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Black Monday Pops the State’s Infrastructure Bubble

By: Nick Zaiac - @NickZaiac - Aug 26, 2015, 9:42 am

The global economy is in free fall. Markets worldwide are down dramatically, and officials around the globe are scrambling for answers. “What’s happening? How can we stop the bleeding?” The coming days and weeks will see millions of words written over the cause and cure for what has happened these past few days.

We don’t know much, but one thing is certain: it is clearly tied to the inefficient spending of Chinese companies and local governments, leading to overcapacity in specific economic sectors, one of those being physical infrastructure, as famed economist Tyler Cowen has noted.

While it may not be the root cause of the crisis, the “infrastructure issue” is certainly a major part of it. The fact is, not all new roads are worth building. Neither are all new ports, airports, power lines, water mains, telephone cables, or any of the other myriad pieces of physical infrastructure that people use in their everyday lives.

Each type of infrastructure is just like any other good. They are produced by producers, and consumed by consumers. Supply and demand, straight out of Economics 101. Sometimes, producers make too much of a product for the available demand, sometimes too little.

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Yet governments seem to always think that their country never has enough infrastructure. They think the roads are always crumbling, and bridges always falling apart. Traffic is a problem for some, and that means more and bigger roads to accommodate the excess cars. There is never enough port capacity; airports are sometimes crowded; and internet speeds in some places are too slow.

Infrastructure spending provides many short-term construction jobs that can be created by political fiat, making the spending particularly tempting for politicians looking to be called “job creators.” This delusion has a cost, and it’s a cost that feels all too real right now.

The fact is that the government is not a particularly efficient asset manager, be that of public lands or public infrastructure. Infrastructure is treated not as a consumer good, but as a public service, expected to be provided free of charge to everybody. Roads are the preeminent example.

Essentially everyone uses them, and most people see access to them as a right. Every time someone seeks to privatize and toll a preexisting road, local residents, who would no longer have their road use subsidized, cause an uproar. Infrastructure has been divorced from the market forces that would normally determine which projects are worthwhile, and which projects are not.

We know that private infrastructure holders are generally better at determining which projects make sense. For them, the workers building their projects are just that, workers. Creating jobs is not the purpose of infrastructure any more than creating other everyday objects.

Infrastructure goods are, and should be treated as, no different than any other ubiquitous goods that people consume. Yet transitioning to a world where more infrastructure is owned by private bodies outside the realm of political meddling would not be easy, despite being worthwhile.

How could this happen? The first step would be for countries to privatize all infrastructure assets that are successfully run by the private sector elsewhere in the world. Prime examples are airports and seaports, which private operators in Europe and China currently run successfully. More controversially, highway assets could be relatively simple to privatize in most places, something common in places like Australia.

Canals and other inland waterways could be similar. Even municipal parking assets could be privatized. This would remove the responsibility to maintain trillions in assets worldwide from governments, assigning the risk to private infrastructure owners, all while depoliticizing infrastructure spending.

Infrastructure is ubiquitous in the lives of normal people. In most cases, it is free to use and owned by the government. This public ownership of consumer goods has failed to provide the kind of high-quality services people wish for, all while using this particular type of good as a powerful political tool.

This cannot go on forever. Bureaucratic incentives to build ever-more infrastructure mean that maintenance of the existing infrastructure stock is ignored, leading to issues from potholes to train derailments to municipal fiscal insolvency.

If we can glean one takeaway from Black Monday, it’s that “free” infrastructure has many risk, and that risk sometimes catches up with us.

Nick Zaiac Nick Zaiac

Nick Zaiac is a public-policy researcher in Washington, DC. He also serves as a policy analyst at the Maryland Public Policy Institute. His column, The DC Leviathan focuses on the often-ignored bureaucratic agencies, from the Department of the Interior to the General Services Administration. He has been published in the Baltimore Sun, City AM, CapX, and other outlets. Follow @NickZaiac.