Posted by: bmeverett | September 10, 2010

No to Infrastructure Stimulus


President Obama has been looking for something to give the economy a boost before the November election. To be more precise, he’s looking for anything that might give voters the impression that he’s giving the economy a boost. He’s settled on a $50 billion infrastructure program. After all, who could possibly oppose fixing our decrepit roads, runways and rail tracks? Well, me for one. Here’s why.

Public works should be managed to provide the best possible services at the lowest possible cost. The primary objective of the President’s infrastructure proposal is to create jobs. Job creation is not a bad goal in itself, but the way the federal government does it is generally awful. First of all, the federal spending process is political, not economic. Money tends to be allocated not to areas where it would be of most use or where spending would be the most cost-effective, but to politically important states or states home to powerful congressmen and senators. Federal funds, such as the Obama Administration’s $787 billion Stimulus Package, are generally regarded by state and local politicians as free money. “Look what I got for you from the feds!” They conveniently forget that the federal government has no money other than what it extracts from the population. Whatever one person gains, someone else loses. Louisiana, Arkansas, Mississippi and the other poorer states may win this game, but New York, Massachusetts and California will always be losers.

Rarely do services constructed on political logic perform well.. Take, for example, the Acela Express train from Washington, DC to New York, which entered service in 2000. The word “express” is ironic here. If you fly from DC to New York, you take off from Reagan-National airport and land at LaGuardia about 40 minutes later. That’s because airlines try very hard (although not always successfully) to make a profit by providing consumers what they want. Not so with the federal government. Since Amtrak, the owner and operator of Acela, is heavily subsidized by the federal government, politicians immediately got their hands in its planning and operation. Instead of simple, high-speed point-to-point service, Acela was turned into a local.

If you take Acela Express train #2110, for example, you will leave Washington’s Union Station at 11:00 am. Twenty-one minutes later the train stops at BWI airport. Fourteen minutes after that, the train stops at Baltimore. Then a comparatively long stretch of 43 minutes to Wilmington, Delaware (so Vice President Biden can disembark), 17 minutes to Philadelphia’s 30th Street Station, two minutes (that’s right TWO minutes) to North Philadelphia, 54 minutes to Newark and then a final 17 minutes to New York’s Penn Station. That’s a total of six intermediate stops. The top speed of the train is around 150 mph, but its average speed is just 70 miles per hour (200 miles in 2 hours and 48 minutes). Compare that performance with the Eurostar from London to Paris (average speed 120 mph), the French TGV from Paris to Marseille (average speed 140 mph) or China’s Wuhan-Guangzhou High Speed Train (average speed 200 mph). In addition to its high capital costs, Amtrak runs an annual operating deficit of about $1 billion. Whatever jobs are created by working on this railroad are more than offset by the burdens it places on taxpayers.

Moreover, federal infrastructure projects generally require what is euphemistically called a Project Labor Agreement (PLA). A PLA essentially requires the contractor to hire only union labor. Not only does this obligation increase the cost of the project, sometimes dramatically, but it also unfairly precludes non-union companies from bidding and requires the winning bidders to withhold union dues from employee paychecks – whether the workers like it or not. Those dues are then used to support the Democratic Party and to lobby for more federal spending.

Unions often portray their activities as attempts to redistribute profits from company owners to company workers. In fact, high union wages are paid for by consumers and non-union workers. There is a reason that private sector unionization has declined dramatically over the last few decades while public sector unions have thrived. In a competitive global marketplace, private companies cannot pass high union wages on to consumers. If unions get greedy (and they always do), the company will become uncompetitive, lose access to capital and ultimately go out of business. Workers know that and generally prefer a non-union job with a prosperous company to a self-destructive exercise in class warfare. When governments agree to above-market wages, on the other hand, they just stick taxpayers with the bill. In a wonderful irony, the Teamsters Union in Houston decided to build their new union hall with non-union labor. Apparently, union workers are too expensive. It doesn’t get any better than that.

The $50 billion for the President’s infrastructure stimulus will be borrowed from China, and the federal budget will be saddled with the interest payments for decades, all for a faint glimmer of political benefit for the Democrats this November. One of the many advantages of adhering to the constitutional principle of federalism is that it’s much harder for states and municipalities to operate at a deficit. This is a good thing, since it forces elected officials to make actual choices about spending priorities. They don’t like it, but they have to do it. States and municipalities are far more likely to be selective in their infrastructure projects and attentive to their real costs and benefits. They love job-creating infrastructure projects, but only when other people have to pay for them.

President Obama wants very much to let the states off the hook by giving them borrowed federal funds and taking the debt onto the national accounts. Governors, including many nominal Republicans like Arnold Schwarzenegger, love this idea. You should hate it.

The bank bail-out program, the stimulus package, and the President’s new infrastructure proposal all share a common element: the direct allocation of capital by the government in preference to the market. President Obama is essentially saying, “Economic growth requires that I decide who gets capital and who does not.” The proper term for this approach is “central planning.” Central planning has never worked before and is most unlikely to work now. (Remember that the Soviet Union lost the cold war). Central planning will do nothing for economic recovery. The sooner voters express this view at the polls, the sooner the country can begin to prosper again.

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Responses

  1. Thank you very much my friend, you are very kind in sharing this useful information with? others…. he details were such a blessing, thanks.


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