Rethinking America's Infrastructure

On NPR today, several commentators discussed the impact of ~$8 billion in stimulus funds that is targeted for high-speed rail. Being NPR, they had to include at least one critic, who in this case questioned whether we could afford such a high cost, and that even this huge amount was only a small fraction of what it would take to build a national high-speed rail network.

While I don't doubt a national high-speed rail network would cost hundreds of billions of dollars, I do wonder how we can think of this as expensive. Aside from the obvious comparison to the $700 Billion we just spent to bail out the financial system, I think a more significant comparison is to the hundreds of billions currently spent by federal and state governments annually just to maintain the existing road network. And we must consider that the existing road network is soon going to require a tremendous overhaul to stay viable. Just tonight the History Channel showed "The Crumbling of America" which examined the poor state of America's infrastructure, including our highway system. Many of our major highways were built to last 50 years, and are now well into their 40's and being used more heavily than designers 50 years ago probably would have anticipated.

One way or another, America will have to spend trillions of dollars over the next decade or so if we want our nation to continue to have a viable transportation system in the 21st century. We need to be seriously consider whether we want to pour this kind of money into just maintaining the status quo, or do we want to have the kind of vision our predecessors did 50-100 years ago when building the transportation network we have enjoyed for so long.

The sad part is I hear nothing being seriously discussed that is at all bold or ambitious. High-speed rail would be nice, but the projects currently being looked at are often no more technically advanced than what was being used nearly 100 years ago in this country. Even the "ambitious" proposals do not represent any sort of advance over the technologies currently in use in Europe, Japan, and elsewhere. Several years ago I ran across a plan for something called a dual-mode system. While I disagree with many aspects of the proposal, it is certainly interesting and has many great ideas. Why aren't revolutionary, forward-thinking proposals being considered as we face the end of an era in American transportation infrastructure? Why does it seem the only two choices we have are to maintain an oil-dependent status quo (cars & planes) that is bad for the environment, accident-prone, reliant on hostile regimes and anti-democracy powers, and offers little chance for efficiency and safety improvements; or to turn to rail at a technological state that we should have moved beyond decades ago?

When did America become a land of such small thinkers?

America's socialist roots

Just started reading Alan Beattie's "False Economy" and I'm not even 20 pages in before learning a very interesting piece of information. I wasn't aware of this, but 100 years ago, apparently Argentina and the US were pretty much in the same boat economically and socially. Both were emerging economic powers, ranked in the top 10 of world economies, with abundant resources, excellent access to global markets, stable democratic governments, etc. Obviously, the situation is dramatically different now...Argentina is close to third world nation status while the US has the most powerful economy in the world. The book starts off the explanation for the divergence with this:

Argentina settled its inland territories by auctioning off large tracts of land to the highest bidder. Yep, capitalism at its finest. So Argentina became a land of extremely wealthy aristocrats with huge tracts of land...and lots of minimally skilled, poorly paid workers to tend the land. Because the aristocrats were already loaded, they had little incentive to invest in the land or do much to make the economy more productive. Grazing large animals that made for good eating was a perfectly good way to use the land. Argentina came to be a land settled by a small portion of very privileged people, and huge portion of unskilled laborers who tended the land but had little attachment to it. Many were actually seasonal migrants. Few immigrants (~5%) became citizens. Few really committed to seeing the nation prosper because all the benefits were going to be reaped by the tiny minority anyway, so what was the point?

America, on the other hand, gave away many smaller tracts of land to lots and lots of people. Sounds pretty damn socialist if you ask me. America attracted many people with skills and initiative who simply didn't have the opportunity to benefit from their skills in the old world because it was too difficult to break out of the lower rungs of society. In America, on the other hand, they were given, for free, a piece of land, where they could live, and build on whatever talents they had. They could share in the wealth that was being created in America. Because so many people were given relatively small pieces of land, all of these people had an incentive to make the best of it, unlike the affluent in Argentina who already had plenty of money and had no incentive to wring all they could out of their vast landholdings.

Two obvious lessons:
-America has always had "socialist" leanings, and these "redistributive" policies have given us an incredible competitive advantage over nations where the rich continue to be rich and get richer.
-The idea that the rich will make the wisest investment decisions, since they obviously had to be wise to earn all that money in the first place, is bunk. That argument *might* have some merit for first-generation wealth, but the majority of the very wealthy got their wealth the old-fashioned way, they inherited it. Generally speaking, the wealthy aren't going put a lot of effort into finding the most productive use for every asset they control. People with lots of assets simply don't have time to find productive uses for all their assets. Without a healthy amount of redistribution, a society can wind up like early 20th century Argentina, where the people who would make productive use of assets have too few assets to matter, and the people who control most of the assets have too much to care about making productive use of them. Shit may roll down hill, but history does not support the notion that wealth trickles down.

A 50% increase in American health care professionals--overnight

In an article ostensibly on rationing, blogger and economist Mark Thoma provides a rudimentary set of equations to summarize where health care costs come from. The gist of his opinion is that critics of health care reform claim the only way we achieve universal coverage and/or cost savings is by reducing quality. He's of the belief that the experiences of other nations suggest there's enough waste in our system that we can cut costs and expand coverage without sacrificing quality of care. I would have to agree with him.

A couple months back the Economist did a number of articles on health care in America. Of particular interest to me was a graph comparing costs among different developed nations (see full article). Obviously the US was way out in front, but what I found interesting was Switzerland came in second, spending roughly 30% more per person than the average of other developed nations--spending over $4k per person while the OECD average is about $3k. Switzerland is one of the only countries besides the US that uses private insurers to pay for health care. Seems like remarkable confirmation of the oft-cited statistic that private insurers add about 30% to the cost of health care through their overhead. If we just eliminate this 30% of health care spending that gets wasted, we'd have plenty of money to cover everybody.

Furthermore, I've worked with lots of doctors in my line of work, and the general consensus is they spend anywhere from a quarter to half their time dealing with insurer billing issues. Again, eliminating private insurers would immediately solve the problem of shortage of health care workers as we would see an effective 50% increase in health care workers overnight.

I've mentioned it in a previous post (here), but it's worth repeating. The legal duty of corporations is to make money for shareholders. A corporation can not carry out its legal duties if it pays for treatment that costs more than the customer is statistically expected to provide in future revenue. We already have a system where a corporate accountant is doing a cost/benefit analysis on every significant procedure you need and determining whether to pay for it based on profitability. That's how we're rationing health care now. I have yet to see any proposal mentioned in the health care debate that's any scarier than that.

A History of Markets (& the Boston Tea Party)

I'm currently reading Niall Ferguson's Empire: The Rise and Demise of the British World Order. While reading the "Rise" part of the history, it's fascinating to be reminded of just how much capitalism has always been an ideal more than a practice. In a previous post I addressed the issue of some of the many things government provides for us that the free market has been unable to provide on its own. I only discussed America, but actually I could have broadened the discussion to Great Britain, the nation that gave the world the very ideals of capitalism. It is important to realize that even in Great Britain, capitalism was only a rough guiding principle but in practice there was never any such thing as "pure capitalism" or "unfettered free markets". The British conquered the world through a public/private hybrid system. Companies like the British East India company were granted monopolies by the government to control specific areas of the world market. These companies were given naval protection on the seas by the most powerful navy in the world. They enjoyed numerous favors from the government at home, and abroad they were free to dismiss the ideals of free exchange between consenting parties by forcible seizure of assets controlled by any native people they encountered.

For centuries, "capitalism" has operated with extensive government protection (i.e. "interference") and a healthy dose of coercion when "free markets" weren't producing desirable results. The British government had a long history of using protectionism and militarism to invade and conquer nations and territories, then demand that the colonized territories respect market principles and play by the rules of free exchange without protectionism. Obviously, such demands only came after Britain had firmly established its power by flouting market principles and free exchange.

I'm not picking on Britain here. The history of America has also been a mix of protectionism, government involvement and subsidy in industry, and of course exploitation of resources forcibly taken from native people.

And we need look no further than the largest developing economy, China, to see that the pattern continues today. China practices a highly regulated, authoritarian, state-run model of capitalism. Numerous enterprises compete for private gain, but the government is actively involved in the market place to insure the success of various industries.

The lessons are there all through-out history. The most successful markets have always had a strong dose of government "interference" to insure their success.

And one more note from the book...Ferguson provides the most scholarly affirmation of something I've recently read in a number of locations regarding the famous Boston Tea Party. American mythology attributes the Tea Party to a rise in taxes. In reality, the Tea Party was in response to a LOWERING of taxes. Here's a quick synopsis of the events leading to the Boston Tea Party:

America actually had it pretty good as a colony of England. We enjoyed the protection of the British navy, as well as privileged access to the British market and all that it controlled. In fact, America probably enjoyed a higher per capita income than England, thanks to the fact that they enjoyed the benefits of British government and protection, but paid no taxes for these services. Britain was able to extract some tax revenue through things such as the Stamp Act (effectively a tax on all paper) and by adding a tax to products that passed through British ports on their way to America, e.g. tea. However, the Americans did not like paying any tax at all (sound familiar?) and Britain relented to most American demands and removed most taxes. In particular, they removed a 25% tax on tea that passed through British ports and replaced it with a 3% tax on tea when it arrived on American shores. The lowering of the tax on tea proved very harmful to powerful bootleggers who had built large enterprises by smuggling tea into America without passing it through British ports and paying the 25% tax as required. These powerful bootleggers (I can't help but see them as the equivalent of modern day corporate interests) rallied the masses to protest this egregious offence of a 3% tax on tea because most people were ignorant of the fact this represented a reduction from the previous 25% rate paid in British ports. So when early Americans bravely protested at the Boston Tea Party, they were actually protesting a REDUCTION in taxes in order to allow businesses to charge higher prices.

Apparently some things never really change.

The US is NOT friendly to small businesses

As a small business owner, THIS is exactly what I'd like to see more of. It's an article on the portion of the US economy composed of small businesses and their employees. The graphic says it all. Not surprisingly, to me at least, the US ranks almost dead last among industrialized nations in employment by small businesses. Turns out we're not so friendly to small businesses after all.

Obviously, inaccessibility of health care is a huge obstacle. But more than that is the lack of social safety net in general that makes the consequences of failure so enormous. Critics of taxes and social programs like to point out that people won't take risks if they fear too much of the reward will be taxed away. They completely ignore the other side of the equation--that people won't take risks if they fear the consequences of failure are too great. And considering the oft-cited statistic that 90% of new businesses fail in the first year of operation, maybe our society needs to think more about minimizing the consequences of failure for budding entrepreneurs than maximizing the reward for the very few that have the talent, persistence, and luck to succeed wildly.

In the debates over health care reform, taxation, and social issues, progressives need to make the argument that providing a safety nets ENCOURAGES entrepreneurship and innovation...not stifles it.

Economic Incentives & the Olympics

In all the current talk about possible higher tax rates on the rich, much is made in some circles about how this "penalizes" the rich. On the face of it, the notion that a person who only makes $5 million in take home pay instead of $6 million is somehow a victim is absurd, but let's consider the argument for a moment.

Those concerned about taxation rates being too high on the rich do have one valid point that if tax rates go too high, people who might otherwise have done something economically productive might choose not to take the risk of losing money since the reward will be too low after taxes are taken into consideration. This is certainly a legitimate perspective when the top marginal tax rate is 94%, as it was in the 1940's. However, when the top marginal tax rate is in the 30s as it is now (actually much lower when AMT considerations and lower capital gains rates are considered), this argument is not nearly so powerful...especially considering virtually every other developed nation has higher tax rates than the US and still manages to turn out plenty of highly successful businesses that compete just fine with American ones on the global stage.

But there are some who seem to feel that ANY progressively increasing tax (or at least any tax increase on high earners) amounts to penalizing the rich and perhaps outright socialism. One interesting analogy I've heard is that a progressive income tax is like asking Michael Phelps to share his gold medals with all the other swimmers in the Olympics because it's "unfair" that one person should have so much more than others. This argument is often portrayed as a clear example of why capitalism is vastly superior to socialism, because only the possibility of receiving the one gold medal will bring out people's best performance.

However, on closer inspection, the Olympics actually serves as a very useful model for how a society might build an effective socialist society. The reason is this: every athlete at the Olympics receives excellent food and accomodations, among other things. Of course, the Olympics committee could choose to provide nothing for any athlete except the medalists. This, actually, would be a far better model for unfettered capitalism. In this warped Olympics, the medals would be much larger (hence, more valuable) and perhaps a larger proportion of athletes might receive them since, after all, the Olympic committee wouldn't have to worry about wasting money on things like food & lodging. However, the athletes would then have to barter their medals in exchange for food & lodging and any other needs and wants they have while at the Olympics ("Oh, you want to make an international call home to your family? Well that's gonna cost you half of that bronze medal.") Yes, some athletes would be better of in this Olympics--Michael Phelps would probably own most of China by now--but the vast majority would be far worse off.

A fundamental problem in capitalism is that people are incentivized out of the same "budget" as people are fed and provided with basic needs. It's all done with dollars and there are a finite (though generally growing) number of dollars in circulation at any time. This isn't necessarily a problem if the number of dollars is growing faster than the rewards for those at the top, and this is generally the case for a nation that is still developing its economy with reasonably sound policies. But when the rewards for those at the top are growing faster than the number of dollars in circulation (which can be roughly thought of as the overall size of the economy), then we do have a case where the rich are growing richer at the expense of the poor. And once an economy reaches a certain point of development, it becomes difficult to find to find ways to continue to grow the economy at a fast enough pace to keep up with those at the top.

It seems to me that the US has been struggling with this fundamental problem since the 1970s. Numerous studies have pointed to wage stagnation for most workers since that time. And while we've come up with numerous tricks to increase overall wealth (immensely) for those at the top of the economic heap, the rest of the population has been forced to try and keep up through longer working hours, increased leveraging, and asset bubble after asset bubble. As these bubbles pop and the country deleverages, however, it's becoming increasingly clear that the net economic effect of the last 3-4 decades has been a massive increase wealth at the top and little gain, at best, to possibly a sizable loss in wealth at the bottom.

The Olympics does not have to worry about athletes going hungry or homeless because of the increasing size of medals for the winners. That's because the Olympics creates separate budgets to deal with each of these needs, and clearly making sure all athletes are fed and sheltered is a paramount need, taking precedence over the size of medals. Yet, even though the medals aren't nearly as large as they could be if the Olympic cut back on the budget for taking care of all athletes, Olympic athletes still put enormous amounts of dedication into delivering the maximum possible performance they can deliver. The actual market value of the medals that athletes receive generally is quite small relative to the amount of time and work that goes in to earning one (and for those who argue that medalists often receive very rich endorsement deals, consider that many Olympic medalists come from countries where this is not possible and the only tangible reward will probably be the medal).

As a believer in a hybrid economy--one in which everybody's basic needs are met, but market forces and incentives still play a significant role in the overall economy--I think there's a valuable lesson in the Olympics. It is absolutely possible to meet everybody's needs in a community while still providing adequate incentive to spur significant achievement.