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Trump's Bad Economic Reasoning on Infrastructure

Wednesday, March 1, 2017 11:32
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(Before It's News)

Last night’s ""
target="_blank">address to Congress
by President Trump was
devoid of detail on infrastructure investment. But in justifying
his desire to harness $1 trillion of public and private funds for
“new roads, bridges, tunnels, airports and railways”, the President
used two lines of bad economic reasoning sadly all too prevalent in
public debate on this issue.

First was to invoke the building of the interstate highway
system. “The time has come,” Trump declared, “for a new program of
national rebuilding.” The implication: the interstate highway
system was good for the economy, so we should invest more in roads
today – a common rhetorical technique, but one which confuses
average with marginal.

target="_blank">Previous economic research
has indeed found
that the construction of the interstate highway system
substantially boosted productivity for industries associated with
road use. But the same research finds those benefits to be largely
one-offs, meaning this analysis does nothing to inform us about new
decisions. In fact, ""
target="_blank">more recent work
has found that too many new
highways have been built between 1983 and 2003, and that marginal
extensions to the highway system tend not to increase social
welfare, because the cost savings of reducing travel times are
small relative to incomes and prices.

In other words, building a highway system can boost growth.
Building a second highway system? Not so much. Rather than
appealing to grand projects based on historical experience, all new
government projects should stand up on their own merits – ideally
having high benefit to cost ratios and being things that would not
be undertaken by the private sector.

The second mistake was to highlight “creating millions of new
jobs” as an aim or positive of any infrastructure spending. When
the government is investing to build something, it should aim to do
so most efficiently. “Jobs” in this sense are a cost, not a
benefit, and ones “created” only come through the diversion of
resources and opportunities in other parts of the economy.

Upon visiting an Asian country in the 1960s, Milton Friedman is
frequently quoted as reacting to the absence of heavy machinery in
a canal build by asking why the project was being undertaken by men
with shovels. Upon being told it was a “jobs program,” he is said
to have remarked: “Oh, I see. I thought you were trying to build a
canal. If you really want to create jobs, then by all means give
these men spoons, not shovels.”

If one is concerned with improving the economic growth potential
of the economy, then you would base both the selection of projects
and the means of undertaking them according to that objective.
Sadly, when governments are involved, other ambitions (be it
stimulating particular regions, appeasing certain interests,
obtaining political prestige or facilitating observable jobs) tend
to interfere with the stated aim. The constant talk of the benefits
of wise, productive investment is an ambition, rather than
something we should expect.


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