Urban[ism] Legend: Transportation is a Public Good

In a recent post, commenter Jeremy H. helped point out that the use of the term “public good” is grossly abused in the case of transportation.  Even Nobel economists refer to roads as “important examples of production of public goods,” ( Samuelson and Nordhaus 1985: 48-49).  I’d like to spend a little more time dispensing of this myth, or as I label it, an “Urban[ism] Legend.”

As Tyler Cowen wrote the entry on Public Goods at The Concise Library of Economics:

Public goods have two distinct aspects: nonexcludability and nonrivalrous consumption. “Nonexcludability” means that the cost of keeping nonpayers from enjoying the benefits of the good or service is prohibitive.

And nonrivalrous consumption means that one consumer’s use does not inhibit the consumption by others.  A clear example being that when I look at a star, it doesn’t prevent others from seeing the same star.

Back when I took Microeconomics at a respectable university in preparation for grad school, I was taught that in some cases roads are public goods.  We used Greg Mankiw’s book, “Principles of Economics” which states the following on page 234:

If a road is not congested, then one person’s use does not effect anyone else. In this case, use is not rival in consumption, and the road is a public good. Yet if a road is congested, then use of that road yields a negative externality. When one person drives on the road, it becomes more crowded, and other people must drive more slowly. In this case, the road is a common resource.

This explanation made sense, but I was skeptical – something didn’t sit right with me.  Let’s take a closer look.

First, Mankiw uses his assertion as an example of rivalrous vs nonrivalrous consumption, while not addressing the question of excludability.  Roads are easily excludable through gates or any other mechanism that could restrict access.

Furthermore, Mankiw’s assertion that an uncongested road is nonrivalrous is simply confusing rivalrousness with the fact that the road is under-utilized and/or over-supplied at certain times.

For a silly example: if the government literally manufactured mountains of marshmallows free for the taking, Mankiw would have to consider marshmallows equally as non-rivalrous and non-excludable as uncongested roads in the US.  Would he then call marshmallows a public good?

Thus we can clearly see that all roads (when done right) are neither nonrival nor non-excludable.   We can use the diagram below (from Living Economics) to see that a congested (or tolled to prevent congestion) road is a private good, and in the case that a roadway is oversupplied, it is simply a “low-congestion good”, often called a “club good.”

I found this diagram at a very helpful site: livingeconomics.com

Roads are the more commonly misused example of a public good, but we can apply the same logic to transit.  First, most transit operations in the US already use a method of exclusions: the turnstyle.  Second, we can see that non-rivalrousness is simply a function of over-supply in the case of the subway car that isn’t full to capacity.

As economist, Don Boudreaux puts it :

So I’m more than sympathetic to the claim that government provision of roads, bridges, and highways distorted Americans’ decisions over the years to drive and live in suburbs.  But my sympathy for this claim comes from my rejection of the classic, naive case for government provision of public goods — and once that case is rejected, it cannot then be used to argue for government provision of, say, light-rail transport.

Does this alone prove that roads should be privatized? No, but the fact roads are either private goods or grossly oversupplied help weaken anyone’s case that transportation is government’s business in the first place.

I should warn you, if your Microeconomics professor teaches you this misconception unchallenged (perhaps using the Mankiw book), and gives you a true/false exam question of whether an uncongested road is a Public Good, you may want to answer “true”, or else be prepared to dispute your grade.  (And feel free to send your professor a link to this post.)

Next time you catch a commenter repeating this Urban[ism] Legend (like Jeremy H. did), refer them to this post.  Here are a few other links to back you up:

Are Roads Public Goods, Club Goods, Private Goods, or Common Pools? by Bruce Benson, Floria State University

Privatizing Roads by Tim Haab, “Environmental Economics” (blog)

Public Goods and Externalities: The Case of Roads by Walter Block, Loyola University

Highways Are Not (Economic) Public Goods by Rob Pitingolo, “Extraordinary Observations” (blog)

Public Goods from an Austrian Economics perspective


Marc Scribner at CEI on Seattle’s land use regulation

A few days ago I wrote about inner Seattle’s residential density liberalization, and I mentioned that I’d emailed a few land use writers at libertarian think tanks to get their reaction. I’m happy to report that all of them responded, and throughout the week I’ll post links to/reprint their responses, along with any comments I might have.

So first I’d like to direct y’all to CEI’s OpenMarkets.org where Marc Scribner responded. He essentially said that the move looks like a net benefit in terms of land use liberalization, but that Seattle’s limits on sprawling growth (as opposed to infill growth) are more serious and costly. I’m glad that he agrees with me that Seattle’s new plan will be a positive marginal change, but I’m not sure that I agree with some of the other things he says.

I’m certainly not going to defend King County’s urban growth boundary – we’re opposed to them, and think that people who are concerned about sprawl could achieve better results less coercively by simply allowing more infill and stopping the subsidies for all modes of transportation. But I do wonder how Marc reached the conclusion that sprawl restrictions are more onerous than density restrictions. He points to the run-up in housing costs in Seattle over the last decade, but given that we’ve already established that Seattle has both sprawl-prohibiting and density-prohibiting regulations, I don’t see how he’s decided that the former are more significant than the latter. This is a difficult question to answer, and on some level can only be done properly by liberalizing and observing. But barring that, econometric methods can be used to make guesses as to how restrictive such regulations really are – something we’ve tried to do before with parking minimums. I do not, however, see any of those in Marc’s argument.

What concerns me even more, though, is all this “war on drivers” talk with regards to local roads. Marc criticizes “aggressive traffic calming measures,” but why shouldn’t the government seek to minimize accidents on its roads? If a private company owned the roads and sought to slow down what it perceived as unsafe speeds on its roads, obviously there would be no problem here. But while both Marc and I would like to see transportation means privatized, this clearly isn’t going to happen anytime soon, so why shouldn’t the government try to keep its roads safe and hospitable for pedestrians and cyclists? If Marc’s argument is that such traffic calming measures don’t achieve these goals and are instead implemented solely to make drivers’ lives more difficult, that would be another story, but he presents no evidence of that, either.

Besides the fact that decisions about priorities seem to be well within the purview of any road operator, I don’t exactly understand why Marc thinks that drivers have any right to the local roads status quo. Unlike state and federal highways, local roads are almost entirely subsidized out of general revenues – user fees like gas taxes are barely kicked down at all to municipalities for local road costs, as Randal O’Toole, who is much more knowledgeable about road financing than I, has told me. In fact, given that local roads are (I assume?) paid for out of property taxes and sales taxes levied on local Seattle residents, it would seem that those who don’t drive in Seattle actually pay more for the roads than the average person who uses him! This could be exacerbated by property taxes, which are often higher for renters – who are more likely not to own cars – than for homeowners, though I’m not sure if this is true in Seattle.

So remind me again – what exactly is so unfair about local roads being reoriented towards walking, transit, and biking, and having car lanes removed and speeds reduced? Drivers aren’t paying any more for the roads’ upkeep than non-drivers, so why are car owners entitled to the lion’s share of the space? Marc mentions ancillary economic benefits of driving, but you could come up with equally plausible benefits to not driving (health being a huge one). So, how do we solve this? We let the market decide. But I don’t see massively subsidized local roads as being much of a market.

Thanks to Marc for responding, and I’ll reprint Randal O’Toole and Wendell Cox’s emailed responses soon.

Weekend link megalist

This is probably my favorite link list yet…enjoy!

1. The WSJ claims that delinquent homeowners can expect to stay in their homes after making their last mortgage payment – that is, they can live rent-free – for at least 16 months. The longer it takes for foreclosures to happen, the longer it will take for real estate markets to adjust to the new paradigm.

2. Fascinating article about food trucks in Houston. In it I found a second example of bad anti-terrorism policy trumping good urbanism:

Chimed in Joyce: “We all know that Houston is not a walking city, as much as we wish it was. But there are two areas that are walkable – downtown and the Medical Center. The use of propane trucks is prohibited downtown, however. The regulation was originally put in place as a part of Homeland Security after 9/11, but the Houston Fire Department continues to enforce it. That’s an example of something we’re looking to work with, to allow food trucks to operate in these higher foot traffic areas.”

The article also confirms my suspicion that food trucks may actually be safer than restaurants: “These are essentially open kitchens…you can look in there and see exactly what these guys are doing, where they’re grabbing the food from, how they’re cooking it.”

3. Hong Kong and Singapore are both instituting controls on their residential property markets to avoid bubbles, but they are also freeing government land for developers (in spite of Singapore’s free market reputation, most residents apparently live in public housing). Some speculate that Hong Kong’s controls might be a sign of increasing control from Beijing. Reuters says that “China, Singapore, Taiwan, Thailand and Malaysia have also unveiled more stringent regulations in recent months” – the bubble that led to the 1997 financial crisis had a large property component. The Beijing Communist Party mouthpiece, apparently fearing that investors have too much faith in the local government, blames the city’s high rents on prostitutes.

4. Cap’n Transit on road subsidies. These sorts of debates often frustrate me because I feel like people are not clear as to which roads they’re talking about (federal, state, local?).

5. Al Gore admits that first-generation ethanol was a mistake and he only supported it because of “a certain fondness for the farmers in the state of Iowa” (yes, he really said that). But talk is cheap – he’s still sticking by non-food biofuels, though I think those’re just as bad. On the bright side, though, DeMint and Tom Coburn are apparently ready to let some key ethanol subsidies lapse this year.

6. DC developer forced to offer below-market rents to an IHOP. You know what would really help “small, local, minority-owned businesses”? Eliminating mandates like this that lead to constrained property markets and sky-high rents.

7. Remember that god-awful North Jersey mall project Xanadu, whose demise prompted an item in the last link list?  Well apparently Chris Christie wants to throw more money down that hole. Speaking of which: Did they really not realize the negative associations people have with the name “Xanadu”? Or is that just evidence that not even the person who named it had any faith in it?

8. Real estate investors are bidding up prices for apartment buildings, says the NYT. Hopefully the increase in prices will convince local officials to zone for more multifamily development.

Urban[ism] Legend: Traffic Planning

Mathieu Helie at Emergent Urbanism posted a link to a interesting game created at the University of Minnesota. Mathieu explains it better than I can:

The game begins in the Stalinian Central Bureau of Traffic Control, where a wrinkly old man pulls you out of your job at the mail room to come save the traffic control system. You are brought to a space command-like control room and put to work setting traffic lights to stop and go. Meanwhile frustrated drivers stuck in the gridlock you create blare their car horns to get your attention, and if their “frustration level” rises too high you fail out of the level. As the road network gets as complicated as four intersections on a square grid, the traffic becomes completely overwhelming and failure is inevitable, but the old man reassures you that they too have failed anyway.

OK, you’ve played the game? If not, don’t go further until you have.

Now that you’ve played the game and failed to control traffic, compare that top-down system with this amazing video a friend sent to me from Cambodia. You’ve gotta see this:

Man, I love this video! I must have watched it a couple dozen times. I keep expecting a crash, in what to me (only being familiar with top-down planned traffic systems) looks like complete chaos. Yet pedestrians, bikes, motorcycles, scooters, rickshaws, and cars all make it to their destinations safely, and probably quicker than in the system in the game above. It must be similar to how capitalism must seem chaotic to people who have always lived in planned economies.

Don’t mistake me as an advocate of a world without traffic signals. I am quite certain that some sort of traffic signaling would likely emerge from a free-market street system. But, my bigger point is that when information is dispersed widely among decision-makers without government monopoly, sustainable solutions emerge from the uncoerced behavior of individual agents over time.

Another article at Infrastructurist discusses the philosophical differences Dutch and American road designs, and gives an example:

A fascinating example is a major–20,000 cars a day!–intersection in the Dutch city of Drachten that used to look a lot a typical American intersection, with lots of bright paint and traffic signals and enormous signs telling you what and what not to do. Traffic planners tore that stuff out and went naked, just putting down a roundabout in the center. The sidewalks even disappeared as distinct structures. Everyone figured it out though. Fatalities at the intersection dropped markedly, as did travel times.

Also read Tom Vanderbilt: News for Traffic Signal Manufacturers

The Nation’s mass transit hypocrisy

by Stephen Smith

I was heartened to see an article about the need for mass transit in the pages of The Nation, though I was severely disappointed by the magazine’s own hypocrisy and historical blindness. The article is in all ways a standard left-liberal screed against the car and for mass transit, which is a topic close to my heart, though I’d prefer a more libertarian approach to returning America to its mass transit roots as opposed to the publicly-funded version that The Nation advocates.

The first bit of historical blindness comes at the end of the second paragraph, when The Nation argues for government investment in mass transit on the grounds that it will “strengthen labor, providing a larger base of unionized construction and maintenance jobs.” But don’t they realize that the demands of organized labor were one of the straws that broke the privately-owned mass transit camel’s back during the first half of the twentieth century? Joseph Ragen wrote an excellent essay about how unions in San Francisco demanded that mass transit companies employ two workers per streetcar instead of one, codifying their wishes through a series of legislative acts and even a referendum. Saddled with these additional costs, the streetcar companies could not make a profit, and eventually the lines were paved over to make way for the automobile. Mass transit companies, whether publicly- or privately-owned, cannot shoulder the burden of paying above-market wages and still hope to pose any serious threat to the automobile’s dominance.

The second, and perhaps more egregious error, comes a little later, when The Nation lays the blame on every group but itself for the deteriorating state of mass transit in America:

Nonetheless, smart growth and transportation activists still have high hopes that the Obama administration and a Democratic Congress will revitalize mass transit. But institutional stumbling blocks–including generations of federal policy favoring roads and cars; pressure from fiscal conservatives; and the power of auto, oil and highway construction lobbies–may cause them to miss this opportunity.

Smart growth, though not a libertarian movement, has a distinctly libertarian issue at its core: reversing the mandatory low density zoning and parking regulations that afflict almost every city, town, and village in America. But who started the movement for zoning and low-density planning in the first place?  Progressives, a group which The Nation fancies itself a member of.

And in fact, a search of The Nation’s archives reveals that my suspicions were correct: the magazine was, sure enough, among those who were calling for a de-densification of America, and railing against the inefficiencies of mass transit. From the April 24 issue published in 1920, there’s an article entitled “The Lack of Houses: Remedies” in which the author, Arthur Gleason, lays out his policy prescriptions for dealing with what he considered to be a dearth of housing in America. Regarding zoning (which at the time almost always meant separating homes from jobs and decreasing density – anathema to the New Urbanist call for mixed uses and density), Gleason was wholeheartedly in favor of it:

Zoning regulates and limits the height and bulk of buildings, and regulates and determines the area of courts, yards, and other open spaces. It divides the city into districts. It regulates and restricts the location of trades and industries and the location of buildings. It conserves property values, directs building development, is a security against nuissance, a guarantee of stability, and an attraction to capital.

Not only did The Nation circa 1920 abhor density, but it also treated mass transit with disdain, writing that “[s]ubways make a slum out of a suburb.” This is typical of progressives of the era, who saw mass transit as capitalistic and backwards. There was also a tinge of racism to the attitude, as the “slum” was populated largely by Polish, Italian, Irish, and Jewish immigrants, while the “suburb” contained more acceptable non-immigrant Americans.

The Nation pays lip-service to America’s mass transit-laden past, writing that “it predates the automobile,” but then conveniently forgets the reasons that mass transit in America ceased to exist. And that’s convenient, because the reasons – almost all driven by government intervention against streetcars, subways, and density – were once causes that The Nation championed.

This post was written by Stephen Smith, who writes for his own blog called Rationalitate.

Uncomfortable truths about the progressive legacy

by Stephen Smith

Yesterday I was listening to the pre-inaugural concert at the Lincoln Memorial on the radio, and one of the speakers said something that struck me as emblematic of the challenges that Barack Obama faces, though I doubt she realized the ironic significance. She was praising Theodore Roosevelt’s conservationist legacy as a model for Obama, with some quotes from him at the Grand Canyon or Yosemite or some other celebrated national park, though she only touched on a small sliver of Roosevelt’s environmental legacy. He definitely did cherish the environment; a timeline of his life shows that in early April 1903 he “commune[d] with deer while writing letters in Yellowstone, WY.” He was indeed a conservationist, as were many progressives at the time.

But the progressives were also something else – something that today’s progressives would do well to remember: ardent planners whose plans often had grave unforeseen consequences. Just after his time communing with the deer at Yellowstone, Roosevelt traveled to St. Louis to address the 1903 Good Roads Convention. The “good roads” movement dated back to before the automobile rose to prominence, and was formed to agitate for improved roads for bicyclists and farmers. But around the time of Roosevelt’s speech, the movement was hijacked by the budding auto-industrial complex. Unwilling or unable to compete on their own against mass transit, the automakers, highway engineers, and road contractors sought for the state to both acquire the rights of way necessary for the roads, and to pay for them to be paved – an advantage the streetcars and railroads did not generally have. Not wanting to appear to be too blatant in their rent seeking, these interests lobbied the government indirectly, giving organizations like the AAA money in exchange for influence and seats on their boards.

The nascent auto industry was not the only booster of subsidized roads – even the private railroads were not immune to the siren song of the great new progressive future. They joined the cause in the 1890s with the idea that improved roads would mean more business for railroads, unaware of the threat that the long-haul trucking industry would come to pose to their business. This new semi-public, semi-private corporatist transportation model suited the progressives as well, who believed in a statist future where “private” enterprise was directed and controlled, though not outright owned, by the government.

In the years since the 1903 Good Roads Convention, the idea that government ought to be providing “good roads” has fundamentally altered the landscape of the country in ways that Theodore Roosevelt never could have imagined. The highway lobby gathered strength throughout the first half of the 20th century, eventually culminating in the Interstate Highway System, the widespread suburbanization of America, and the destruction of American cities. Urban planners like Robert Moses razed neighborhoods and blighted the remaining barren landscapes with highways that have become increasingly congested ever since. In order to stave off this inevitable overuse, planners flattened America with zoning laws and parking regulations that forced Americans to sprawl away from city centers, to areas reachable only by cars and trucks. A century later it’s hard to imagine it happening any other way, and it’s often forgotten that there was a workable free market urbanism before there was unsustainable sprawl.

Especially in recent decades, the system has acquired the façade of self-sufficiency and thus the illusion of being a market institution, because of the Highway Trust Fund and separate gas taxes and user fees levied specifically on motorists. But some of the most significant costs – the acquisition of land for rights-of-way – were paid for earlier in the century, when the government’s power of eminent domain was near absolute. Furthermore, roads are asked only to recoup their capital and operating costs (well, most of them anyway), though every freshman in Econ 101 ought to know that a profit-seeking entrepreneur seeks to recoup his opportunity costs rather than just his accounting costs. In other words, not only does he try to make a profit, but the underlying land shouldn’t earn him any more money were it put to some other use – a test no roads are subject to. To add insult to injury, the nature of roads and private cars is such that they work best in low density environments, but cannot scale upwards without becoming prohibitively expensive due to the cost of ever-widening roads. Mass transit is precisely the opposite – it handles high densities well, and is utterly unprofitable at lower ones. Predictably, America’s zoning rules and parking regulations are overwhelmingly oriented towards densities lower than what the market would demand in their absence.

Theodore Roosevelt might be more commonly remembered for his conservationist work, but it’s important for people today to remember the unforeseen consequences of the his other grand plans. The “good roads” path that he helped put America on has shown itself to be an enabler of global climate change, encouraging Americans to live farther apart, travel farther each day, have bigger houses, and fill those houses with more things. The common telling of the roading of America is that it oiled the gears of commerce and is an integral part of the “American dream,” but it’s impossible to know what sort of advances in mass transit technology would have come about and how we’d be living had the government not favored the automobile and the truck over the streetcar and the train. Theodore Roosevelt’s conservationist efforts are indeed praiseworthy, but might both the environment and the economy be in better shape today had the progressives not interrupted the rail-based urbanization of turn-of-the-century America and put us on the car-based sprawling sub- and exurbanization that characterizes America today?

In calling for the government to fund more mass transit and urban projects, Barack Obama has shown that he sees the problems in America’s land use configuration. But in doing so, he’s shown himself to be ignorant of the root causes of the crisis: government meddling in the transportation and land use industries. Just as the progressives and futurists failed to use the government to design a more efficient transportation scheme, Obama will likely fail in using the government to fix America’s energy problems. Unless he renounces the legacy of the progressives and admits to America that it needs to return to its market-based roots – at least with respect to transportation and land use policy – his campaign promises of reversing our unsustainable ways will go unfulfilled.

This post was written by Stephen Smith, who writes for his own blog called Rationalitate.

Urban[ism] Legend: Positive NPV Infrastructure

As Washington debates how many hundreds-of-billions of the nearly trillion-dollar stimulus will go towards infrastructure or to other spending/tax cut schemes, pundits claim that spending billions on “shovel ready” public works projects can effectively create jobs that will lead to recovery. As readers probably know, I am skeptical that the anticipated spending could be activated so quickly. As Bruce Bartlett put it:

Despite claims by the Conference of Mayors and the transportation lobby that there is as much as $96 billion in construction “ready to go,” the fact is that it takes a long time before meaningful numbers of workers can be hired for such projects.

As a recent Congressional Budget Office study explains, “Practically speaking … public works involve long start-up lags. … Even those that are ‘on the shelf’ generally cannot be undertaken quickly enough to provide timely stimulus to the economy.”

The prospects for unconventional projects such as alternative energy sources are even worse. The CBO calls them “totally impractical for counter-cyclical policy” because they take even longer to come online…

Finally, the impact of increased public works spending on state and local governments cannot be ignored. Most federal transportation spending goes for projects initiated by them. When they think there is a chance that the federal government will increase its funding, they tend to cut back on their own spending in hopes that the feds will foot the bill. A study by economist Edward Gramlich found that the $2 billion appropriated by the Local Public Works Act of 1976 postponed $22 billion in total spending as state and local governments competed for federal funds and actually reduced GDP by $30 billion ($225 billion today).

Meanwhile, proponents of infrastructure spending claim that Congress should sift through the shelved projects to identify those projects that will be economically beneficial, or in other words, have a “positive net present value”. One particular free-market impostor is bold enough to advocate highway spending, as “new roads can largely pay for themselves through tolls and other user fees.”

For the non-financial types, Net Present Value (NPV) is the amount of wealth created, discounted (per the time value of money) to the present, of a particular endeavor. Or in other words, positive NPV projects are expected to “pay for themselves”, from an investment point of view. As a simple rule, opportunities that have a positive NPV should be pursued, and negative NPV projects should be avoided.

2008 Nobel Prize winner Paul Krugman possibly infers positive NPV when he says “public investment leaves something of value behind when the stimulus is over”, but just because something of value is left behind doesn’t mean it was a good investment or that it had positive NPV. At the same time, if not inferring positive NPV, Krugman’s inference that something of value is left behind by private investment makes me think that he actually believes NY Times readers will be easily deceived by his amateurish sleight of hand.

While we know that something of value will be created by infrastructure spending, how certain can we be that alternative spending ideas won’t create something of greater value.

Those who claim positive NPV public infrastructure projects are plentiful neglect some common features of infrastructure projects. From my first-hand experience and study, ambitious, large-scale projects are vulnerable to huge cost overruns. I don’t feel I’m going out going out on a limb when I say that very large projects that are completed on-budget or under-budget are a rarity.

Having been involved with many extremely large projects, one thing has been consistent – they have grossly cost more than originally conceived. There are long-standing jokes (not so funny for taxpayers) among consultants that when estimating big projects in Chicago (and I imagine everywhere), you have to assume the cost at the end of the day will be a factor of 2-3 times as expensive. (The factor varies depending on whether it’s airport work, highway work, or other boondoggles.)

I typically attribute the under-estimation to “optimism bias” of project proponents. Politicians promise the public benefits of the project to voters, and if lucky have the project named after themselves.  Often, by the time the over-budget project is complete, the politician’s term will have ended. If all goes as planned, the politician will have moved to a higher office by then. Often, voters forget the cost over-runs of a boondoggle project once they start using it. After all, it was only a few dollars out of each of their pockets.

Furthermore, bureaucrats are driven to expand their departments and budgets. Designers and consultants who advise on the feasibility of the project are interested in eventually having the inside track on the full commission They thus have the incentive to low ball cost estimates, and inflate benefits. Contractors initially bid low, knowing huge projects are full of changes that are typically more lucrative than the original scope.  Estimators often neglect potential risks such as unexpected soil conditions.  They may neglect these things out of expediency, incompetence, or willfully in order to further a project that has the potential to bring future fees.

Industry lobbies produce studies that exaggerate the need for certain projects. Furthermore, project feasibility studies often neglect or underestimate the time needed to condemn the land needed for the large projects, as they usually are not careful to properly anticipate resistance from landowners who do not wish to give up their land or live near the blighted construction site.

For a more in-depth look, Bent Flyvbjerg has extensively studied cost overruns of large projects and similar topics:
How Optimism Bias and Strategic Misrepresentation Undermine Implementation Concept Report No 17 Chapter 3, Bent Flyvbjerg, January 4, 2007.

Characteristics of Large Infrastructure Projects

Large infrastructure projects, and planning for such projects, generally have the following characteristics (Flyvbjerg and Cowi, 2004):

• Such projects are inherently risky due to long planning horizons and complex interfaces.
• Technology is often not standard.
• Decision making and planning is often multi-actor processes with conflicting interests.
• Often the project scope or ambition level change significantly over time.
• Statistical evidence shows that such unplanned events are often unaccounted for, leaving budget contingencies inadequate.
• As a consequence, misinformation about costs, benefits, and risks is the norm.
• The result is cost overruns and/or benefit shortfalls with a majority of projects.

Projects With Cost Overruns and Benefit Shortfalls

The list of examples of projects with cost overruns and/or benefit shortfalls is seemingly endless (Flyvbjerg, 2005a).

Boston‘s Big Dig, – 275 percent or US$11 billion over budget in constant dollars when it opened, and further overruns are accruing due to faulty construction.

Denver‘s $5 billion International Airport were close to 200 percent higher than estimated costs.

The overrun on the San Francisco-Oakland Bay Bridge retrofit was $2.5 billion, or more than 100 percent, even before construction started.

The Channel tunnel between the UK and France came in 80 percent over budget for construction and 140 percent over for financing. At the initial public offering, Eurotunnel, the private owner of the tunnel, lured investors by telling them that 10 percent “would be a reasonable allowance for the possible impact of unforeseen circumstances on construction costs.”

Policy Implications

The policy implications of the results presented above are as follows:

• Lawmakers, investors, and the public cannot trust information about costs, benefits, and risks of large infrastructure projects produced by promoters and planners of such projects.

• The current way of planning large infrastructure projects is ineffective in conventional economic terms, i.e., it leads to Pareto-inefficient investments.

• There is a strong need for reform in policy and planning for large infrastructure projects.

[hat tip: bound rationality]

Also, the wisdom of Tyler Cowen:

…quick projects are usually wasteful projects. Good new projects need to be thought out and planned. The environmental impact study alone can take years. But Obama has told the state governments they will have to “use it or lose it” when it comes to federal grants. The result will be a lot of poorly conceived projects just to capture the money.

The biggest problem with a fiscal stimulus is this: our economic problems stem from having spent too much in the first place. Now that our homes are no longer rising in value every year and America is aging, more saving is in order, not more spending. Recovery will come only when we discover which new and valuable things the economy should produce as it shifts out of real estate and finance. Simply borrowing and doling out more cash doesn’t solve that problem.

[hat tip: Positive Liberty]

and Harvard’s Linda Bilmes:

A good play to start looking for lessons is by analyzing the three biggest recent examples of heavy government spending on infrastructure: the Iraqi reconstruction effort, Hurricane Katrina reconstruction, and the Big Dig artery construction in Boston. Let me start by pointing out that all of these were plagued by a number of serious problems.

(more from Alex Tabarrok)

And if the government really wanted to, it could easily find positive NPV projects by butting its nose in the business of anti-growth cities that are unreasonably down-zoned by anti-growth policies, as noted at winterspeak:

Infrastructure Spending will be allocated the way Infrastructure Spending is always allocated — it will be based on political expediency, not whether it is a positive net present value or not. If Infrastructure was based on positive net present value, we’d have sky scrape[rs] being built in San Francisco, and 8 story apartment complexes built in Cambridge, MA, and I don’t see a whole lot of either going on.

In my opinion, there is only one true test of a positive net present value, and that is whether private capital is willing to take on a particular project. And, if private enterprise is willing to risk capital to achieve a particular endeavor, why not let them put their own money on the line instead of taxpayer funds.

The bottom line is that big projects tend to go over-budget. Even the rare big projects that are showboated as being a positive NPV investments for society, rarely are after all is said and done as their actually cost far exceed their original budgets. When private projects (positive NPV or negative) are over-budget, investors who took the risk are on the hook for the losses. When public projects are over-budget, the taxpayers are on the hook for the losses. And when it comes to big, ambitious projects, budget over-runs and sizable losses are frequent.

Private Roads Work

Bart Frazier wrote a brief article for the Future of Freedom Foundation on private roads. He begins by discussing how most Americans remain strongly opposed to privately owned roads, while at the same time many have warmed to private education, medicine, and social security. This first part of the article is somewhat similar to many articles advocating private roads.

In the second part of the article, Bart goes on to discuss some examples of private roads in America, including a homeowners association, The Dulles Greenway in the suburbs of DC, and the city of North Oaks, Michigan, which doesn’t even own any property.

Frazier concludes:

Everyone, particularly libertarians, should favor private roads. They have much going for them — they rely on mutual consent for their construction and use, and the market decides what is the appropriate level of their use. People who don’t want to use them are free to spend their dollars on other things that they consider more worthy. And as far-fetched as they seem to some, we have examples of working private roads. I cannot think of a better way for cash-strapped state governments to reduce their budgets than to stop paving the roads.