As Congress and President Trump debate the size and merits of an infrastructure spending bill, they should consider recent examples of how the selection and administration of government infrastructure projects are fraught with expensive inefficiencies.
In my book, The Upside of Inequality (pp. 145-148), I point to a study of 126 countries by the International Monetary Fund (IMF) that found:
“[There is] no robust evidence that…[public] investment booms exerted a long-term positive impact on the level of GDP.” The study cautions: “This paper…is not about whether in theory public investment…could accelerate growth…but rather whether in practice, with real governments deciding how to spend the funds and implementing investments, they have in fact accelerated growth.”
“Free enterprise shows us how hard it is to find good investments and how many investment ideas prove unworthy. Rather than taking the difficulty of finding sound investments and the inefficiency of the political process into consideration, advocates for expanding public investment look past these difficulties and inefficiencies by pointing exclusively to specific investment opportunities with theoretically high returns. This selective focus on success alone assumes infrastructure investments will boost productivity on average despite real world experience to the contrary.”
“Moreover, we already invest extensively in infrastructure—on par with other advanced economies. So increased investment is at the margin—after we have already funded high priority projects—where the returns to additional investments are lower. It’s true additional private investment is also at the margin, but the private sector is more likely to both reject unprofitable investments and cut off funding much sooner.”
“No surprise, Japan, boosted infrastructure spending from 4.5% of GDP to over 6% in 1990 and held spending at that high level for a decade with no appreciable gains in productivity. Spain’s boom in infrastructure spending in the lead-up to the financial crisis left it with raft of unused airports and other white elephants.”
Propaganda for increased infrastructure spending typically employs three false tactics:
It points to high theoretical returns rather than much lower real-world returns.
It points to aging infrastructure that is already in the queue for financing.
It ignores the opportunity cost of trading one form of spending for another—reduced entitlement spending for increased infrastructure spending or taxing the more productive private sector to fund increased public sector spending.
The New York Times provides anecdotal evidence that supports these conclusions. It reports:
“At least 150 [subway] projects have been initiated [worldwide] since 1990, according to a recent study by Yale University. 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…New York.’
The estimated cost of the Long Island Rail Road project…has ballooned to $12 billion, or nearly $3.5 billion for each new mile of track — seven times the average elsewhere in the world. The recently completed Second Avenue subway on Manhattan’s Upper East Side and the 2015 extension of the No. 7 line to Hudson Yards also cost…$2.5 billion and $1.5 billion per mile, respectively.
[NYC’s] density is the norm in cities where subway projects occur. Regulations are similar everywhere. All projects use the same equipment at the same prices. Land and other types of construction do not cost dramatically more in New York. Insurance costs more but is only a fraction of the budget. The M.T.A.’s stations have not been bigger (nor deeper) than is typical. In some ways, M.T.A. projects have been easier than work elsewhere. East Side Access uses an existing tunnel for nearly half its route. The hard rock under the city also is easy to blast through, and workers do not encounter ancient sites that need to be protected.
[Paris’s]Line 14 extension, is similar to the Second Avenue subway. Both projects extend decades-old lines. Both involved digging through moderately hard soil….Both used tunnel-boring machines made by Herrenknecht. Both faced strict regulations, high density and demands from neighbors, which limited some construction to 12 hours per day. But while the Second Avenue Subway cost $2.5 billion a mile, the Line 14 extension is on track to cost $450 million a mile. In Paris, which has famously powerful unions, the review found the lower costs were the result of efficient staffing, fierce vendor competition and scant use of consultants.”
The New York Times “found that a host of factors have contributed to the transit authority’s exorbitant capital costs:
Politicians have diverted money from the transit authority and saddled it with debt. Nearly 17 percent of its budget now goes to pay down debt.
Public officials have stood by as a small group of politically connected labor unions, construction companies and consulting firms have amassed large profits. Construction companies…have increased their projected costs by up to 50 percent when bidding for work from the M.T.A.
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 resulting agreements apply to all companies, preventing contractors from lowering their bids by proposing less generous wages or work rules. Construction companies…earn a percentage of the project’s costs as profit, so the higher the cost, the bigger their profit.
Trade unions…have secured deals requiring underground construction work to be staffed by as many as four times more laborers than elsewhere in the world.
Consulting firms…have persuaded the authority to spend an unusual amount on design and management. On average, ‘soft costs’ — preliminary design and engineering, plus management while construction is underway — make up about 20 percent of the cost of transit projects in America, according to a 2010 report by the Transportation Research Board. The average is similar in other countries, contractors said. … The latest federal oversight report for the Second Avenue subway projected soft cost spending at…one-third of the budget.”
The Wall Street Journal reports Germany also experiences cost overruns with its government infrastructure projects:
“A litany of bungled infrastructure projects has tarred Germany’s reputation for engineering prowess. There is still no opening date for Berlin’s new €6 billion ($7.2 billion) airport, which is already 10 years behind schedule, and the redesign of Stuttgart’s railway station remains stalled more than a decade after work on the project started.”
Don’t be persuaded by mythical returns!