Public Works and Pyramids
Stones into bread.
When New Jersey Governor Chris Christie recently pulled out of the proposed Hudson River rail tunnel, angst gripped the editorial pages of the New York Times and elsewhere. Columnists and some economists declared in effect: We need the tunnel! It will provide jobs! We have too much congestion! This decision is shortsighted!
For example, Bob Herbert bewails that the government can do all sorts of very costly things, but “can’t seem to build a railroad tunnel to carry commuters between New Jersey and New York.” He continues:
The United States is not just losing its capacity to do great things. It’s losing its soul. It’s speeding down an increasingly rubble-strewn path to a region where being second rate is good enough. [Emphasis added.]
The railroad tunnel was the kind of infrastructure project that used to get done in the United States almost as a matter of routine. It was a big and expensive project, but the payoff would have been huge. It would have reduced congestion and pollution in the New York-New Jersey corridor. It would have generated economic activity and put thousands of people to work. It would have enabled twice as many passengers to ride the trains on that heavily traveled route between the two states.
Herbert fails to mention that Christie vetoed the project because huge cost overruns would have imposed a crushing burden on New Jersey taxpayers. Paul Krugman (not surprisingly) counters that getting rid of what economists call “externalities” (such as traffic congestion) would magically transform the multibillion-dollar expenditures from red to black ink. Therefore, a costly boondoggle always can be justified as a net plus for taxpayers. Krugman writes:
It was a destructive and incredibly foolish decision on multiple levels. But it shouldn’t have been all that surprising. We are no longer the nation that used to amaze the world with its visionary projects. We have become, instead, a nation whose politicians seem to compete over who can show the least vision, the least concern about the future and the greatest willingness to pander to short-term, narrow-minded selfishness.
I hate to interrupt this self-righteous pity party, but if there ever were a “Not So Fast” moment, this is it. A public-works project such as the proposed tunnel makes sense if over time the marginal benefits outweigh the marginal costs. If they do not, then it provides a benefit to some at the expense of others, something the ancients might have called “unjust.” Since the output of public works is not priced in the market, how would we know if costs exceed benefits?
In contrast, the existing rail tunnel under the Hudson was built by the Pennsylvania Railroad a century ago, and despite the modern declarations that government must provide such things, the company did it because it was good business. There was none of the convoluted “this lowers externalities” arguments we hear from people like Krugman as justification for the rail tunnel. The old tunnel was governed in large part by market prices so there was a market-driven return on investment.
Today, we see economic analysis turned on its head. Projected cost overruns suddenly are justified because “they provide jobs,” as though higher costs mean more wealth created. Writes Herbert:
The railroad tunnel project, all set and ready to go, would have provided jobs for 6,000 construction workers, not to mention all the residual employment that accompanies such projects. What we’ll get instead, if it is not built, is the increased pollution and worsening traffic jams that result when tens of thousands of commuters who would have preferred to take the train are redirected to their automobiles.
Don’t forget, this was a multibillion-dollar project to aid a subsidized industry, which means that in the end, it would have enabled the consumption of more wealth than it allegedly would create. Furthermore, the history of such projects in New York is that they become financial black holes, and this likely would have been one.
Egypt’s pyramids, while today drawing tourists and archeologists, were in their day just another giant public-works project that ultimately lowered the standard of living for ordinary Egyptians. High-cost projects can be impressive and even have a wonder all their own, like Hoover Dam. However, if they use more wealth than they create, they are a burden, period.
Comment by Johnny on 13 October 2010:
On the mark sir! If we could get rid of all our present day pyramids, the economy would begin recovering itself overnight.
Comment by Michael Fremer on 13 October 2010:
THE PENNSYLVANIA RAIL ROAD DID NOT FUND THE TUNNEL. That’s A. B, the Hudson and Manhattan Railroad that built the tunnel eventually went bankrupt but kept operating under court order since shutting it down would have been an economic disaster. Eventually, a deal was struck with (god forbid!) the quasi-public Port Authority so that the former Hudson and Manhattan depot could become the site of the original World Trade Center and the PATH subsidiary of the Port Authority began operating and upgrading this vital link between lower Manhattan and New Jersey.
NO doubt had “conservatives” held sway, they would have objected to the “socialism” involved in the deal and they would have preferred the “purity” of the market: letting the railroad go broke, closing the tunnels and who knows what else that would have been a TRIUMPH for a stupid philosophy and a DISASTER for America, which is what happened during the Bush years and will surely happen again when the likes of Jim DeMint and the other Tea Party idiots gain control.
Andersen, at least get your facts right.
Comment by Ed on 13 October 2010:
When so many on The Left deny American Exceptionalism at all how can Mr. Krugman lament that, “[America is] speeding down an increasingly rubble-strewn path to a region where being second rate is good enough.” I thought that was the plan of liberals from the get-go(?)
Comment by charles on 13 October 2010:
Your general point is well made: a private project that survives (generates profit and not loss) indicates that is a worthwhile use of society’s scarce resources, and that a public project does not have such a litmus test to determine if it is worthwhile (i.e., if benefits > cost).
One missing point: the project fails to create new jobs insofar as the tax funds used to build it could have been kept/spent elsewhere by consumers, and that activity would have created jobs in the industries whose products society values.
Critique 1: There is likely some reduction of externalities with this project. Granted, it would be very hard to claim they constitute enough benefit to justify the cost. Nonetheless, it seems hasty to totally dismiss this benefit. Indeed, an economist who did a cost/benefit analysis of this project would include an estimate of this on the benefit side.
Critique 2: Due to the existence of externalities here, a private project litmus test would be inaccurate, as the benefit of externality reduction — less traffic and pollution — would not enter into the profit/loss calculation made by the private transportation firm. Hence, they may determine the project not worthwhile and not engage in it even if it is possible that this non-captured benefit may (possibly) push a perceived loser into a winner. Thus, there is a solid argument for subsidy of such a project to capture this benefit. (Ideally, the subsidy would be paid by the people who live/work in the area that benefits from reduced traffic/pollution.)
Critique 3: you went one step beyond critical analysis and declared that this particular project would not be worthwhile. We don’t KNOW this for sure. Maybe it would have been, or maybe not. Since the profit/loss signal is missing here, I suppose an economist could construct a cost/benefit analysis to form a best guess. This is a “hefty” critique because claiming that this project would not be worthwhile turns the essay from a solid piece of critical analysis into an opinion — an unsupported claim. And I hate to say it but we all know the learning-content of opinions is usually zero?
Comment by Doug Calvin on 13 October 2010:
“…Krugman (not surprisingly) counters that getting rid of what economists call ‘externalities’ (such as traffic congestion) would magically transform the multibillion-dollar expenditures from red to black ink.” If you do doubt Adam Smith’s “Invisible Hand”; why would you doubt Krugman’s “Magic Unicorn of Liberal Utopianism”. It is the undeniable, indomitable force that channels his economics ever so gently to the left. And that is raison d’être for his predictable, bombastic discourse.
Comment by Rocky Eades on 14 October 2010:
If I remember correctly, I read some years ago that, after 70 years or so, NYC still owed more on the original IRT subway line than it cost to build it.
Charles,re Critique 2: externalities such as traffic “reduction” would certainly figure heavily into a private firm’s decision whether to build or not. Are there enough people pissed off enough with current and anticipated levels of congestion that there would be a sufficient pool of potential users to make such a project profitable? A company which didn’t ask and accurately answer that question would be punished severely if they built and the answer turned out to be “No”.
Comment by Harry on 15 October 2010:
Another example of why there should be precious few entities run by the city, state, or federal government. If it were profitable then private enterprise would be more than willing to build it. Of course if they wanted to the bureaucrats would slow the project down so much that the tunnel would probably be never built. I just wonder how much more cost effective it would be to move the businesses from New York to New Jersey instead of building a tunnel. If the over ridding concern is to get the workers to the job then maybe the job should come to the worker. Just think of all of that pollution that would be saved, the gasoline saved, the time commuting saved. Is New York the only place that these businesses can be located? I think not. Personally I think that Wall Street should be broken up and moved to the rest of the country and let them live among the people. Can you say Goldman Sachs in Amarillo? J P Morgan in Jackson? They have high speed computers now, they don’t need to be next door to do a deal, besides the hamburgers don’t cost $12 in Jackson. Wall Street needs to see what the real cost are, not some inflated cost driven by unions, big government and crooked politicians.
Comment by Richard Finn on 15 October 2010:
Don’t forget that these jobs, because of project agreements, will go only to union members.
Organized Labor is no longer a special interest group; it is a part of the Democratice party, and they operate together similar to drug cartels. The Dem politicians create all of the benefits for Labor, and they in turn, launder the money and send it back to the Pols as campaign contributions. Thus the graft system is maintained.
Comment by James Madison Fan on 18 October 2010:
There are other benefits to business that should also be taken into account. Parking is a nightmare. Traffice is a nightmare. Tardiness is an epidemic. Increased accessability means better access for clients, vendors, and employees.
If I can get easy access to downtown without having to worry about finding a place to park my car and the cost of a meter or structure then I’m more likely to visit and spend my money in a store or resturant there than tossing my keys on the table and staying home because it is too much effort.
A lot of these public works are specifically designed to funnel consumers into shopping areas. The difference between a good rail system and a pyramid is a pyramid doesn’t make it easier to shop at Macy’s, Sak’s, Tiffany’s, Shwartz, and Bloomingdales.