Shaky Foundation, Overbuilt Solution


America in Ruins: Beyond the Public Works Pork Barrel, by Pat Choate and Susan Walter, Washington, D.C.: The Council of State Planning Agencies, 1981, 97 pp., $9.95.

America in Ruins, although a rather thin volume, might well prove to be one of the most influential books of this decade. Fortune reported recently that it has already been translated into Japanese and will soon be produced in a mass-market edition for the United States.

Choate and Walter, both former public-sector planners, are now private-sector bureaucrats; Choate is a senior economic policy analyst with TRW, in Washington, and Walter works as a liaison with state governments for General Electric. The authors' thesis is devastatingly simple: given the decrepit state of the nation's infrastructure, our future infrastructure "needs," and the existing methods and levels of infrastructure funding, we face an infrastructure famine that threatens to become a critical bottleneck to national economic renewal.

Choate and Walter's solution is also simple and straightforward: to avert the coming famine, we must funnel more resources into public works; to ensure that these resources are wisely used, we must institute better public planning, with a so-called capital budget; and we must not forget a financing scheme—they recommend a new National Public Works Bank that would, among other things, guarantee state and local public infrastructure debt issues.

By manipulating data and mixing them with a few horror stories about falling bridges, sewage treatment plants that don't work, crumbling roads, etc., the authors have effectively given the impression that there is a current crisis. They have also convinced many that if we stay on the same course, we will certainly face an infrastructure famine in the future.

Famine is an old melody, and regardless of the words that accompany it, it always plays well with interventionists of all varieties. Just review the impact that Choate and Walter have already had:

• In the last two years their book has been widely—and favorably—reviewed and quoted.

• The House Democratic Caucus has embraced the famine hypothesis in Rebuilding the Road to Opportunity: Turning Point for America's Economy.

• The big banks, always interested in government guarantees, have not allowed the infrastructure opportunity to pass them by. They, too, are warning of an impending infrastructure famine.

• Needless to say, there is a long list of "professional" organizations, with representatives in Washington, that have begun to sing Choate and Walter's song.

• All this harmony has caught the ear of more than one politician: Sens. Daniel Patrick Moynihan (D–N.Y.) and Gary Hart (D–Colo.) have introduced legislation that would require an inventory of our public works; and in the House, Reps. William Clinger (R–Pa.), Robert Edgar (D–Pa.), and James Oberstar (D–Minn.) have sponsored a bill that would require not only an inventory but also a federal capital budget or, in less technical language, a public works wish list.

The "infrastructure famine," however, is a house of cards. Even Choate has admitted in an interview in Fortune in December 1982, that his "data are atrocious."

So what, if anything, can be done to avoid Choate and Walter's snake oil? We must convince President Reagan to return to his original goals of cutting budgets (public works subsidies) and taxes, since these policies will encourage the privatization of so-called public works and services. By eliminating federal subsidies, the glow of public provision begins to fade. By increasing tax benefits (reducing taxes) on private investments, private provision becomes more viable. As a result of these two policies, we will be able to privatize and to capture the inherent cost advantages and efficiencies associated with private supply. And, as we all know, the private provision of goods and services does not lead to famine.

To demonstrate the effectiveness of budget and tax cuts in promoting privatization, we need only examine what is happening in the wastewater field. The US Environmental Protection Agency's Construction Grants Program has been the largest federally funded public works program in our nation's history. But the Construction Grants Amendments of 1981, signed by the president on December 29 of that year, act to reduce and restrict the subsidies from the federal government to state and local public bodies responsible for supplying wastewater services. These amendments, therefore, reduce but do not eliminate the perceived advantage associated with the public provision of wastewater services.

Subsidies are not the end of the story, however. The Economic Recovery Tax Act of 1981, through its accelerated cost-recovery system and investment tax credit provisions, acts to reduce tax liabilities associated with all private investments. The act allows for a reduction in the before-tax rate of return required to yield a given after-tax rate of return. This translates into lower prices for goods and services produced by private investments.

The arithmetic of reduced subsidies for public facilities and increased tax benefits on all private investments tilts the balance toward privatization. The key factor that tips the balance is the inherent cost advantages associated with the private supply of so-called public services. As pointed out by James Bennett and Manuel Johnson in Better Government at Half the Price, the real resource costs of providing services are from 30 to 50 percent less with private supply than with public supply. Let's give the president credit; his policies have laid the foundation for a sharp shift toward the privatization of wastewater services.

To avoid the predicted infrastructure famine, we must encourage President Reagan to return to his original policies of cutting federal subsidies and taxes. For it is these policies that will encourage privatization. And it is privatization that will benefit us all by eliminating the public-works pork barrel and capitalizing on the real cost advantages of private supply.

Steve Hanke is professor of applied economics at Johns Hopkins University and served on the President's Council of Economic Advisers until mid-1982.