Why America Should Privatise Its Infrastructure

Barry Ritholtz has a nice piece today talking about how American, and American conservatives especially, should be coming around to the idea of spending more money on the nation’s infrastructure. As ever with Ritholtz though it’s a good idea to look at his information source rather than his conclusions: the first might guide you to the right path, the second quite probably won’t. For Ritholtz is quite obviously calling for more public spending on such infrastructure (his comment that it would provide needed stimulus is a clue there) when reality, and his source, actually rather argue that America should privatise said infrastructure.

His source for the idea that more should be spent on infrastructure is this report from McKinsey. And I’m quite happy to just accept everything they say about the way that the US requires both more bridges, transport links and water treatment plants. Well, not happy, but happy for the purpose of argument you understand. Which leaves us with the two important points they also make plus one that we can divine from real world experience.

The first of those is that they point to how infrastructure spending in the US is generally appallingly done. The Big Dig in Boston only cost 10 times the original estimates. This is a feature of publicly run and financed projects: a bridge in Oakland did a bit better and was only three times over budget. This is a constant feature of public projects: in my native UK the Olympics came in at well over 10x that original budget. In that case it was because the original budget offered to us taxpayers before it started was quite simply a lie. We would never have gone ahead with it if we had known the true cost therefore we weren’t told it. That’s not always the reason for these over runs but there’s obviously a definite suspicion that California’s entirely ludicrous high speed rail plan is going come in well over even its hopelessly vast budget.

The point being that government, at any and every level, is just not very good at running these large projects.

The second is that government, at any and every level, is just not very good at choosing which projects to undertake. That high speed rail in CA CA +0.36% could be used as an example a second time even though McKinsey resists that temptation. They do though point out that it’s maintenance and incremental improvements that get ignored when government runs things. To be every so slightly cynical because it’s a lot easier to gain votes as a politician when there’s a picture of you opening a new bridge than when people don’t note the absence of potholes. Thus politicians will allocate budgets to new bridges and not to the pothole elimination fund.

McKinsey does say that more money should be spent: but not in the manner that it is currently spent and not on the sorts of projects that it is currently spent upon. That is, probably not allow politicians to spend the money.

That will disappoint vote seeking politicians of course. But there’s a theoretical (ie, not the correct amount of cynicism brought on by observation of the real world) reason, even series of reasons, why we might not want the private sector to be doing these things. The first and most obvious being that government borrowing costs are a great deal lower than private sector ones. That may or may not be a wash depending upon how more efficient the private sector is in the construction phase though.

The second and more theoretical again one is that governments take the public interest into account. In a manner that someone just running a road system, or a railway, won’t. Government is therefore able to allocate the socially optimal amount of capital to such things as infrastructure rather than the privately profitable amount that private sector actors would. And as a theory that’s just great. Which brings us back to our real world evidence from the wave of British privatisations of infrastructure.

We sold off all of the power companies and investment in the infrastructure of power generation and distribution rose. We sold off all the water companies and investment in the infrastructure of water and sewage services rose. We sold off all the railroads and investment in the railroads rose. Meaning that while government could, in theory, allocate the socially optimal amount of capital to these activities it probably didn’t. For we’re pretty much going to assume that the socially optimal amount is higher than the privately profitable: that’s what the theory assumes at least.

As to why government didn’t this brings us back to politicians and their incentives to spend money. Sure, new bridges are nice but nowhere near as good at gaining votes as a pay rise for the government workers, or an expansion of subsidised child care, or any of the other myriad things that politicians decide to provide us with our own money. And we actually have that UK example in front of us: when freed from the political process, from the allocation of capital by politicians, spending on infrastructure rose.

So, this brings us to a solution to America’s infrastructure woes that conservatives might be able to get behind and one that neoliberals like myself think would be a remarkably good idea. Sell it.

Just sell it all: the airports, the highways, the railroads, the water treatment plants, the lot. Past experience tells us that the private sector will, in defiance of theory, actually spend more on these things than budget constrained (ooops, sorry, vote buying politicians) governments will. As that’s what the liberals want, more infrastructure spending, they should be right behind this idea too. And as I say, we’ve that real world evidence that this works. For infrastructure investment did rise in the UK after privatisation.

Quite frankly it’s appallingly difficult to think of a reason why anyone at all might oppose this idea.