Thursday, September 24, 2015

The Trouble with Infrastructure Spending

Politicians know that they can buy votes by promising large infrastructure spending to a public tired of waiting in traffic jams and for crowded buses. So in this election campaign in Canada the campaigns to buy votes are on all over. However, they should be greeted with some questions and scepticism.

First, voters should ask their politicians what they mean by infrastructure. Traditionally it is roads, bridges and other engineering projects that are capital intensive and provided free of charge to the public. Some politicians have made statements that suggest they consider infrastructure to include facilities for the delivery of education, health-care, policing and similar government services. Infrastructure spending on these projects represents a thinly veiled plan for an expansion of the role of government and public service unions in the economy.

Second, considering only traditional infrastructure, voters should ask why this spending should be increased above the already planned level. Is it to end a recession or is it to alleviate congestion and how will it be paid for?

If it is designed to end a recession, the politicians are likely to answer that the cost of production will be recovered through increased economic growth and tax revenues. However, voters should be sceptical of this free gift. Experience has shown that infrastructure spending typically takes a long time to get under way because of lengthy processes required to design and revise the projects in consultations with so-called stake-holders: City planners discuss the community’s needs; citizens demand protection of their life-styles; environmentalists insist on the protection of nature and the climate; archeologists require time to search for artifacts; artists want the inclusion of public art; natives press their inherent rights to land and so on.

As a result of the long approval process, new construction projects often get fully under way at the end of the recession and inflationary pressures are developing.

Even when there is no recession, some politicians during election campaigns promise new infrastructure spending to alleviate traffic congestion and pollution. No politicians can get away with saying that such spending will be matched by increased tax revenues. Taxes, the debt or both will have to be raised, though sometimes now and under special conditions, tolls and partnerships with private firms may lower the burden on the general taxpayer to some extent.

However, politicians often quiet public concerns about the higher debt by suggesting that future generations will not mind it since they will have the use of the infrastructure. The politicians never raise the point that future generations will not have had a choice about the amount and type of infrastructure would have preferred - public roads or transit, serving downtowns or the suburbs and so on.

Most fundamental and intractable is the problem that under the present system of free use, engineers and politicians have no reliable information on the efficient number and size of roads and bridges. They do not have access to the guide provided by prices that determine the right amount of beer and pretzels produced and consumed. Instead, politicians use public pressure to decide the right number and size of roads and bridges.

The resultant amount of infrastructures is most likely to be excessively large because congestion and public pressures are unreliable indicators of the optimum. As the critics of new roads and bridges argue correctly, they relieve congestion only for a short time before commuters find out that they can leave home later than before and re-create congestion, albeit at a different and shorter time than before.

The critics of roads and bridges are wrong suggesting that therefore the better and new roads necessarily are a waste of resources. Commuters benefit by being able to stay home longer. They value the extra time in bed or with the family. The problem is that planners cannot know whether these benefits are worth the cost, whether to get them, commuters would willingly pay tolls high enough to finance the improved facilities.

The recent costly expansion of the Port Mann Bridge in Vancouver illustrates this proposition. The bridge is tolled and underused while alternate, free routes are congested more than they were before. Many commuters obviously consider the extra time spent at home worth less than the cost of the toll.

Until road tolling is made universal, voters should be sceptical about the merit of politicians’ promises for the construction of large new infrastructure projects. The politicians are buying votes but may impose unnecessary costs on taxpayers, especially those who rarely or never use the facility.

Herbert Grubel,
Professor of Economics (Emeritus)
Simon Fraser University