Saturday, November 22, 2008

Public Works

I watched President-Elect Obama's weekly address this morning on You-tube, in which he called for a massive public works programs to help us crawl out of recession.

In principle, this is a very good idea.  One of the deficiencies of policy over the past eight years (and for 20 or the past 28) has been an ideological denial of the existence and importance of public goods--goods with high fixed costs, close-to-zero marginal costs (i.e., non-rival), and goods where it is difficult to exclude.  The Republican throwaway lines--you are always better at spending your own money than the government, and government doesn't solve the problem, it is the problem--represent the contempt Republicans have for public goods.

Many public goods, however, are manifestly beneficial to the economy.  Even George Will cites the Interstate Highway System as an unambiguous success.  Rural electrification, which has a heavily subsidized enterprise, was almost certainly a positive net present value investment for the country,  as were the California aqueducts (or for that matter, the Roman aqueducts).  The bridges and tunnels of New York City helped it become the world's leading city.  One could go on and on.

When one looks at the long term insufficiency of our roads, our water systems, our power grid, our ports and our airports, it is clear that there are many positive NPV opportunities for government now--particularly in light of the low cost of long-term Treasury debt.

The problem is that government usually allocates investment funds via a political process, rather than a feasibility process.  Government officials also often prefer grand, ineffective projects to more pedestrian, effective projects (transit officials here in LA prefer extended light rail to synchronizing the traffic lights).  So if we are about to spend a lot on public works, I think we need some sort of non-partisan entity, such as the CBO, that develops a rigorous capital budget process for determining spending priorities.  In the absence of such a process, we will spend money on negative NPV bridges to nowhere.


Anonymous said...

"I think we need some sort of non-partisan entity"

Yes! Possibly even dozens of them. And a way to vet them and their overseers.

Government can work once we are able to root out all the ticks that suck its blood. I've only lived for a short time, but I've seen enough government money getting siphoned off.

Anonymous said...

This just in from Krugman blog. I think he's saying, from the engineering standpoint, something close to what you did:

"It occurs to me that we are witnessing a classic regenerative or positive-gain feedback loop. The factor feeding forward is FEAR, that is, the panic itself is a purely psychological event. In an audio system one can hear the system locking up into a feedback whine. The interesting thing about feedbacks of this type is that they can be interrupted instantaneously–in the case of the simple audio or PA system, by muting the gain on the offending microphone. I would suggest that, as Mr. K has written, what is needed is the government to step up and announce that it will in fact not give in to panic and schedule significant spending. Once the fear-driven panic has been interrupted we can get back to the long slow slog we will need to pay down debt, retool industry, rethink energy and so on.
But the panic is making things far worse than they are, and, I stress, the current pessimism is every bit as irrational as the preceding exuberance.

This insight from systems theory may seem illogical. They key thing that is needed is what is known as “higher order (or negative) feedback,” meaning that some agency must stand outside the panic as it were, recognize it for an out-of-control feedback and act to interrupt it.

One could object that this is a merely theoretical idea which cannot be implemented in such a complex system, however, I believe that not only is this objection false, but in a sense this belief enables fear and locks its holder into the panic. I repeat, nonlinear effects traceable to regenerative feedbacks CAN IN PRINCIPLE be alleviated instantaneoulsy."

Steve Roth said...

Bravo. Absolutely right.

See Richard Lights recent NYT Op-Ed. I blog it here:

Anonymous said...

I live about two miles outside of Boston but the nearest T stop is over a mile away. The state has promised extending the trains to my area but.... no surprise... they don't have the money.

Edward said...

Should we define "public works" today in the same sense of decades past? Building roads, bridges, dams, reservoirs, and water systems? Or should we be investing instead in new telecommunications infrastructure? Or expanding/building new university engineering facilities? Or energy research to create a more diverse set of energy production?

I fear we will mostly end up building "bridges to nowhere", or sports stadiums (which are rarely net positive for the local economy) or merely replacing existing roads and highways with new ones - which become one shot jobs programs but make no difference long term. And hence, are not very good investment.