Public Choice: More than a Mere Footnote in Infrastructure Policy Discussions
posted by Adam Thierer
[My thanks to Deven Desai, Frank Pasquale, and all the folks here at Concurring Opinions for inviting me to contribute to this symposium on infrastructure policy and Brett's important new book on the topic. -- AT]
As a textbook, there’s a lot to like about Brett Frischmann’s new book, Infrastructure: The Social Value of Shared Resources. He offers a comprehensive and highly accessible survey of the key issues and concepts, and outlines much of the relevant literature in the field. The student of infrastructure policy will benefit from Frischmann’s excellent treatment of public goods and social goods; spillovers and externalities; proprietary versus commons systems management; common carriage policies and open access regulation; congestion pricing strategies; and the debate over price discrimination for infrastructural resources. Frischmann’s book deserves a spot on your shelf whether you are just beginning your investigation of these issues or if you have covered them your entire life.
As a polemic that hopes to persuade the reader that “society is better off sharing infrastructure openly,” however, Frischmann’s book is less convincing. It certainly isn’t because I can’t find examples of some resources that might need to be managed as a commons or a collective resource. But there’s a question of balance and I believe Frischmann too often strikes it in favor of commons-based management based on the rationale that “citizens must learn to appreciate the social value of shared infrastructure” (p. xi), without fully appreciating the costs and complexities of making that the paramount value in this debate.
Generally speaking, Frischmann’s book reflects a long-standing frustration often seen at work in the field of infrastructure management. Proponents of grand infrastructure goals and commons-based management schemes often engage in a bit of wishful thinking about how much better off society would be if everyone realized how open infrastructures “generate spillovers that benefit society as a whole” and facilitate various “downstream productive activities” (p. xii). There’s certainly some truth to both those assertions, which Frischmann classifies as “demand-side” considerations. He devotes much of the book to making the case that those demand-side values should trump whatever supply-side concerns critics might raise.
But, oh, those supply-side problems! They cannot be swept under the rug so easily. Frischmann does acknowledge that “there is no such thing as a free lunch” and that, at the end of the day, “investment must come from somewhere, and the public must pay one way or another (taxes, users fees, etc.)” (p. xi). But while he speaks ambiguously at several points in the narrative about infrastructure investment “falling well short of investment needs,” (p. 210) he never really makes it clear how much he thinks we should be investing or where that money should come from. In several places he also hints that, for certain infrastructure, “government subsidization of fixed costs to drive prices to marginal costs may be attractive,” (p. 133) but doesn’t spend much time explaining why expanded government provisioning of infrastructure will be any more effective going forward than it has been in the past.
Early on in the book, he presents us with the following results from a recent “Report Card for America’s Infrastructure,” and uses it to conclude that “we have a major infrastructure problem in the United States” (p. x):
No doubt we do have an infrastructure problem in the U.S., but are we to conclude from this chart that enhanced commons-based management or more money — $2.2 trillion to be exact — will satisfy our infrastructural “investment needs” and turn around this dismal state of affairs?
Here’s another way of interpreting that chart: the current system doesn’t work. Most of the infrastructure resources listed are already either government controlled, regulated, or heavily funded, and many are currently managed as a commons or semi-commons. Yet, things haven’t turned out so well. Might it be the case that it is government intervention and persistent mismanagement — not a shortage of funding — that’s responsible for the low grades? Had private actors been managing those resources, after all, they would have all been fired or gone out of business a long time ago with grades like that.
Unless we are going to completely disregard Einstein’s definition of insanity — “doing the same thing over and over again and expecting different results” — we must take into account the many downsides of expanding commons-based management of infrastructural resources or employing greater government subsidy / ownership of infrastructure. In other words, we have to be willing to discuss the possibility of government failure as a root cause of our infrastructure woes.
Sadly, Frischmann is unwilling to do so. He admits to a “limited attention to supply-side issues” (p. 368) and, in a mere footnote in Chapter 2 he tells us that:
In the past few decades, concerns over government failures have served as a counterbalance and suggested that identifying a market failure alone does not warrant government intervention because the solution may be worse than the problem. There has been and continues to be much wrangling over these issues. This book will not focus on public choice analysis. (p. 12)
I find Frischmann’s terse dismissal of public choice insights perplexing because it is precisely those insights that can help us unlock the mystery of why infrastructural supply-side problems have become so costly and seemingly intractable.
Politics without Romance
For those unfamiliar with the field, public choice analysis was perhaps best described by Nobel prize-winning economist James M. Buchanan as “politics without romance.” Public choice strips away the “public interest” and “common good” gloss sometimes associated with government regulation and public resource management. Instead, public choice analysis shows that political actors are typically motivated by the same concerns as private actors. Public figures are just as self-interested and prone to make mistakes as private figures. Politicians will cater to special interests and bureaucrats will seek to protect their turf and grow their budgets (and not just the folks at the General Services Administration!)
When one begins to ponder infrastructure management problems through the prism of public choice theory, the resulting failures we witness become far less surprising. The sheer scale of many infrastructure projects opens the door to logrolling, rent-seeking, bureaucratic mismanagement, and even outright graft. Regulatory capture is an omnipresent threat, too. As I have shown elsewhere, a large body of nonpartisan scholarship — from economists, political scientists, historians, and journalists — has documented the lamentable reality that any system big enough and important to be captured by special interests and affected parties often will be. Frischmann acknowledges the problem of capture in just a single footnote in the book and admits that “there are many ways in which government failures can be substantial.” (p. 165) But he asks the reader to quickly dispense with any worries about government failure since he believes “the claims rest on ideological and perhaps cultural beliefs rather than proven theory or empirical fact.” (p. 165)
To the contrary, decades of public choice scholarship has empirically documented the reality of government failure and its costs to society, as well as the plain old-fashioned inefficiency often associated with large-scale government programs. For infrastructure projects in particular, the combination of these public choice factors usually adds up to massive inefficiencies and cost overruns.
If You Build It, They Might Come — But You Will Pay for It Anyway
For example, Bent Flyvbjerg of the Oxford Business School has recently described the “survival of the unﬁttest” problem that pervades many infrastructure fields in that, “the projects that are made to look best on paper are the projects that amass the highest cost overruns and beneﬁt shortfalls.” There is a persistent underestimation of costs and an overestimation of benefits in most infrastructure sectors because, sadly, governments have traditionally rewarded such dishonesty with larger infrastructure grants.
We should not be surprised by the results. Flyvbjerg and his colleagues studied 258 transportation infrastructure projects in 20 nations on five continents over a 70-year period. Road projects averaged cost overruns of 20.4%; bridges and tunnels averaged cost overruns of 33.8%; and rail projects averaged an astonishing 44.7% cost overrun. And every week brings a new headline along these lines: “Urban Center Is Budget Hole.” That one is from a Wall Street Journal article this Monday about a Kansas City urban redevelopment project that wildly overestimated benefits and now “generates less than one-third of what is needed to cover the debt service on the bonds.” Meanwhile, the epic cost overruns associated with sports stadium deals have become so commonplace that it is surprising when one actually doesn’t result in budget-busting bailouts and massive tax hikes. Studies consistently find no net economic benefits for local communities from those infrastructure deals despite persistent predictions to the contrary. Other public services and programs often suffer as a result of these grotesque misallocations of scare public resources.
Because of the chronic ongoing problems of cost overruns, beneﬁt shortfalls, and the systematic underestimation of risks for large infrastructure projects, Flyvbjerg has actually recommended criminal penalties “for managers and forecasters who consistently and foreseeably produce deceptive forecasts.” That seems like an extreme step to me, but it’s a good indication of just how out-of-hand things have gotten in the infrastructure sectors that have the greatest degree of government involvement. Without a profit and loss feedback mechanism, and with so little accountability for failure, governments cannot allocate resources to their most efficient use or manage them effectively.
Building a Better Bureaucrat
How these public choice considerations warrant only two footnotes in Frischmann’s 400+ page narrative — and dismissive ones at that — is beyond me. But I can imagine his reply to these concerns. When I raise such public choice considerations in debates with other supporters of increased government infrastructure subsidies or commons-based management methods, their response typically comes in the form of “we must try harder” or “we can do better.” It always reminds me of the old tagline from the popular 1970s television show The Six Million Dollar Man: “We can rebuild him, we have the technology!” That is, they say, we can build a better breed of bureaucrat and politician who will be immune to these public choice problems, or we can at least institute policies that safeguard against the threat of profligate spending and inefficient allocation of scare taxpayer dollars.
Well, good luck with that. I don’t place much stock in such efforts. Layering on checks and balances can help to some extent, but limiting the scope of political involvement to begin with is usually the only way to make sure these problems dissipate. When possible, I prefer the “3-Ps”: privatize, property-tize, and price. That is, (1) get as many infrastructure resources out of the public sector as is possible; (2) incentivize the owners to care for those resources by granting clearly defined property rights in them; and then (3) allow the market to price resources according to actual demand. (The Reason Foundation’s Annual Privatization Report offers plenty of good examples of how these strategies work quite effectively in practice.)
Frischmann isn’t always clear about which specific solutions he thinks will work best but those “3-Ps” aren’t high on his list. More often than not under his paradigm, those approaches become subservient to the goal of “openness” and commons-based management. He argues that:
we should commit to sharing such infrastructure resources in an open, nondiscriminatory manner when it is feasible to do so; that deviations from this baseline objective require justification; and that the burden is on those arguing for freedom to discriminate. Arguably, this move entails a dramatic shift — perhaps a paradigm shift — away from the conventional position favoring market provisioning and markets “free” from government intervention. (p. 368)
But at what cost? Must we tolerate the seemingly endless expenditure of public funds on infrastructure projects that are so consistently mismanaged and over-budget? Frischmann never really says, but the tenor of his book seems to imply that the beneficial demand-side spillovers and downstream effects of commons / open access infrastructure generally outweigh most supply-side considerations. For others, including me, the reverse calculus is at work: the cost of government failure typically exceeds the cost of most potential market failures, meaning we should consider other solutions whenever possible.
Of course, for some infrastructure issues and resources, my preferred approach will be inadequate and Frischmann’s approach will prevail. Society will continue to treat certain systems as a commons and we must expect some level of government involvement and investment in “essential” resources and networks that the market will simply not provide on a ubiquitous or supposedly equitable basis. Local roads and bridges are pretty good examples, but there are others. (In those cases, public-private partnerships are at least better than pure public ownership and management). And there may be some unique “infrastructure” issues where the case for strict property rights is weaker or challenged by enforcement realities. Environmental pollution and intellectual property protection are prime examples.
I am not so naïve as to think we can always escape the public goods challenges that haunt certain infrastructure resources and sectors. But I believe it is far more naïve to imagine that our infrastructure situation — at least for most traditional systems and networks — will be improved by pouring on even more taxpayer dollars, expanding the horizons of state control even further, and mandating that even more of these resources be managed as a commons.
That’s largely the way things have always worked and doing the same thing over and over again and expecting different results really is, as Einstein suggested, quite insane.
April 25, 2012 at 10:03 am Tags: Buchanan, budgets, capture, commons, demand-side, Flyvbjerg, free lunch, incentives, infrastructure, investment, privatization, public choice, spending, supply-side, taxpayers Posted in: Economic Analysis of Law, Infrastructure Symposium, Politics, Symposium (Infrastructure) Print This Post