Paul Krugman's Terrible Misunderstanding Of Trump's Infrastructure Plans
Tim Worstall ,
Contributor
OK, so we get it, Paul Krugman doesn’t like Donald Trump. He and Matt Yglesias seem to be competing for who can predict the fastest fall into fascism that is going to result. But that’s no excuse for such a good economist (this is not a reference to Yglesias) to start doing bad economics. Which is what Krugman is doing here as he says that there’s just no possible reason other than the ability of some to rip off the taxpayers for there to be private involvement in the financing and construction of infrastructure. What’s worse he really should know this too as it’s really a rather famous case:
Again, all of these questions could be avoided by doing things the straightforward way: if you think we should build more infrastructure, then build more infrastructure, and never mind the complicated private equity/tax credits stuff. You could try to come up with some justification for the complexity of the scheme, but one simple answer would be that it’s not about investment, it’s about ripping off taxpayers. Is that implausible, given who we’re talking about?
Actually, there’s reasonable experience to tell us that we’d rather have rich people doing this sort of thing as rich people already have lots of money and thus feel the temptation to steal ours rather less. But agreed, that’s both politics and anecdote. The real mistake comes here:
Second, how is this kind of scheme supposed to finance investment that doesn’t produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on? You could bring in private investors by guaranteeing them future government money — say, paying rent in perpetuity for the use of a water system built by a private consortium. But this, even more than having someone else collect tolls, would simply be government borrowing through the back door — with much less transparency, and hence greater opportunities for giveaways to favored interests.
It’s that example of water and sewer systems. Just as one example the two have, traditionally, been provided by private companies in France. Yes, France, where government is about twice the size of that in the US, actually has private, not public, water companies. And then there’s the experience of the UK.
When the water companies were privatised the four constituent nations got different systems. England got privately owned (although publicly floated on stock markets) water companies. Wales got a hybrid private company with the shareholders being the Great and the Good in Welsh life. Scotland got a government owned water company, Northern Ireland left it to the local councils to continue delivering the water and sewage services. A decade after this OfWat, the regulator, decided to study the effects. They tested four different things, water quality, price, and two different tests of the effects upon the environment (so, river water quality after sewage treatment and so on). Obviously all of these four things could have got worse or better and that itself could have varied by organisational form.
And our actual results were interesting: all four got better in England faster than in the other three. And it was more interesting than that too. England got better best in all four, Wales second, Scotland third and NI fourth. That is, the less direct government control there was of the activity, the closer it was to being a private sector organisation, the better the results.
That is, we’ve found a reason why we might want to use private sector actors to run our water and sewage systems. As far as we can tell they’re better at it. We get cheaper and better services by allowing the profit gouging capitalists to do it and more expensive and worse water by allowing government to do it. The people of Flint would probably be rather happy if some economist had pointed this out to their own municipal managers.
And quite the most interesting finding was that government is really, really, bad at these decisions. One thing we’re often told about government making these sorts of investment decisions is that only government can look at the bigger picture, see where there are results and outcomes that are socially beneficial not just directly monetisable into profit. Thus government will allocate more capital to such plans as only they can properly account for them. It is of course possible that this is true, that the people who run the DMV know how societal resources should be allocated. However, we found that those private, profit making, water companies in England invested much more into the water and sewage systems than government ever had done. That is, government wasn’t just bad at running the systems it was also terrible at allocating resources to them.
At which point we perhaps should feel rather better about Trump’s private sector infrastructure plan. We do have good evidence that it is at least possible that it will have a good outcome. Sure, of course, such a plan could degenerate into a mad scramble to collect the taxpayers’ cash. But then public procurement projects are already a mad scramble to collect the taxpayers’ cash. It’s just different people doing the scrambling–Pentagon procurement isn’t known as a greatly efficient process and the unions scramble like mad to make sure that they get a cut of the road building etc pie.
But what really annoys here is that Krugman is a truly good economist. He didn’t gain that Nobel just by collecting the coupons on his Wheaties packets. Yet, as all too often, what he knows he knows about economics gets left aside when he writes a column or blog post. Of course we can use private investment to build and run water and sewer systems. The UK has done it and it turned out very well indeed. And Krugman knows this.
forbes.com |
