Matt Yglesias has a very good post where he casts a skeptical eye on some of the proposals for infrastructure spending.
Something like the Silver Line in D.C. has been much more of a mixed bag. Not only did it cost a lot of money, but it’s just a poorly conceived project that’s actually reduced capacity on the Blue Line and therefore made transit service in the region worse in some ways. The Obama era brought us a lot of mixed-traffic streetcars that do absolutely nothing to improve transportation, and I suspect in many cases diverted local funds from what could have been bus lines.
There are various useful things one could do in intercity passenger rail. But is Amtrak actually prepared to do any of them?
My broad view is that on the transportation side, despite endless rhetoric about “crumbling bridges,” we mostly have structures in place where either significant expansion is undesirable (highways) or the existing institutions are mismanaged or incompetent.
At the same time, he’s not particularly concerned about financing issues:
I acknowledge that this is a somewhat pedantic point, but I do want to insist on it. If you want to renovate your house but you don’t have the cash, there’s a difference between getting a renovation loan and hiring contractors who you then stiff. Paying for things with borrowed money is a way of paying for things, not an alternative to paying for them. King put it more squarely, which is that the difference between debt financing and tax financing is whether you try to constrain current consumption to pay for investment or future consumption. And I think the right answer is future consumption.
Another thread of progressive thought focuses on the downside of laissez-faire economic policies. Progressives often cite a 2013 study by Autor, Dorn, and Hanson, which showed that freer trade with China may have led to painful economic restructuring in industrial areas that compete with imports from China. Subsequent studies have questioned certain aspects of this research, but the basic finding seems intuitively plausible. Those who accept this critique of import competition often conclude that public policy should aim to reduce the trade deficit. To do that, you need to either reduce domestic investment of increase domestic saving. That’s because the current account balance is equal to domestic saving minus domestic investment.
In fact, all the recent energy among progressives has been in exactly the opposite direction, that we should borrow more to finance current consumption. In the very short run, those policies might boost real output. But over any meaningful period of time an expansionary fiscal policy will boost consumption at the expense of investment, or else create a larger trade deficit. And that’s what pundits are currently predicting:
The US macroeconomic policy stance is more aggressive than elsewhere. The Organisation for Economic Co-operation and Development estimates that President Joe Biden’s $1.9tn American Rescue Plan could raise US output by around 3% to 4% on average in the package’s first full year. Many forecasters project US growth of 6% to 8% in 2021. . . .
The US was running current account deficits of around 3.3% of gross domestic product in the second and third quarters of 2020. Its merchandise goods deficit was nearly two percentage points of GDP higher.
The OECD has estimated Biden’s fiscal package could raise the US current account deficit by three-quarters of a percentage point through the first quarter of 2022. That could mean a US current account deficit around 4% of GDP in 2021.
Suddenly all this hand ringing about free trade costing jobs in manufacturing seems to have gone by the wayside. Progressives have a bad habit of focusing on an outcome that seems “nice” in isolation, without considering the opportunity cost of various public policies. That’s one reason I liked the Yglesias post; he discusses how the Silver Line expansion hurt commuters on competing lines. But I wonder if Yglesias fully understands the opportunity cost of focusing public policy on boosting current consumption. I don’t doubt that more consumption makes us happier in the short run, but what about the long run opportunity costs? And why have progressives stopped talking about deindustrialization? Is the trade deficit no longer a problem?
PS. In past posts I’ve argued that trade imbalances are not a problem. For me, the actual cost of budget deficits is higher future taxes, which slow economic growth.
READER COMMENTS
Alan Goldhammer
Mar 16 2021 at 5:51pm
As someone who has lived in the DC area since 1978, I can say with some certainty that Yglesias is totally wrong about the Metro Silver Line. If he really wanted to focus on a boondoggle of immense proportions he would look at Maryland’s attempt at light rail with the Purple Line which is really a total waste of state money. The initial contractors walked away from the project.
I don’t think it’s a matter of building new roads but focusing on roads/bridges that need to be refurbished.
Scott Sumner
Mar 16 2021 at 8:14pm
Do you have any evidence that Yglesias is wrong? Is he wrong that there is a problem with capacity in the tunnel under the Potomac? What is your evidence for that claim? Yglesias is pretty knowledgable about DC transit issues.
Dan Culley
Mar 19 2021 at 10:41am
Not sure where you are getting your info. Yglesias is right.
I have many friends who live in South Arlington, along the blue line. I used to live in North Arlington, on the orange line. As soon as silver line trains started running, I saw a small improvement in frequency during rush hour, from an average four-minute wait to something more like two minutes. But my friends living on the blue line saw a huge drop: their average wait times during rush hour went from 5 minutes or so to around 12 minutes.
That doesn’t necessarily mean it was the wrong decision, as growth along the orange and silver lines had been much higher and every single one of those orange and silver line cars was completely full.
But it certainly wasn’t a paragon of planning, and it seems pretty hard to justify running the metro out to Dulles, a roughly 70-minute ride, before investing in expanding the Rosslyn/Foggy Bottom tunnel that is the capacity bottleneck.
Philo
Mar 16 2021 at 6:03pm
“Progressives have a bad habit of focusing on an outcome that seems ‘nice’ in isolation, without considering the opportunity cost of various public policies.” Not just progressives: the vast majority of people have this bad habit when thinking about politics. (In one’s personal affairs the tendency to ignore opportunity costs is too immediately painful.)
Michael Rulle
Mar 16 2021 at 6:07pm
Hazlett’s Economics in One Lesson is still one of the best books for the non -academic person written on this topic. He spells out what should be obvious but is not. Opportunity cost, as I have mentioned before, is a general way of thinking about almost any decision. Therefore, if one does not perceive it that way, it is easy to miss—as it applies to virtually everything.
Oddly, if we are going to make a financial mistake, the least costly way is to just give people money. Better that, than building clever railroads—-just look at California as an example of that— or Matt’s own transportation example.
But the best way to give people money is to lower taxes and reduce spending. But this will never (never say “never”………..but) happen. We are already pretty deep into forward spending (or higher taxes, or higher deficits). It seems impossible for this eventually not to fail ——it “has” to fail—–except, the predictions have been way off—-20 years ago we would have said “today” is not possible (remember the forecasts of Government surpluses made in 2000 for 2010?) –but here we are–looking like 1945——after we destroyed just about everything in Europe, Japan and the Soviet Union (talk about broken window fallacies)
We could overcome this, on the other hand, by exceptional productivity gains. I buy cotton shirts made in Vietnam for $18–about 1/2-1/4th (in real terms) of shirts bought in 1965.
One can buy a 5-year-old Ford that is better than a new BMW in 1985 that was 2-3 times today’s nominal price of the 2016 Ford. (I know because I have done both). While the Ford is today’s consumption, it is not a function of today’s investment.
This does not mean we are better off deficit spending—not in the least. But it might mean we are not bad off—-just not as well off as we would otherwise be. So maybe we have decades and decades to go before deficits get us–if ever.
Gene
Mar 16 2021 at 8:50pm
Because they are IN FAVOR of it.
Phil H
Mar 17 2021 at 2:49am
“But I wonder if Yglesias fully understands the opportunity cost of focusing public policy on boosting current consumption. I don’t doubt that more consumption makes us happier in the short run, but what about the long run opportunity costs?”
I still don’t understand this point. Why would boosting current consumption limit future opportunities? It seems like a… Malthusian idea. If we eat all the grain today, there’ll be none left tomorrow and we’ll all die! But the additional consumption we do today is in services and intellectual property, not physical resources; and the impact of expanding the economy is more science, which expands the supply of physical resources.
I guess there’s a question of scale: if all human consumption around the world jumped by 1000% today, I agree that that could do some serious damage to our environment and future prospects. But if all human consumption jumped by 10% today, and 1000% over the next century, then I suspect we’d be fine and much better off. And infrastructure projects are very much in the 10% kind of range.
AMT
Mar 17 2021 at 11:51am
There is a difference between consumption and investment.
Scott Sumner
Mar 17 2021 at 7:08pm
The consumption might result in less investment or it might lead to a trade deficit. Either way, that would be at the cost of future consumption.
Phil H
Mar 18 2021 at 7:26am
This is what I’m not getting. Why would more consumption reduce investment? What is the mechanism? It doesn’t feel like we consume the same stuff that we invest – If I choose to consume three more movies this year than last, that doesn’t take concrete out of the hands of the builders creating assets with investment money.
Jon Murphy
Mar 18 2021 at 7:45am
The mechanism is that resources are scarce: unlimited wants but limited resources. Every dollar, labor hour, etc spent on short term infrastructure projects cannot be spent on long term investment
Phil H
Mar 18 2021 at 7:06pm
Right, so my point is that that mechanism literally doesn’t exist in at least two ways. First, electronic reproduction of content costs nothing, and uses near as dammit to zero resources. Second, spending money on consumption absolutely does not not make it unavailable for investment. The dollar spent on a massage is not used up. It’s still there, just in the hands of a different person.
Labour hours are used up, that’s true. But as I was saying, it seems like a question of scale. A 10% increase in labour dedicated to consumption would not, I suggest, materially affect the supply of labour available for investment. This is about the “slack” in the economy – I just don’t see that there’s that little slack.
Jon Murphy
Mar 19 2021 at 3:18pm
Electronic reproduction of content does indeed use resources, if only time.
If it’s used for a massage, then it is not used for investment. Now, the massage parlor owner who got that dollar may use it for investment, but it is a “different” dollar at that point.
So, we can easily test your hypothesis that money is not scarce. If 100% of dollars out there were invested, would consumption not change?
Jon Murphy
Mar 20 2021 at 11:38am
Let me rephrase the point:
The fact that a choice has to be made implies scarcity. Remember: scarcity does not mean rare. It just means that there are unlimited wants and limited means.
So, the fact I need to choose how to use a dollar, whether to consume or to save (invest), means that the dollar is indeed scarce. The fact that someone makes a different choice does not imply no scarcity. Indeed, the fact they also make a choice is further evidence of scarcity.
The point of prices (and interest rates, which are just prices on money) is to transmit information to actors. For a given interest rate, X, to me it may mean my dollar is better spent getting a massage. To the masseuse, it may mean the dollar they now have is better spent saving. As prices change, people’s behavior on the margins change too.
Resources are scarce. They may be relatively more abundant (as indicated by a lower relative price) or relatively less abundant (as indicated by a relatively higher price), but they are always and everywhere scarce. Scarcity is a fact of life, just like gravity and mass.
Michael Sandifer
Mar 17 2021 at 3:42am
To me, all of these public transportation ideas are awful. Here is Jacksonville, for example, if you take the budget for the JTA, which runs city busses, they spend enough money-per-ride, such that we could just give riders vouchers for Lyft or Uber rides and obviously riders would be much better off. Bus systems never made much sense in large, sprawling southern cities anyway, taking 2 hours to get a rider to a place that’s 20 minutes away by car.
Particularly as fully-autonomous taxi services emerge and cost for taxi rides presumably collapse, such “investment” makes no sense. Yet, I see little acknowledgement of this in government, at any level.
We’re also moving toward electrification of cars, and there’s considerable innovation underway in the electricity generation and delivery markets, and yet we have progressives talking about improvements to the US grid as if little’s changed in 30 years.
This is pre-eminently the time to institute a carbon tax, deregulate, and let the market solve many of these problems.
I say this as a progressive. I’m only libertarian so far as it makes practical sense.
Sadly, we’ve become a very stupid country, and one in which voluntary sacrifice for the common good is becoming increasingly unheard of.
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