We can use this same kind of approach for most other infrastructure investments. For example, if we’re going to build a new highway interchange or a frontage road, the local government could acquire all the developable land impacted by the project at pre-project prices. Once the project is completed and the land value improved, the local government could then sell the land to the highest bidder and use that revenue to pay for the project.
If that seems a little too authoritarian, understand that this is how most of the United States was originally built. Only, it wasn’t government; it was trading monopolies and railroad companies. For the latter, the railroad would acquire land for a town where they intended to put a train stop. As they developed the rail line, they would sell the land around the stop to speculators and use that revenue to pay their capital expenses of building the railroad line. The Long Recession of the 1870s was largely a market correction when railroads overbuilt their systems and the profits speculators counted on didn’t materialize.
If this still seems un-American, there’s another approach that cities use all the time: the general assessment. If the local government does an infrastructure project that improves the value of a property by $10,000, they may levy an assessment on that property for up to $10,000. There’s dual logic to this: It protects property owners from arbitrary taxation by requiring a real improvement in value for the landowner, and it protects the public by having a mechanism preventing public dollars from enriching individuals.
The assessment process could be used by cities or states to capture the private gains that public infrastructure investments make, those dollars being recycled to pay for the project. This is often done for very local projects, although the full cost is generally not assessed. The assessment process is almost never used for major projects, like highway interchanges or light rail stops.
If it were widely used, it would almost certainly kill most projects; our current development pattern does create enough wealth to justify the capital expenditures we make. In other words, private landowners would reject most major projects if they were asked to pay for them. They would reject them because they would lose money.
If we’re going to believe in the power of infrastructure spending, if we’re going to have faith in the improved efficiency of the market that results from taxpayer investments like these, we should use the feedback from those markets to help us identify worthy infrastructure investments. We don’t do this, and within the Infrastructure Cult, such a suggestion is heretical.
That is because, if we did rely on user feedback and real return-on-investment calculations to pick our infrastructure investments, our projects would look nothing like the ones we are currently undertaking, nor the ones we are planning to do.
The Data Doesn’t Lie
In 2016, the Congressional Budget Office (CBO) published an analysis that called into question the optimistic rates of return often assumed for federal infrastructure spending, particularly when the money is borrowed, and interest is accrued.13 This was a rather nuanced white paper, but it undermined a foundational belief of the infrastructure spending narrative: that investments in infrastructure pay a return.
The conclusions of the CBO were hotly contested by some of the nation’s leading economists, people for whom a belief in the powers of infrastructure spending has near religious significance. Former Treasury Secretary Larry Summers said the CBO “blew it”14 and Nobel prize economist Paul Krugman agreed, offering a very specific set of numbers to make the case.15 When Krugman’s scenario is analyzed, only a third of the investment is recovered within three decades, a period when maintenance costs start to overwhelm the wealth produced from those investments.16 In other words, in the real world, the numbers just don’t work.
Summers seems to acknowledge this when, in voicing his disagreement with the CBO conclusions, he predictably indicates (emphasis added):
I think anyone taking this kind of ground up approach will conclude that the social return to public investment is far higher than 2 percent.17
Social return. For the Infrastructure Cult, it’s where the action is.
The social return can be enormous, and we can develop all kinds of optimistic ways to suggest that it is, but if the investments we’re making don’t pay a real return – if we don’t create enough wealth to pay for the investment and its long-term maintenance – it’s not going to matter much. The accumulated weight of negative-returning investments will weigh us down, forcing us to divert more and more of our resources from things that could improve our lives to sustaining systems that never will.
This was evident in an article published by the magazine Jacobin, although that’s not the conclusion proposed by the author, Doug Henwood. Henwood argued, while citing the ASCE, that the United States is failing to properly invest in infrastructure. He suggests:
In simple English, the public sector is barely investing enough to keep up with normal decay, let alone doing anything to improve things.18
Henwood then provides a chart showing the opposite: nearly eight decades of positive net public investment. The chart shows, decade after decade, total public investments in infrastructure that exceed the amount lost to depreciation. In simple English, even though we now must pay to maintain more than 80 years of public infrastructure – much of it with a negative real return – we continue to build even more.
The CBO only looked at the impact to the federal budget. It didn’t consider the impact on state and local governments, which is far worse. While the federal government experiences a general increase in revenue from an overall increase in economic growth, that’s not necessarily true for local governments, which rely more on fees, property values, and sales taxes.
And while getting a lower share of the revenue from new growth, local governments assume nearly all the responsibility for the long-term maintenance of new infrastructure. Those costs accelerate over time, while the tax base – built to a finished state – stagnates by design.
It’s one thing for the federal government to play this game, but it’s quite another for local municipalities. Whether they should be believed or not, there are at least economic theories for national governments to run perpetual deficits, print money, and shun savings. There are no credible approaches, or even potential mechanisms, for cities to operate in this way.
We started with an approach to city-building based on thousands of years of trial and error experimentation, a method that – while not necessarily efficient in its day-to-day operation – was stable, adaptable, and resilient. We now have a new, experimental approach, one where we make transformative investments based on our cultural desires, wrapping them in a veneer of intellectual theory and propaganda math.
The Infrastructure Cult is a byproduct of our approach, not its cause. To fully understand where we are, it’s important to understand the fundamentals of why we made the transition from a bottom-up development pattern based on strong neighborhoods to a development approach predicated on top-down infrastructure spending.
Notes
1 https://krugman.blogs.nytimes.com/2016/02/27/the-cases-for- public-investment/.
2 http://larrysummers.com/2017/01/17/the-case-for-a-proper-program-of-infrastructure-spending/.
3 https://obamawhitehouse.archives.gov/the-press-office/2010/10/11/remarks-president-rebuilding-americas-infrastructure.
4 https://www.cnn.com/2015/11/29/politics/hillary-clinton- infrastructure-spending/index.html.
5 https://www.cnbc.com/2017/02/27/trump-pledges-to-spend-big-on- infrastructure.html.
6 https://news.gallup.com/poll/226961/news-public-backs- infrastructure-spending.aspx.
7 Mineta Transportation Institute, http://transweb.sjsu.edu/research/what-do-americans-think-about-federal-tax-options-support-public-transit-highways-and-0.
8 https://www.asce.org/uploadedFiles/Issues_and_Advocacy/Our_ Initiatives/Infrastructure/Content_Pieces/failure-to-act-transportation- report.pdf.
9 Ibid.
10 https://w
ww.bloomberg.com/news/articles/2011-08-04/initial-claims-for-u-s-unemployment-benefits-fell-last-week-to-400-000.
11 https://www.in.gov/indot/files/LSIORB%20Project%20Post- Construction%20Traffic%20Study_Final.pdf.
12 https://archpaper.com/2018/11/ohio-bridges-project-louisville- kentucky/.
13 https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51628-Federal_Investment-OneCol.pdf.
14 http://larrysummers.com/2016/07/14/even-the-best-umps-occasionally-blow-a-call/.
15 https://www.nytimes.com/2016/08/08/opinion/time-to-borrow.html.
16 https://www.strongtowns.org/journal/2016/8/23/makes-us-richer.
17 http://larrysummers.com/2016/07/14/even-the-best-umps-occasionally-blow-a-call/
18 https://www.jacobinmag.com/2017/09/infrastructure-crumbing- public-sector-spending.
5
Growth or Stability
Peasants in medieval England participated in a common-field farming approach that consisted of three great fields. In any given year, the great fields would be designated for wheat or barley, or were left fallow in a rotation understood to maintain optimal soil conditions. By foregoing immediate production and giving a field time to recover, overall yields would be more stable and secure. It was a tradeoff between short-term production capacity and long-term stability, with the peasants opting for stability.
What is more interesting is how these great fields were subdivided among the peasants. Instead of each having their own contiguous section, each peasant would have up to a dozen scattered plots throughout. They would tend to each of these, shunning a consolidation of holdings for an approach that involved burning precious calories walking between plots.
A similar approach has been witnessed in modern times in the Andean mountains of Peru. There the subsistence farmers would likewise scatter their plots over a large area, walking long distances in between to tend to each one. Development experts studying this situation concluded that the Peruvians were paying “intolerably high” costs for all this inefficiency, something more advanced people would not do.
The peasant’s cumulative agricultural efficiency is so appalling . . . that our amazement is how these people even survive at all.1
The expert recommendation was to create a land swapping program so these seemingly uneducated, backward peasants could consolidate their holdings and, through improved efficiencies, realize more of the fruits of their own labor.
This was reported in a journal article by researcher Carol Goland, who, with a level of humility not seen in the development experts, sought to understand why peasants would scatter their plots in this way. What she discovered by asking – and then confirmed through measurement and calculation – was that spreading plots is a risk management strategy. In any given year, one plot may be randomly wiped out. Having enough plots, and having them spread out, ensured the peasant family wouldn’t starve.
Geographer and historian Jared Diamond examined Goland’s research in his book The World Until Yesterday. He notes that consolidation of holdings would improve efficiency. Peasant farmers could grow more food using fewer resources and less energy, but they would be – to quote the adage – putting “all their eggs in one basket.”
If your time-averaged yield is marvelously high as a result of the combination of nine great years and one year of crop failure, you will still starve to death in that one year of crop failure before you can look back and congratulate yourself on your great time-averaged yield. Instead, the peasant’s aim is to make sure to provide a yield above starvation level in every single year, even though the time-averaged yield may not be highest.2
What the efficiency-obsessed development experts didn’t appreciate was how fragile their consolidation strategy would make life for the peasant farmers. Instead of being ignorant, the peasants understood a spooky wisdom, insights gained over many lifetimes of trial and error experimentation. The farmers who didn’t scatter their plots died. Those who didn’t have enough plots also died. The farmers who survived had lots of scattered plots, a strategy for survival they passed on as traditional wisdom.
The development experts were trying to meet a single objective – increasing efficiency – while the peasants were forced to harmonize many competing objectives in an infinite game, one where survival was the ultimate constraint.
Where Does Strength Come From?
The Infrastructure Cult can recommend Americans spend $2.2 trillion at the federal level in order to avoid $1 trillion in local losses because they are focusing on a tiny set of objectives, and not attempting to harmonize many competing priorities. There are understandable reasons for why this myopia developed. I’m going to touch on some of them, but I want to preface that by giving a clear statement on my beliefs.
As an unprovable article of faith, I believe that a financially strong national economy is the byproduct of having financially strong cities, towns, and neighborhoods. I do not believe the opposite: that our cities will be financially strong and healthy if we can only create a strong national economy.
In short, I believe that economic strength is built from the bottom and works its way up, like a foundation supporting a structure. I do not believe that a focus on success at the national level will result in enduring, fine-grained prosperity in our local communities.
I start here with my beliefs in acknowledgment that any conversation about economics today is ultimately a conversation about what one believes. Economics has become our secular national religion, with economists being the shamans of our time. They peer into the statistical entrails whenever we need a one-decimal-point estimate of next year’s GDP. They consult disparate signs when we must know whether we should prepare for inflation or deflation.
As within any diverse culture, there are economic priests for all beliefs and attitudes. If you search, you’re going to find ones you like and dislike, with no honest way to discern between them other than weighing them against your own values.
My goal here isn’t to change your economic religion. What I want to convey are the serious tradeoffs that come with a centralized, nationalized economic strategy. We can have national growth and that has some obvious, positive benefits, but in experiencing growth in that way, we sacrifice some of our local stability. We can increase our local stability, but only if we are willing to sacrifice some national growth.
If we’re to work together at the local level to make our places stronger and more prosperous, we’re going to find ourselves, at times, purposefully swimming against the currents of national economic policy.
Depression Economics
I’ll start with World War I, arguably the greatest turning point for humanity in the post-Enlightenment. The world was one way and then, four and a half years later, it was another. Empires dissolved, monarchs deposed, treasuries drained, and a new experiment in Bolshevism undertaken. It’s hard to understate the depth of impact that mechanized killing at such a grand and futile scale had on cultures everywhere.
In the early years of the war, American banks made huge loans to England and France, who used that money to buy war materials, mostly from American companies. The transfer of wealth from Europe to America would set the stage for the next hundred years. When the United States declared war on Germany in April of 1917, it had a small army barely capable of handling border skirmishes. By the end, millions had been drafted into service. From an economic standpoint, this was all extremely stimulative.
The end of the war kicked off what has become known as the Roaring Twenties, a period of unprecedented prosperity preceding the Great Depression. This was a decade of progressive social policies, technological advances, and easy money. Banks loaned massive fortunes into existence for stock market speculation, a mania that some powerful people tried to curtail but which in the end took on a life of its own, covering up some serious structural problems in the underlying economy.
The fault lines began to be painfully exposed after the huge stock market decline in October 1929, setti
ng off the Great Depression. The interesting thing about the Great Depression is that nobody at the time understood why it happened. We still don’t, although many economic denominations claim to have revelatory insight. There were proximate causes to be certain, but it ultimately was the breakdown of a complex system and, thus, any analysis defies a simple cause and effect explanation.
Worse than not being able to point to a cause, there was no clear path to getting out of it. While President Herbert Hoover believed – as many did then and still do now – that the economy would self-correct in time, what he didn’t appreciate is that the self-correction of a complex system can be a long and brutal process. And there is no reason to assume it will correct back to anything recognizable. Or desirable. For a representative republic, this belief – right or wrong – seems impossible to adhere to in difficult times.
The New Deal policies of Franklin Roosevelt embraced an attitude of active, large-scale intervention in the economy. Since the exact cause of the hardship was unknown, and the cure even more elusive, the idea was to keep trying things until the economy got better. This generally meant attacking the acute symptoms, particularly unemployment, with national work programs and other centrally directed initiatives.
My late grandfather was a boy during the Great Depression. He spent part of it living with a neighbor family, exchanging his labor for sharing the family’s meals and sleeping in the barn. He would go on to join the Marines and be one of the first Americans into Nagasaki after the second atomic bomb was dropped. No weakling, he once told me that he “would be dead” without Franklin Roosevelt and the New Deal. That seemed wrong to me, but I was in no position to argue with him.
With his response to the Depression, Roosevelt was following the economic theories of John Maynard Keynes. One of the truly great minds of the twentieth century, Keynes identified a paradox that has become orthodoxy: Although cutting back on spending during a difficult time was logical for an individual, when everyone did likewise, things quickly went from bad to worse. Called the “paradox of thrift,” the corrective response was for the government to step in and stimulate the economy, filling the void left by declining personal spending.
Strong Towns Page 9