The Problem with Infrastructure

Obama, accompanied by the usual chorus on the Left including Kevin Drum, is yet again trumpeting infrastructure spending as a partial economic solution for what ails us, in part based on a McKinsey Global Institute report.   Infrastructure is like education (the other half of the Obama "plan") -- it's hard to find anyone against it per se, it is easy to find examples of it failing, and it is really hard to craft programs at the Federal level that really improve anything.

Having been inside the McKinsey sausage factor for five years, I was loath to just accept their conclusion without seeing the data, so I read the section of the report on infrastructure.  Having read the report, I still don't see how they got to the under-funding number.  Some of the evidence is laughably biased, such as pronouncements from the American Society of Civil Engineers, who clearly would be thrilled with more government infrastructure spending.  The rest comes from something called the world economic forum, but I simply don't have the energy right now to follow the pea any further.

I had two reactions to this plan:

  1. Presumably what infrastructure projects we choose matters, so how can we have any confidence (given things like our green energy investment program) that these investments will be chosen wisely and not based on political expediency?
  2. From my experience, and also from the McKinsey numbers, most of the infrastructure needs are refurbishment and replacement of existing infrastructure, rather than new infrastructure.  But politicians are typically loath to make these kind of investments, preferring to offer new toys to voters rather than saying all that money was spent just to keep their existing toys.  Just look at the DC metro system, which is still pursuing expensive expansion plans at the same time it refuses to perform capital maintenance and replacement on its current crumbling infrastructure.  Or look at Detroit which is falling apart but still wants to spend $400 million on a new hockey rink.

I was pleasantly surprised that McKinsey actually raised both of these issues as critical.  To the point about project selection:

To effectively deploy additional investment in infrastructure, the United States will have to improve its performance on project election, timely delivery and execution, and maintenance and renewal. This could raise the overall productivity of US infrastructure by as much as 40 percent and generate more economic impact for every dollar spent. And there is added pressure to raise infrastructure productivity today: as commodity prices rise, input costs are going up as well. In extreme circumstances, this can even lead to spot shortages of asphalt and other critical materials, making productive use of such assets even more important.

One of the most effective ways to make infrastructure investment more productive is to choose the right mix of projects from the outset. Too often, the primary approval criteria for project selection in the United States are political support and visibility rather than comprehensive cost-benefit analysis.129 Even when economic analysis is used, it is not always rigorous, or it may be disregarded in actual decision making. When state and local governments choose sub-optimal projects, the cost of financing rises, so focusing on those projects with the clearest returns is a crucial part of taking a more cost-effective approach for the nation as a whole.

In addition, planners at all levels of US government tend to have a bias toward addressing congestion and bottlenecks by building new capacity. But rather than immediately jumping to build new infrastructure projects to solve problems,
planners and project sponsors might first consider refurbishing existing assets or using technology to get more out of them. (See “Better maintenance, optimization, and demand management can extend the life of existing infrastructure assets” later in this chapter.)

The McKinsey study is not arguing for Keynesian digging holes and filling them in again.   They are arguing for infrastructure spending but only if it is better targeted than such programs have been in the past.   Anything about this Administration (or any other Administration, really) that gives you confidence this will happen?

In fact, they argue that a large reason for under-developed infrastructure is not the spending level per se but the insanely inefficient way in which government spends the money

Delays and cost overruns are a familiar refrain in infrastructure projects. Boston’s Big Dig, for example, remains the costliest highway project in US history and was plagued by years of delay and shoddy construction. Originally estimated at $2.6 billion, it now has a final price tag estimated by the Massachusetts Department of Transportation at $24.3 billion, including interest on borrowing. More recently, the San Francisco–Oakland Bay Bridge is being completed almost a decade late, and its original budget of $1.3 billion has grown to more than $6 billion.

Finally, their recommendation focuses more on maintenance and the prosaic, rather than expensive sexy headline grabbing investments (cough California high speed rail cough) that politicians prefer

Another major strategy for increasing infrastructure productivity involves maximizing the life span and capacity of existing assets. In many cases, directing more resources to these areas may be a more cost-effective choice for policy makers than new build-outs.

First, there is a need to focus more attention on maintenance, refurbishment, and renewal. This is an increasingly urgent issue for the nation’s aging water infrastructure, much of which was built in the years immediately after World War II; some of the nation’s oldest pipe systems are now more than a century old. Even more recent water treatment plants will need refurbishment: many built in the
1970s after passage of the Clean Water Act will soon require rehabilitation or replacement. Proactive maintenance to upgrade and extend the life of these aging systems is becoming a more urgent priority.

The study uses a GDP multiplier of 1.77 for infrastructure spending, which explains why their claimed GDP impacts are so high.  Using this kind of chicked-in-every-pot high multiplier will of course make infrastructure spending seem like a no-brainer.  Of course those of us with more sympathy towards Austrian economics, wherein recessions are caused by misallocations of capital, will worry that this kind of government spending program, shifting private resources to public decision makers to spend, will only double down on the same crap that caused the recession in the first place.  I grew up with Japan's MITI being praised as a model by the American Left, watched the lost decades that followed this government-directed investment program, and believe that a similar reckoning is coming in China.


  1. Richard Harrington:

    My rejoinder to the "libertarians/conservatives" don't believe in government is that I'm not an anarchist. My full answer is that I believe that since government runs on other people's money it has a HIGHER duty to ensure that there is the best possible return on its investments.

    The liberal ethos seems to be that all government spending is good. This amazes me considering the overwhelming evidence to the contrary.

    I hate seeing that canard about austerity causing the current malaise for several reasons. Mostly because of the implication that government spending should be such a large part of the economy. But, also because I know that one of the many causes of the current economic troubles is the deadweight loss of all that crappy government spending.

    What exactly is the ROI of a gold-plated government pension? Pretty darn close to zero.

  2. Tom Lindmark:

    I don't understand how Keystone according to the President will only generate 2000 jobs but government infrastructure spending is going to put multitudes to work.

  3. Philip Ngai:

    Wouldn't a general policy of (as far as practical) structuring and analyzing projects with the requirement that they be funded by user fees give the best incentive structure?

  4. mlhouse:

    In theory I agree with this. But in reality I don't. The problem with user fees in most public infrastructure isn't the fees, but the collection of fees as anyone stopped at a toll booth well knows. The value of the time wasted outweighs the fee.

  5. Philip Ngai:

    The technology and mechanism of the user fees is an important detail to work out. Public infrastructure is far more than toll roads.

  6. Andrew_M_Garland:

    If there were a multiplier such as the (supposedly mild) 1.5 multiplier claimed by Team Obama, then we could Counterfeit Our Way to Wealth.

    - -
    Econ 201: The Myth of the Economic Multiplier
    Government spending doesn't multiply anything. It takes resources from taxpayers and applies them to government projects. You get a bridge or some paperwork, that is it.

    - -
    The commonly taught and usually believed Keynes Multiplier is probably the most destructive piece of false economics. It provides support for government borrowing and spending regardless of the merits of the project. The act of spending is supposed to create more wealth than the wealth wasted by the spending. So, why not spend big?

    But, the commonly taught derivation is laughably illogical, not merely a bad estimate. Big name economists teach this derivation. Are they themselves illogical or ideological?

    The Illogic of the Keynes Multiplier


  7. mlhouse:

    Sure but even other user fees are harder to ascertain and the toll road would be the most important public infrastructure around. In the instance of roads, I think the gas tax is the best proxy for user fees and should be used to support 100% of road construction and 100% of the gas taxes should be used on road construction, i.e. not other "transporation projects.

    At the same time, outside of roads, very few public infrastrucure spending could ever be supported by user fees. Maybe the public parks operated by efficient private companies like Warren's could stay at least break even, but other than that???????? THe balance of this is that there probably would be too little spent on public infrastructure so the real happy medium is suggested by Coyote in this article: highly efficient spending on maintenance, refurbishment, and smart replacement.

  8. Richard Harrington:

    I am by no means an economics expert or even know that much about Keynes. But, I think of Keynes' approach as something similar to surgery or radiation treatment - there is a crisis where demand has dropped so much that the only institution that can, the government, steps in to temporarily prop up demand. You only do it when absolutely necessary, and you certainly cannot keep doing it indefinitely.

    The whole multiplier thing is hooey.

  9. obloodyhell:

    }}} a similar reckoning is coming in China.

    China? What about here? :-/

  10. Mark Alger:

    As I see it, the sad state of our infrastructure is that, to the extent the maintenance of it is a government function, those urging us to spend more money on it than ever are the same ones who abandoned their responsibility to maintain it in the first place -- haring off instead in pursuit of bright, shiny vote-buying devices because the nitty gritty of taking care of what you already have is just not sexy enough. So, before we drop MORE billions on infrastructure, why don't we get rid of the persons and parties who put us in this position in the first place.