue thinking that big government is good because someone else is paying for it. To be sure, because there’s so much more debt involved, bailing out Italy will be much harder than bailing out Greece. But so long as the corrupt and venal IMF plays a role, it’s always prudent to assume the worst policy will be imposed.
I hope all readers have a happy new year. And I hope. for the sake of America and the rest of the world, that the first half of today’s column is more accurate than the second half.
During the election, Donald Trump promised a big package of infrastructure spending, twice as much new spending as Hillary Clinton was proposing.
During his victory speech the night of the election, he doubled down on this approach, promising that more infrastructure spending would be one his first priorities.
This sounds like bad news for advocates of limited government. And it may turn out to be bad news. Though if you look at what the Trump campaign actually proposed, there’s a lot of wiggle room.
I will work with Congress to introduce the following broader legislative measures and fight for their passage within the first 100 days of my Administration: …American Energy & Infrastructure Act. Leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years. It is revenue neutral.
In other words, it’s possible that President-Elect Trump might give us an Obama-style stimulus scheme. Or he may take a radically different approach by removing roadblocks that hinder more private-sector involvement.
And my colleague Chris Edwards points out that the private sector already does most of the heavy lifting when it comes to infrastructure spending.
Hillary Clinton says that “we are dramatically underinvesting” in infrastructure and she promises a large increase in federal spending. Donald Trump is promising to spend twice as much as Clinton. …But more federal spending is the wrong way to go. …let’s look at some data. There is no hard definition of “infrastructure,” but one broad measure is gross fixed investment in the BEA national accounts. …The first thing to note is that private investment at about $3 trillion was six times larger than combined federal, state, and local government nondefense investment of $472 billion. Private investment in pipelines, broadband, refineries, factories, cell towers, and other items greatly exceeds government investment in schools, highways, prisons, and the like. …if policymakers want to boost infrastructure spending, they should reduce barriers to private investment.
This is very helpful and interesting data. And one of the obvious conclusions is that the types of infrastructure that historically are the responsibility of the private sector (pipelines, cell towers, etc) are handled much more efficiently than those (highways, mass transit, etc) that have been monopolized by governments.
Trump presumably intends his infrastructure plan to focus on the latter type of infrastructure, so let’s consider three simple rules to help guide an effective approach for transportation.
1. More private-sector involvement
A key principle for good infrastructure policy is to harness the efficiency of the private sector.
Why? Because, as Lawrence McQuillan of the Independent Institute argues, governments naturally are inefficient and incompetent at building and managing infrastructure.
Government authorities view maintenance solely as a cost, rather than as an investment that can increase future revenues. As a result, roads remain riddled with potholes, bridges crumble, airports are overcrowded, water is contaminated, and we have classrooms with mold and falling ceilings. Moreover, without a profit motive, repairs are seldom done in a timely manner or at lowest cost. Instead of assets being owned and controlled by people who understand the economics of the industry and have the technical knowledge to operate and repair them efficiently, politicians (the majority of whom appear to be lawyers these days) and bureaucrats control them. This guarantees waste, inefficiency and cronyism, such as the greenlighting of white-elephant projects that are driven by politics rather than economics.
But there is some good news.
Chris Edwards explains that the private sector is taking a larger role.
Before the 20th century, for example, more than 2,000 turnpike companies in America built more than 10,000 miles of toll roads. And up until the mid-20th century, most urban rail and bus services were private. With respect to railroads, the federal government subsidized some of the railroads to the West, but most U.S. rail mileage in the 19th century was in the East, and it was generally unsubsidized. The takeover of private infrastructure by governments here and abroad in the 20th century caused many problems. Fortunately, most governments have reversed course in recent decades and started to hand back infrastructure to the private sector. …Short of full privatization, many countries have partly privatized portions of their infrastructure through public-private partnerships (“PPPs” or “P3s”). PPPs differ from traditional government contracting by shifting various elements of financing, management, maintenance, operations, and project risks to the private sector. …Unfortunately, the United States “has lagged behind Australia and Europe in privatization of infrastructure such as roads, bridges and tunnels,” notes the OECD. More than one fifth of infrastructure spending in Britain and Portugal is now through the PPP process, so this has become a normal way of doing business in some countries. Canada is also a leader in using PPP for major infrastructure projects.
…the Department of Transportation should be dismantled for the simple reason that we’ll get better roads at lower cost with the federalist approach of returning responsibility to state and local governments. …Washington involvement is a recipe for pork and corruption. Lawmakers in Congress – including Republicans – get on the Transportation Committees precisely because they can buy votes and raise campaign cash by diverting taxpayer money to friends and cronies. …the federal budget is mostly a scam where endless streams of money are shifted back and forth in leaky buckets. This scam is great for insiders and bad news for taxpayers. Washington involvement necessarily means another layer of costly bureaucracy. And this is not a trivial issues since the Department of Transportation is infamous for overpaid bureaucrats.
For a more detailed explanation, Professor Edward Glaeser of Harvard has some devastating analysis in an article for City Journal.
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. Redirecting tax dollars across jurisdictions is rarely fair—and it isn’t right, either, that poorer, lower-density regions should subsidize New York’s subway and airports. Washington’s involvement also distorts infrastructure planning by favoring pet projects. The Recovery Act set aside $8 billion for high-speed rail, for instance, despite the fact that such projects would never be appropriate for most of moderate-density America. California was lured down the high-speed hole with Washington support… Detroit’s infamous People Mover Monorail would never have been built without federal aid. Alaska’s $400 million Gravina Island bridge to nowhere was a particularly notorious example of how Congress abuses transportation investment. As the Office of Management and Budget noted, during the Bush years, highway funding was “not based on need or performance and has been heavily earmarked.”
3. Sensible cost-benefit analysis
Our third principle is that infrastructure should only be built if it makes sense. In other words, do the benefits exceed the costs?
In the private sector, the profit motive automatically generates that type of calculation.
With government, that effort becomes much more challenging.
Professor Michael Boskin at Stanford explains the problem in a column for the Wall Street Journal.
…a huge pot of additional money earmarked for infrastructure, on top of the recently passed $305 billion five-year highway bill, is sure to unleash a mad scramble in Congress to secure funds for the home turf. The logrolling and pork will get ugly without far tighter cost-benefit tests and oversight. …Most federal infrastructure spending is done by sending funds to state and local governments. For highway programs, the ratio is usually 80% federal, 20% state and local. But that means every local district has an incentive to press the federal authorities to fund projects with poor national returns. We all remember Alaska’s infamous “bridge to nowhere.” In other words, if a local government is putting up only 20% of the funds, it needs the benefits to its own citizens to be only 21% of the total national cost. Yet every state and every locality has potential infrastructure needs that it would like the rest of the country to pay for. That leads to the misallocation of federal funds and infrastructure projects that benefit the few at the cost of the many. …taxpayers generally don’t notice all the fiscal cross-hauling, sending their money to Washington to be sent back in leaky buckets to local jurisdictions. Since we all reside in a state and locality, it’s an inefficient negative sum game with complex cross-subsidies. If these local projects are so good, why aren’t citizens willing to finance the projects locally?
And don’t forget government infrastructure always is more expensive – sometimes far more expensive – than politicians first promise. Chris Edwards has the details.
Federal infrastructure projects often suffer from large cost overruns. Highway projects, energy projects, airport projects, and air traffic control projects have ended up costing far more than promised. When both federal and state governments are involved in infrastructure, it reduces accountability. That was one of the problems with the federally backed Big Dig highway project in Boston, which exploded in cost to five times the original estimate. U.S. and foreign studies have found that privately financed infrastructure projects are less likely to have cost overruns.
The challenge, of course, is getting governments to produce honest cost-benefit analysis. Bureaucrats respond to the people who control their jobs and control their pay. So if politicians want to squander more money, it’s quite likely that bureaucrats will concoct the numbers needed to justify the expansion of government.
To cite a high-profile example, I caught the IMF making up numbers to justify infrastructure boondoggles, even though that politically driven analysis contradicted the work of the bureaucracy’s professional economists.
Let’s finish with two additional points.
First, advocates of more infrastructure spending act like there’s some national crisis.
But if this is true, why does the United States get relatively high scores from the World Economic Forum?
Second, let’s consider the example of Japan. That nation has been stuck in a multi-decade period of stagnation, with very little expectation of an economic turnaround. But if infrastructure spending was some sort of elixir, that economy should be booming.
…a look at ailing Japan, which has spent over $6.3 trillion since 1981 on truly impressive bridges and bullet trains, suggests infrastructure isn’t always a cure for economic woes.
The bottom line is that Donald Trump should not follow the business-as-usual approach of simply dumping more money into a system that almost always produces poor results.
P.P.S. I wrote two years ago about the guy in England who built a private road to help drivers avoid lengthy delays caused by poor government planning. We have an even more…um…interesting example from Russia of how the private sector can take over when the government founders.
Gangs smuggling goods into Russia have secretly repaired a road on the Belarussian border in order to boost business, the TASS news agency reported Monday. Smugglers have transformed the gravel track in the Smolensk region in order to help their heavy goods vehicles traveling on the route, said Alexander Laznenko from the Smolensk region border agency. The criminal groups have widened and raised the road and added additional turning points, he said. The road, which connects Moscow to the Belarussian capital of Minsk, is known to be used by smugglers wishing to avoid official customs posts.
This is like a libertarian fantasy. The private sector builds a road to help entrepreneurs avoid trade taxes. What’s not to love? And unlike the libertarian sex fantasy or my 1992 debate fantasy, it’s actually true!
The state’s population dropped by more than 500,000 people between July 2020 and July 2022. Outmigration to other states fueled the decline: Almost 900,000 more people have moved to other states from California in the past three years than have moved in. …This exodus poses massive risks for the state’s finances because of its reliance on revenue from the rich. As of 2018, almost 35 percent of California’s personal income tax revenue came from the sliver of taxpayers earning $1 million or more. Nearly two-thirds come from those earning more than $200,000. That means a small change in these people’s residence can cost the state billions. …It could take a New York-style collapse to force significant change. Given the direction California is heading, that unhappy prospect is no longer unthinkable.
High taxes represent an approach that favors bigger, more pervasive government, which takes many other forms besides taxes: a tendency to greater regulation and differing spending priorities than those of lower-taxed states, for example. …Fueled by its taxes on high earners and on businesses, California has an enormous budget. Its general fund alone tops $200 billion. You might expect, for that money, top-notch services from government, but the opposite is true. …Advocates for higher taxes often argue that progressive tax systems like California’s are fairer because wealthier residents pay at higher rates. …And yet high-taxing states like California, New York, and New Jersey also have among the highest rates of outmigration. These states are so “fair” that a significant number of their lower- and middle-income residents can’t wait to leave.
…let’s look at some data. There is no hard definition of “infrastructure,” but one broad measure is gross fixed investment in the BEA national accounts. …The first thing to note is that private investment at about $3 trillion was six times larger than combined federal, state, and local government nondefense investment of $472 billion. Private investment in pipelines, broadband, refineries, factories, cell towers, and other items greatly exceeds government investment in schools, highways, prisons, and the like. …if policymakers want to boost infrastructure spending, they should reduce barriers to private investment.
International Liberty 