infrastructure

President Obama received a lot of outraged criticism from the right during the 2012 campaign for his remark, “You didn’t build that.” What he meant, though he uncharacteristically said it in a fairly clumsy way, was that for every proudly self-made entrepreneur there is a huge web of supporting institutions and infrastructure built by the government. These essential supports include the obvious – the courts, the Interstate highway system, police and fire departments, etc. – but also a tremendous array of investments undertaken by national governments, many of which have provided a platform on which entrepreneurs can build. A recent article in The Economist, reviewing a new book entitled “The Entrepreneurial State,” by Mariana Mazzucato of Sussex University in England, makes this explicit. And nowhere is this investment activity more influential than the United States, supposedly the cradle of unbridled individual enterprise.

Beneficiaries of these investments include Apple: “The armed forces pioneered the Internet, GPS positioning and voice-activated ‘virtual assistants.’ They also provided much of the early funding for Silicon Valley. Academic scientists in publicly funded universities and labs developed the touchscreen and the HTML language. An obscure government body even lent Apple $500,000 before it went public.” They also include Google, which received early funding from the National Science Foundation. Pharmaceutical and biotechnology companies benefit from the $30 billion in annual funding for biomedical research from the National Institutes of Health.

As Ms. Mazzucato argues, “The entrepreneurial state does far more than just make up for the private sector’s shortcomings: through the big bets it makes on new technologies, such as aircraft or the internet, it creates and shapes the markets of the future. At its best the state is nothing less than the ultimate Schumpeterian innovator—generating the gales of creative destruction that provide strong tailwinds for private firms like Apple.”

There are reasons to be skeptical of some government investments. The Solyndra debacle, in which the Federal government provided $500 million in loan guarantees to a California manufacturer of solar panels, which promptly went bust in the face of low-cost competition from China, is a cautionary example of the dangers of bureaucrats playing at being venture capitalists. But the rallying cry of the Tea Party – the Randian (Ayn and Paul) notion that the state is essentially a parasite feeding on the efforts of bold and visionary individual entrepreneurs – is a pure fairy tale.

The Economist article asks “why are some states successful entrepreneurs while others are failures?” and it provides an answer:  “Successful states are obsessed by competition; they make scientists compete for research grants, and businesses compete for start-up funds—and leave the decisions to experts, rather than politicians or bureaucrats. They also foster networks of innovation that stretch from universities to profit-maximizing companies, keeping their own role to a minimum.” This sounds much like the blueprint for Silicon Valley, or any other successful technology-based industrial cluster.

In our current budget-cutting environment, these essential investments are under threat. According to a recent article in The Huffington Post, sequestration will cost the NIH 5% of its budget, or $1.7 billion, forcing the cancellation of 700 competitive research grants in the current Federal budget year. Similarly, the National Science Foundation is expected to issue 1,000 fewer research grants this year as a result of sequestration.

According to a statement by the Congressional Budget Office, the Federal Highway Trust Fund, which is funded by taxes on gasoline and diesel and which provides a substantial portion of the money states use to maintain state and national roads, is essentially insolvent and will run out of money completely by 2015. The only way to avoid this would be to cut transportation funding by 92% or raise the Federal gasoline tax by 50 cents a gallon, and it’s hard to imagine the Republican-controlled House of Representatives going along with the latter.

In the current political environment, much of the public investment that enables American businesses to innovate and prosper is under threat, mainly from ideologues who refuse to recognize the essential role that government initiative and funds have played since the founding of the Republic, from the Erie Canal to the interstate highway system, to nanotechnology research.

It is worth considering these facts in the context of the current legal battle between Verizon and the Federal Communications Commission. Verizon is challenging a net-neutrality order adopted by the FCC in 2010, which states that internet service providers (ISPs) cannot block lawful content and mobile broadband providers cannot block lawful websites. Verizon contends that the order violates its First Amendment rights. More to the point, Verizon and its competitors, including Comcast and AT&T, maintain that they spent billions of dollars to build their networks and should be able to grant or deny access as they please, or charge different customers different rates for transmitting on their networks. This is a spurious argument. The broadband companies are “common carriers,” a term that applies not only to telecoms companies but also to airlines, railroads, and trucking companies: they offer their services to the general public under a license or authority granted by a public regulatory body. Common carriers are subject to licensing requirements because they are using a public resource: radio spectrum, rights of way, public roads, or air traffic control systems, without which they would be unable to operate. In the case of the telecoms company, they are also using a resource – the Internet – that was developed by DARPA, the U.S. Defense Advanced Research Projects Agency.

The Internet and the public airwaves are not the property of those companies to use as they please, free from any oversight or interference. It is time to tell them, “No, you didn’t build that.”

 

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I am not a great fan of Jeffrey Sachs, the former Harvard development economist now Director of Columbia University’s Earth Institute, whose main claim to fame is having administered shock liberalization to the Bolivian and Russian economies in the 1980s and 1990s, respectively. Though his prescriptions did put an end to Bolivia’s hyperinflation, neither Bolivia nor Russia is a paragon of economic dynamism, and the main beneficiaries of his Russian experiment were the soon-to-be oligarchs who snapped up state-owned companies at a fraction of their real value. Nevertheless, Sachs, writing in yesterday’s Financial Times, has neatly identified the culprit in the U.S. fiscal sequester, which went into effect at noon today. It is not the Tea Party, nor even the House Republican leadership, but Obama himself, counterintuitive as that may appear. [click to continue…]

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If any event could illustrate the fragility of the BRICS conceit, it is the recent blackout in India, which left as many as 600 million people without power for up to two days. More than anything else, it reveals the sorry state of India’s governance. Yes, there are some extenuating circumstances: an unusually hot and dry monsoon season, which has reduced the available flow in hydroelectric plants while also causing the wealthy to use more power to run their air conditioners, while at the same time farmers are using more power to run pumps bringing up irrigation water from deep wells.

But the real story is under-investment in power generation, in coal production, and in transmission and distribution infrastructure, which in turn are attributable to monopoly pricing, hugely inefficient subsidies, endemic corruption, and political stagnation. The power outage was unique only in its extent and duration. Businesses, households, and public institutions all rely on diesel generators, which to a large extent have gone from a backup to the primary source of electricity, as “load shedding” – the system of rolling blackouts that utilities impose to reduce the strain on an overtaxed network, which often deprive whole areas of a city of power for as much as 14 hours a day. The event, and the global publicity it has attracted, has put a dent in India’s self-image as a nascent superpower. India has nuclear weapons and a space program – it launched a lunar probe in 2008 and has announced plans to send an orbiter to Mars next year – but it can’t keep the lights on. [click to continue…]

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Even as unemployment in the United States stubbornly remains above nine percent, many companies struggle to find qualified workers. In its 2011 Talent Shortage Survey, Manpower, Inc., the staffing agency, reports that 52% of U.S. companies are having trouble recruiting essential employees, up from 14% in 2010. On the one hand, this could be a sign of a real recovery – economic growth and renewed confidence creating a surge in employer demand – but on the other hand, it could be a sign that the United States is losing its competitive edge, failing to produce graduates and school leavers who possess the attributes employers need: chiefly, literacy, numeracy, and a work ethic.  The United States is hardly the only country to face such problems. Saudi Arabia, which differs from the United States in just about every way that matters, is trying to resolve its twin problems of unemployment and a lack of skills in ways that could be instructive for U.S. policy makers. [click to continue…]

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Nearly two years ago I wrote a blog post in which I argued that Africa’s enduring poverty is attributable in large part to its awful roads, which make it cost roughly three times more to move a shipping container by truck  the 750 miles from Kampala, Uganda to Mombasa, Kenya, than the equivalent distance from Portland, Maine to Cleveland, Ohio. It turns out, though, that the quality of American and African roads is converging faster than I knew, and not because Africa’s have become so much better.

Last weekend I drove from Boston to Utica, New York, to pick up my daughter who goes to college nearby. Much of Interstate 90 in New York State runs parallel to the Erie Canal, arguably the first major public infrastructure project in the United States, begun in 1817 and opened in 1825, which connected the Great Lakes to the Hudson River, and from there the Atlantic Ocean. The canal today carries mostly recreational traffic, though there has been a recent uptick in commercial use. The bridges that cross the canal, and the locks and the tidy white lockkeepers’ cottages spaced at intervals along its length, create a pleasing impression of efficiency, order, and purpose.

It took the canal’s backers ten years to assemble the financing. The U.S. Congress refused, questioning the constitutionality of using federal funds, and Presidents Thomas Jefferson and James Madison both considered it a lunatic scheme. New York State, under Governor Dewitt Clinton, stepped into the breach and issued $7 million in bonds – around $130 million in today’s money – representing about one percent of U.S. gross domestic product of $700 million. The equivalent expenditure today would be $150 billion out of a GDP of around $15 trillion. But the tolls levied on canal users repaid the initial investment in less than 30 years, and generated a surplus that funded much of the state budget until 1882, when the tolls were abolished.

The canal transformed New York City into the premier port and the economic and business capital of the United States, and helped make the United States a world industrial, commercial, and political power.

We don’t do those kinds of grand projects anymore. Not only that, we don’t even maintain the infrastructure we have. According to the American Society of Civil Engineers (ASCE), which periodically puts out a report card on America’s infrastructure, we are flunking, with grades ranging from C+ (solid waste management) to D- (roads, wastewater, drinking water, levees, and inland waterways). The ASCE estimates the U.S. would need to spend $2.2 trillion over five years just to bring its transport and water infrastructure back up to a passing grade after years of under-spending. That’s about $440 billion, or 3% of GDP, annually. Right now, total U.S. public spending on infrastructure is about 2.4% of GDP, or $360 billion. In contrast to Europe, which spends much more on maintenance and repair, nearly half that amount goes to new construction. There is more political mileage to be gained from building a new bridge than from filling 10,000 potholes. Also in contrast to Europe and much of the developing world, where private capital has filled a big part of the funding gap, Americans on both left and right oppose public-private partnerships with equal fervor.

To climb substantially above our current 23rd place in the World Economic Forum international ranking of infrastructure quality and to accommodate the expected 40% rise in the U.S. population over the next 40 years, we would probably need to spend at least four, if not five, percent of GDP each year, or between $240 and $390 billion more than we do now. The European Union countries already spend about five percent, and China nine percent of GDP, on infrastructure.

What does this mean in concrete terms? According to the ASCE, one in four of the nation’s bridges are either structurally deficient or functionally obsolete. One-third of America’s major roads are “in poor or mediocre condition,” and highway congestion is a growing problem. In the ASCE’s words, “The current spending level of $70.3 billion per year for highway capital improvements is well below the estimated $186 billion needed annually to substantially improve the nation’s highways.”

President Obama was wrong when he said, recently, that the U.S. needs to “out-invest China.” China and India, rapidly developing countries with awful infrastructure, ought to spend far more, proportionally, than the U.S. We already have interstate highways and sewage systems, and they don’t. But how far are we willing to let our existing assets crumble? Shouldn’t we spend at least enough to prevent our roads from turning into the potholed nightmares of Tajikistan or Haiti?

In today’s political climate the question can’t even be asked.

Paul Krugman, on his blog and in his New York Times op-ed column, has referred to the federal government as “an insurance company with an army.” It’s a picturesque image and true, though awfully sad. Our country’s founders surely had loftier ambitions when they cast off British rule to usher in a  “Novus Ordo Seclorum,” a new order for the ages.

Sadder still is that so few mainstream politicians have questioned this state of affairs. Instead, they argue about cutting $8 billion out of foreign aid and State Department budgets – a whopping 0.3% of the $3.7 trillion budget – while ignoring the entitlement programs and invasions of other countries that are bankrupting us.

Fuel taxes support the Federal Highway Trust Fund, but the fund will become insolvent in 2012, largely because the tax of 18.4 cents on gasoline and 24.4 cents on diesel hasn’t gone up since 1993. Congressional transfers have kept the fund afloat for the past several years, but with a $1.5 trillion budget deficit those transfers will end next year, and with gas at $4 a gallon it would be political suicide to suggest raising the tax.

So, in the likeliest scenario, we will continue to stumble along in the same direction until we discover, as we must, that sometimes things get so badly broken no amount of money or effort will ever put them back together.

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