President Trump has begun to flesh out his promise to rebuild America’s infrastructure. His planned “massive investment … will be matched by significant private, state, and local dollars,” Trump said on June 8. The administration has also pledged to offer loans and grants to states and cities, and to shorten the time required to win federal approval for state and local projects, from 10 to 2 years.
The Associated Press reported that “the funding would come from $200 billion in tax breaks [i.e., credits] over nine years that would then — in theory — leverage $1 trillion worth of construction.” In this case, the “tax breaks” are dollars that are deducted from companies’ tax bills, but with strings attached. The AP added, “A senior White House official has said the infrastructure plan might also incentivize local governments to sell their existing infrastructure to private firms.” If done in the context of free, competitive, and unsubsidized markets, this would have the potential for landmark change. If taken far enough, it might also mean that improvements could be made without hitting up the taxpayers. (In contrast, considering the budget deficit, tax credits require borrowing, the costs of which the taxpayers must bear.)
Like his predecessors, Trump laments the poor condition of America’s roads, bridges, dams, waterways, and so on for its drag on economic growth. Previous infrastructure programs, however, have fallen well short of their promises. Marc Scribner of the Competitive Enterprise Institute notes that “the large development effects claimed by project boosters rarely materialize (or are so small and diffuse that they are undetectable to researchers).”
Will this time be different? To avoid the fate of previous efforts, Trump would have to break radically with business as usual and move in a truly free market direction.
First, though, is the infrastructure as bad off as portrayed? No, writes Ryan Bourne of the Cato Institute: “The quality of U.S. infrastructure actually appears relatively high when compared with other developed nations. The World Economic Forum’s Global Competitiveness Report ranks the United States 11th in the world for infrastructure overall, placing it ahead of many advanced economies, such as Australia, Belgium, Canada, and all of Scandinavia.… Further, the U.S. government is not currently spending less on investment than other countries either.” Bourne adds that, for example, “bridge quality has actually improved substantially since 1990.… Many other measures of quality tell a similar story of improvement.”
Another misconception is that infrastructure enhancement is a condition for economic growth. But cause and effect run in both directions. Historically, economic growth prompted the private building of infrastructure, such as turnpikes in the United States. It’s still true today when government stays out of the way. Even smugglers are known to upgrade bad roads to make their operations more profitable.
The obstacles to government infrastructure planning can be divided into two categories: the knowledge problem and the incentive problem.
In a world of scarcity every person who embarks on a course of action — including politicians and bureaucrats — faces opportunity costs. Resources, labor, and time invested in Project A cannot also be invested in Project B. Private entrepreneurs in a competitive market set priorities by estimating the future relative profitability — the potential for increasing consumer welfare — of projects according to current resource and output prices and their hunches about future demand for their products. They are fallible, of course, but the unencumbered price system is the best way for grappling with uncertainty under scarcity because it, and the profit-and-loss system of which it is a part, encourages entrepreneurs to detect and correct errors.
Planners have no comparable process available. The infrastructure is not a homogenous substance. Rather, it consists of many discrete things in particular locations. Resources used to build a bridge in Location X cannot be used to fix a road in Location Y. How are planners to choose which projects to encourage with tax credits or grants? The services rendered by bridges, roads, and the like are not typically priced: they are paid for through taxes. The lack of output prices deprives the planners of information about consumer demand with which to make rational choices.
Even if we assume away the knowledge problem, we must wonder what would ensure that the planners would want to make sound choices. Since they do not risk personal financial ruin if they choose wrongly, considerations other than consumer welfare are likely to take precedence. For example, the selection of projects is likely be influenced by the wish to satisfy certain political constituencies or to create jobs in certain congressional districts. The cost of projects would probably be inflated by a “Buy American” policy. It is no surprise that Scribner found that “operational viability is generally overstated, cost overruns of 50 to 100 percent are the norm, and demand forecasts are frequently off by 20 to 70 percent.… In reality, the primary beneficiaries of infrastructure projects often turn out to be the construction contractors and the politicians they support.”
Many other serious problems could be cited, all stemming from the planners’ lack of market-based knowledge and market-driven incentives. That’s why we must hope that the Trump administration will indeed “incentivize local governments to sell their existing infrastructure to private firms.”