Infrastructure spending is Washington's latest cure for the nation's economic ills. In the Washington Post an oped by Emil Henry this week says that conservatives should end their traditional skepticism of government and jump on the government-investment bandwagon. Henry is correct that infrastructure is essential to the operation of a market economy. But he is incorrect to assume that markets can't provide infrastructure, that public infrastructure has been historically crucial for economic growth, or that government infrastructure spending has been too low.
While America debates higher government spending on infrastructure, governments on every continent have sold off state-owned assets to private investors in recent decades. Airports, railroads, energy utilities, and many other assets have been privatized. Heathrow airport in London is privately owned and operated. Air-traffic control services are fully private in Canada. In Italy and France, limited access highways are private concessions funded with toll revenue. In many areas, the U.S. is a laggard in the world on private infrastructure provision.
The issue of whether public infrastructure spending encourages economic growth has been studied extensively by economists. In the late 1980s and early 1990s, some research argued that public capital investments had double the effect of private investment on subsequent economic growth. But those findings were challenged, and the statistical techniques were found to be faulty. By the early 2000s the consensus of economists was that the effect of public investment on subsequent economic output was at best extremely low and at worst no effect at all.
The main problem with current government infrastructure spending is not its magnitude but its lack of efficiency. More roads and transit capacity may or may not make sense depending on whether the benefits exceed the costs. One sure way to find out is to have private provision and user charges. If users are not willing to pay the costs of extra or newer capacity, then calls for taxpayer involvement probably imply subsidy of some at the expense of others rather than efficiency.
Privatization of federal and state infrastructure makes sense for many reasons. First, privatization would reduce the responsibilities of the government so that policymakers could better focus on their core responsibilities, such as national security. Second, there is vast foreign privatization experience that could be drawn upon in pursuing U.S. reforms. Third, privatization would spur economic growth by opening new markets to entrepreneurs. For example, repeal of the U.S. postal monopoly could bring major innovation to the mail industry, just as the 1980s' breakup of AT&T brought innovation to the telecommunications industry.
Here are some of the government businesses and infrastructure that could be privatized:
- Postal Services. The mammoth 685,000-person U.S. Postal Service is facing declining mail volume and rising costs. The way ahead is to privatize the USPS and repeal the company's legal monopoly over first-class mail. Reforms in countries such as Germany and New Zealand show that there is no good reason for the current mail monopoly.
- Air Traffic Control. The Federal Aviation Administration has been mismanaged for decades and provides Americans with second-rate air traffic control. The FAA has struggled to expand capacity and modernize its technology. Canada privatized its ATC system in 1996. It set up a private, nonprofit ATC corporation, Nav Canada, which is self-supporting from charges on aviation users. The Canadian system has received high marks for sound finances, solid management, and investment in new technologies.
- Highways. A number of states are moving ahead with privately financed and operated highways. The Dulles Greenway in Northern Virginia is a 14-mile private highway opened in 1995 that was financed by private bond and equity issues. In the same region, Fluor-Transurban is building and mainly funding high-occupancy toll lanes on a 14-mile stretch of the Capital Beltway. Drivers will pay to use the lanes with electronic tolling, which will recoup the company's roughly $1 billion investment.
- Airports. Nearly all major U.S. airports are owned by state and local governments, with the federal government subsidizing airport renovation and expansion. By contrast, airports have been fully or partly privatized in many foreign cities, including Athens, Auckland, Brussels, Copenhagen, Frankfurt, London, Melbourne, Naples, Rome, Sydney, and Vienna.
- Seaports. Nearly all U.S. seaports are owned by state and local governments. Many operate below world standards because of inflexible union work rules and other factors. A Maritime Administration report noted that "American ports lag well behind other international transportation gateways such as Singapore and Rotterdam in terms of productivity." Dozens of countries around the world have privatized their seaports. One Hong Kong company, Hutchinson Whampoa, owns 30 ports in 15 countries. In Britain, 19 ports were privatized in 1983 to form Associated British Ports.
To sum up, some policymakers think that certain activities, such as air traffic control, are "too important" to leave to the private sector. But the reality is just the opposite. The government has shown itself to be a failure at providing efficiency and high quality in services such as air traffic control. Such industries are too important to miss out on the innovations that private entrepreneurs could bring to them.