Support for my argument
I was pleasantly surprised this morning to open the New York Times Magazine and find David Leonhardt’s cover story The Big Fix. Surprised because it’s obvious that he is wrestling with the exact same issues that I was raising yesterday. Here is a sample.
ONE GOOD WAY TO UNDERSTAND the current growth slowdown is to think of the debt-fueled consumer-spending spree of the past 20 years as a symbol of an even larger problem. As a country we have been spending too much on the present and not enough on the future. We have been consuming rather than investing. We’re suffering from investment-deficit disorder.
You can find examples of this disorder in just about any realm of American life. Walk into a doctor’s office and you will be asked to fill out a long form with the most basic kinds of information that you have provided dozens of times before. Walk into a doctor’s office in many other rich countries and that information — as well as your medical history — will be stored in computers. These electronic records not only reduce hassle; they also reduce medical errors. Americans cannot avail themselves of this innovation despite the fact that the United States spends far more on health care, per person, than any other country. We are spending our money to consume medical treatments, many of which have only marginal health benefits, rather than to invest it in ways that would eventually have far broader benefits.
Along similar lines, Americans are indefatigable buyers of consumer electronics, yet asmaller share of households in the United States has broadband Internet service than in Canada, Japan, Britain, South Korea and about a dozen other countries. Then there’s education: this country once led the world in educational attainment by a wide margin. It no longer does. And transportation: a trip from Boston to Washington, on the fastest train in this country, takes six-and-a-half hours. A trip from Paris to Marseilles, roughly the same distance, takes three hours — a result of the French government’s commitment to infrastructure.
These are only a few examples. Tucked away in the many statistical tables at the Commerce Department are numbers on how much the government and the private sector spend on investment and research — on highways, software, medical research and other things likely to yield future benefits. Spending by the private sector hasn’t changed much over time. It was equal to 17 percent of G.D.P. 50 years ago, and it is about 17 percent now. But spending by the government — federal, state and local — has changed. It has dropped from about 7 percent of G.D.P. in the 1950s to about 4 percent now.
Governments have a unique role to play in making investments for two main reasons. Some activities, like mass transportation and pollution reduction, have societal benefits but not necessarily financial ones, and the private sector simply won’t undertake them. And while many other kinds of investments do bring big financial returns, only a fraction of those returns go to the original investor. This makes the private sector reluctant to jump in. As a result, economists say that the private sector tends to spend less on research and investment than is economically ideal.
What I was suggesting is the the U.S. is going to evolve into what some call a “mixed economy” ,some call a “Social Democracy” and others call “The Third Way”. The reason the Right Wing Republicans are so mad about Obama’s Recovery Act is that they understand that the government is beginning to make large long term investments in technology and infrastructure. For instance, as my friend and colleague Yochai Benkler points out the provisions for Broadband investments in the Senate version of the Recovery Act are really quite good.
First, it stands at 9 billion dollars instead of 6 billion dollars, and is to be disposed purely through the National Telecommunications and Information Administration Technology Opportunities Program. 9 billion is not the 44 billion Free Press was arguing for, but it is no chump change, either. It’s about 40% of what Verizon had planned to spend over six years as its investment to shift to FiOS. Second, it is all to be administered through the NTIA, through a program that was set up during the Clinton Administration to support experimentation and deployment of public and non-profit efforts, and to study public networks; a program that has been starved of funds for half a decade.
Since the election of Ronald Reagan, the American public has been fed a steady stream of propaganda that the government “is the problem, not the solution”. And so as Leonhardt points out, we have fallen behind many developed countries in the basic modern infrastructure on which new productivity revolutions, financed by private capital, can be built. That is going to change. And the Club for Growth and Mike Pence and Rush Limbaugh are going to be screaming “socialism” , just as they did in the last weeks of the Presidential Election.
Just as you did on Nov. 4th, ignore the noise and push your Congressman to support the Recovery Act.
The one thing that I remain quite skeptical about with the whole broadband build-out is that it will actually happen. The government gave enormous tax breaks to telecom companies in the 90’s, to provide FTTH. Nothing ever came of it. Nothing.
Fios was started after those tax breaks had expired. And that’s still the only medium-to-large scale roll-out of FTTH in the US.
I’m also a bit worried about net neutrality; look at the history of the railroads. A government board was set up to keep the railroad companies from running rough-shod over the interests of the common citizens. What happened? The industries stacked that board until it did exactly the opposite of what it was founded to do.
Will that happen again? I don’t know, and I certainly hope not, but it isn’t difficult to envision how it could.
Just look at the revolving door between congress and lobbyists.
AMusingFool
February 1, 2009 at 10:53 am
The problem simply put is this: the private sector is better than the public sector at handling certain kinds of products and services, but the REASON that this is the case disappears when applied to infrastructure.
The simple explanation of this reason is competition. Multiple companies can compete against one another, forcing them to either increase efficiency and drop prices, or improve the quality of product/service. This is meant to be a perpetual struggle which produces both better prices for the consumer and better quality products and services.
The limiting factor on competition is the profit motive. This is what drives businesses to compete for market share in the first place. It is also what limits how far prices can drop and how much can be spent on development (either research or infrastructure investment).
The basic idea is that competition, limited by the profit motive, produces the best outcome for both the business and the consumer.
However, there are at least two situations in which this dynamic doesn’t function properly, what we might call Market Pathologies:-
1) Racketeering: Where companies engage in a tacit agreement not to compete too much, and so to keep profits artificially high. This not only cheats the consumer of lower prices, but also of better products and services, because it reduces the incentive to both.
2) Monopolies: Situations in which there is only one choice available to the consumer, i.e., where competition for market share is impossible.
The most fundamental kinds of infrastructure are heavily prone to both. Either the consumer only has one choice of provider because of geographical reasons (this is the case with my water provider for instance). Or the few provides there are happily settle down into tacit agreements not to over-compete for market share.
What is it that makes infrastructure prone to these pathological outcomes?
My proposed answer would be the prohibitively high cost of entering the market in the first place. It is so hard for new companies to enter the market that it they’d have to be guaranteed a really high market share (in virtue of having a seriously better service) than their competitor(s). Of course, its really easy for the existing company to pre-emptively respond to take away this advantage. This doesn’t mean that they have to do everything that the potential competitor proposes, they only have to do enough to lessen their proposed advantage to make it not worthwhile. This is like having the high ground in a battlefield scenario.
In any such case, the real advantages of market mechanisms don’t work properly. The profit motive acts as a limit to competition, but the reverse also holds. In the absence of competition there is no incentive to invest in quality (development) any more than one has to, and the incentive for efficiency is driven directly by the profit motive, meaning the consumer loses out on price.
So, the bad argument is that the private sector model produces the best result for both business and the consumer in ALL cases. In some cases the public sector retains its advantages (direct incentive for development) when the private sector loses its own (indirect incentive to develop).
Pete Wolf
February 2, 2009 at 3:37 am
I should also add that with infrastructure it is often impracticable to have more than one basic system of infrastructure (gas pipes, electricity cabling, railway lines), meaning that there can only be multiple providers selling access to the same system. If the system is shared then there it ceases to be part of the competition between the providers, meaning that there is no incentive to develop the infrastructure provided by having such a multiplicity of providers.
Pete Wolf
February 2, 2009 at 3:46 am
@pete: The third leg is when the customer is the government and it is only tending to the process of procuring the product and not ensuring the quality of the product. The infrastructure of the highway system has been in steady decline. The inspectors know it, have known it and have reported it.
A bridge had to collapse to make people notice.
Until the quality of the civil service that administrates the procurement improves, expect more of the same service that took the TARP and made half of it magically vanish. Competition won’t fix that. The Market won’t fix that.
What will? More money?
The reason for New Federalism as I understand it is to bring the procurement closer to the market that implements it. In other words, instead of making all states equally incompetent by spreading the Federal ineptness equally, each State has to work out how to improve its own competence and if it doesn’t work…. well what then?
And that is my challenge to the New Federalists. If States receive significant funding but nothing is presented indicating that they are competent to administer the funds and in fact, are in deep financial trouble because of incompetence, how does this offer any promise of change other than a shorter chain of hands out?
How can throwing money into a fire put out the fire?
len
February 2, 2009 at 6:23 am
I think a big reason Right-Wing Republicans are so mad right now is that their chickens have come home to roost in a way they never expected.
The economic stimulus programs currently being considered to clean up the mess made by these guys are going to completely undermine their “starve the beast” long-term strategy of reducing the size of the federal government (excepting defense and intelligence, of course).
I just hope like hell that in the coming years some smart people in the Centre/Left area of the political spectrum are able to use the results of the government stimulus as evidence to make some succint, convincing arguments that sometimes government can do a better job than the private sector, and cut another leg off of the footstool that the Right has been shouting atop for the last 30 years.
Jason
February 2, 2009 at 7:25 am
len — I think the idea is to SMOTHER the fire with the money. Dribbling it in piecemeal will give the expected result.
As to “receiving funding” from Sugar Daddy Uncle Sam, why does “the money” have to make a trip through the Treasury at all? Isn’t the idea that local governments take care of local problems best? All we have to do is get rid of a bunch of state constitutional prohibitions on state and municipal governments running deficits. let them do what they can with tax anticipation financing and go for it. It’s not like the present system of allocating Real Wealth extracted from the economic system, or funny munny printed by the Fed, is proving to have any virtues of fairness, efficiency or what-ever.
At least if the local gov’t officials get it wrong or steal big, they will be within rifle or maybe even pistol shot.
JTMcPhee
February 2, 2009 at 9:20 am
Wouldn’t it be simpler to reduce Federal taxes and increase State taxes?
OTW, The Kingfisher kept Marcello going until Huey messed with the wrong civil servant. I’m trying to think of an example where cheap ammo solved an infrastructure problem.
len
February 2, 2009 at 10:20 am
Len: I absolutely agree that government “outsourcing” is the third pathology here. Often because governments don’t have the necessary competence, or even willingness, to manage their contracts properly. In the UK we’ve made a serious mess of public private partnerships in the health service, and companies have taken us to the cleaners while providing sub-public sector service, KBR style.
Pete Wolf
February 2, 2009 at 10:35 am
Pete Wolf:
Good points regarding infrastructure. This all comes back to the concept of the ‘tragedy of the commons‘ — the private sector is terrific at taking care of most things, but there are some “public goods” where the inability to reliably account for private shares of the costs and returns just kills the effectiveness of the private market. In some cases a public utility model with regulated monopolies addresses the problem effectively. In others, we need more direct government involvement. (In fact, it can be difficult to distinguish the two in our increasingly out-sourced government.)
The ideal stimulus package would focus on public goods for exactly this reason. Cutting taxes from very high levels to more moderate ones will adjust thresholds for private investment in much the way lowering interest rates can. But tax cuts can’t remove the mismatch between public goods and the private market.
Our problem in recent years has been a lack of infrastructure investment. Investment in public goods, of both the material goods (eg bridges) kind and in services (eg. bank regulators). So one fundamental direction for stimulus has to be a reallocation of tax revenues into that infrastructure — and NOT back to private taxpayers. (I’d like to see us shift money from defense to domestic infrastructure, but the MIC owns most of the government, so this is unlikely unless/until the dollar crashes hard.)
But as we dig up all the ’shovel-ready’ projects out there, let’s remember there are at least two kinds of ’shovel’ metaphor at work. One is the intended one: suit-wearing exec dons a hard-hat and does a ceremonial ground-breaking for the cameras holding a shovel. The other one, which the Republican opposition are starting to point out is: fat-cat lobbyists shoveling money to their usual constituencies.
The risk of the ’shovel-ready’ focus, is that it is a narrow focus on “what we already know exactly how to do”. It carries too little long-range vision. We really need to think about a bigger question:
What will America do for a living this century? What infrastructure investment will be required to make that happenhere rather than somewhere else in the world?
Seth
February 2, 2009 at 11:40 am
I think taking a long, hard look at domestically produced food and energy would be a good start. Both should be productive, economical, and sustainable–probably some mix of small and large production and distribution–the end of both should be providing a PRODUCT to a consumer/customer, not on making money for a small group of stockholders.
Amber in Albuquerque
February 2, 2009 at 11:53 am
@pete: It was noted by the NASA vets that when NASA really was an engineering organization, it did fantastic work and kept costs within realistic constraints for the kind of work it was doing. As soon as the Nixonites were able to retire the “Nazi rocket scientists” who had managed the Saturn program strictly and ensure that the work would be done by contractors instead, the damage was done.
Of course, some of that can be attributed to experience. The OldTimers (how the German scientists refer to themselves) had incredible amounts of expertise and team comraderie. It’s like being in an old band that worked in the studio together for decades. They are good at it as long as they are with each other.
Sometimes it is better for the work to actually be done by government workers who don’t have a profit incentive but a bonus incentive. Go figure.
Then there is the problem that a profit-based incentive minimizes costs and that would be fine until they go overseas for labor and materiel removing out any but the weakest stimulus effect akin to the claim that if the Wall Streeters don’t get their bonuses, New York restaurants suffer and we teeter on the brink of Depression.
Whadda crock.
len
February 2, 2009 at 12:17 pm
There are many parallels between the US and the UK, and there’s an opportunity for both countries that many seem to have missed.
Many people see the collapse of the banking system as an opportunity to reform the financial system. Fewer people seem to recognise that the similar collapse of the housing market offers an opportunity to reform the construction industry.
The architectural technology now available enables us to make far more energy efficient homes than we do in practice for the most part. We’re still making houses as if energy is not only cheap and plentiful, but as if its going to remain cheap and plentiful. The only way to stop this is to re-regulate the industry, and do so in a drastic way, introducing far higher minimum standards for energy efficiency.
The biggest obstacle to making the construction industry greener has always been that the construction industry is vehemently opposed to such regulation. Unfortunately construction has one of the most powerful lobbying arms of any industry. The power of the construction lobby increased as the housing sector came to play a more fundamental role in the economy following the last recession.
Now that the market has collapsed in a drastic fashion, the power of the construction lobby has similarly ebbed. If there was ever a time to force them into a deal, now is it.
Pete Wolf
February 2, 2009 at 1:35 pm
I brought that up before. As Rick and others mentioned, there is a ton of regulations that have to be redone community by community first. Then there are the retraining costs. Money made in home construction isn’t that good unless the crew is fast and efficient. Retooling, retraining and coming up with a new generation of workers who can build a home within costs will take some time.
Nine women and one month do not a baby make.
len
February 2, 2009 at 1:46 pm
Hmmmm…is now the time to force industries whose operating motto is “that’s the way we’ve always done it” into new modes…or could we just let them die a slow painful death and give the innovators our full support? The ‘dinosaur brains’ in the various industries (agriculture, energy, autos, construction) are a HUGE part of the problem. Do we try to regulate them though…or should we just let the market take its course (as slow and painful as that may be)?
This interregnum is not just political, but economic/industrial. I’m not sure we should be propping up or attempting to regulate industries back to life. This is a really sticky issue, but I see a huge opportunity in the lack of purchasing going on. It’s like our entire country (and yours in Britain) has realized that they don’t have to listen to marketing that tells people what to buy. For example, Detroit has always been build a car and tell the public that they want it…it will make them cool, will make people think they are rich, etc. Now that the buying has all but stopped, there’s an opening for the consumer to say here’s what I want and I’m not buying squat until you build what I want (and build it green).
Someone will eventually build the stuff that people want and need and are willing to spend their hard-earned money on. Question is is that ’someone’ going to be a small start-up or can the government somehow ‘regulate’ existing large companies into actually listening to their customers (again, instead of their shareholders). As Jon pointed out on another post, this will require an acceptance of moderate profits based on what real people are actually really buying instead of all of the accounting sleight of hand and skimming that has been going on for the last 20 years. Don’t know if the 1% is going to be willing (or able) to wrap their brains around that one. Perhaps it’s back to the pikes, pillories…and guillotines.
Amber in Albuquerque
February 2, 2009 at 1:52 pm
Pete, Len: Seems like the simplest path to more energy-efficiency friendly regulation in localities is: carbon taxes. Make energy efficiency pay by putting a substantially higher floor under prices and the local regs will be taken out.
The market takes care of equilibrium — once power decides what boundary conditions it wants.
Seth
February 2, 2009 at 2:53 pm
Len: I totally agree. Any attempt to seriously reform the construction industry must be a long term process, you can’t simply throw them a bunch of new regulations and tell them to deal with it.
There is also a real question as to whether to pursue such an in depth process of reform via existing big development companies or to encourage newer, smaller developers who are willing to think differently from the start. It’s pretty obvious which one we all prefer, but the practicalities need working out.
Seth, Amber: Both of you make good points, but I’m not sure that the market will create equilibrium on the basis of setting a single boundary condition. Or if it will, it will take far longer than it would if we gave it a good push.
What we really want is houses that are built to deal with our energy consumption needs in the long-term. If we have to constantly build new generations of homes that get incrementally better in their energy efficiency, we waste a great deal more energy in the process of building, as well as what was lost relative to the original better standard. Although I think a carbon tax is a good idea, I don’t think it’s an all purpose cure, because people won’t make the choices that maximise the energy efficiency of their homes.
When it comes to the decision of buying a home, people will have to weigh initial price outleigh against price outleigh over time, given that most people don’t have an adequate grasp on how prices will rise over time, my bet is that many would opt for a solution which would cost them more in the long term (and when scaled up to the population, cost us all more carbon wise). This is why most people’s homes in the UK aren’t insulated properly, despite the fact they’d save money.
The same applies if you instigate a carbon tax. People will make non-optimal solutions, and there will be a substantial market for lower price homes that cost you more carbon. This situation is worsened by the fact that a carbon tax would have to be scaled, getting greater over time, and as noted above, most people wouldn’t adequately compensate for the rise in the price of carbon over time.
What is more, I’d wager that the very existence of a bargain basement energy inefficient home market would drive up the prices of more energy efficient homes, because they would be in effect be ‘deluxe’ products.
Pete Wolf
February 3, 2009 at 12:39 am