Sunday, May 29, 2016

The Trouble with Infrastructure Spending

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

Mass Immigration and Vancouver House Prices

In recent years about 33,500 immigrants have settled in the greater Vancouver area annually. Assuming an average of three per family, the needs of these immigrants for housing has resulted in a demand of 11,166 units a year, 931 a month or 233 EVERY WEEK. This demand for housing is the direct result of the mass immigration permitted under federal law.

Speculative investment in housing by foreigners adds an unknown but likely very much smaller number to this demand. Virtually no demand has been coming from Vancouver residents as a result of births exceeding deaths and net migration to and from the rest of Canada.

It does not take a PhD in economics to understand that the demand for housing created by the immigrants and foreign speculators leads to higher prices. Whereas in the case of most goods price increases are restrained by the response of suppliers who can buy inputs at constant costs, this is not the case for the supply of housing. Land needed for building is in limited supply because Vancouver is surrounded by mountains, the ocean and the US border and is reduced further by laws restricting a large proportion of available land to agricultural use. Increased demand for this land leads to increases in its cost and the cost of building homes.

The other reason for the high prices of housing is that the efficient use of available land is prevented by codes restricting the height of buildings and regulations concerning safety, amenities, congestion and pollution. These codes exist because the residents of Vancouver want them.

Top prevent future increases in house prices, nothing can be done to eliminate the natural scarcity of land. This leaves only two alternatives. One is the relaxation of restrictive building codes, which requires the action of local politicians. There are no indications that the public wants their politicians to enact such a relaxation of codes.
The other alternative is the curtailment of mass immigration, which is the responsibility of the federal government. Such curtailment will not take place since federal politicians are pressured to maintain present policies by the many beneficiaries of mass immigration: The owners and workers in the construction industry; real estate agents; employers hiring immigrants to keep labour costs low and increase profits; retailers benefiting from increased sales to immigrants; the owners of land and homes whose capital gains depend on high demand by immigrants; the members of the immigration industry consisting of lawyers, consultants, providers of adjustment assistance, teachers of English as a second language and others who are paid by government to serve immigrants; members of immigrant communities wanting to increase their economic and political influence; immigrants who want to have their parents and grand-parents join them.

There are also Canadians who enjoy more ephemeral benefits from mass immigration: many socially conscious people who want to do good and get satisfaction from seeing immigrants escape poverty in their home countries, make Canada a globally admired multicultural society, create jobs and make its economy grow. Politicians whose re-election chances are increased by catering to these do-gooders and who, ironically gain status and self-esteem by designing and financing at tax-payers’ expense policies for the assistance of those suffering from the high costs of housing.

Because of the politics surrounding building codes and immigration policies, Vancouver’s young will continue to suffer from the high and increasing costs of housing. Many will leave Vancouver. Some will live in the basement of their parents’ home or share accommodations with others, postponing and often foregoing marriage and having children.

However, eventually the silent majority of Vancouverites who do not benefit from mass immigration may vote for changes in federal policies. This will happen once this silent majority becomes aware of the negative effects on their own well being caused by mass immigration: fiscal deficits resulting in higher taxes; lower wages and incomes per person; traffic congestion, pollution, scarcity of family physicians, hospital beds and university places and diminishing returns from multi-culturalism.

Herbert Grubel
Professor of Economics (Emeritus)
Simon Fraser University