August 19, 2012
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Infrastructure is one of the most difficult argument for libertarians to make. What is surprising is the paucity of theoretical justifications for infrastructure. This has come up with Daniel Kuehn ripping on Don Boudreaux for not getting introductory economics, and then going on to make a series of pseudo-economic arguments that, if true, would render traditional cost-benefit analysis useless. I can say all this without even putting the Austrian cap on and citing nothing but my textbooks on CBA and the economics of regulation.
What are the grounds for government intervention?
- Public goods and externalities. This would be the traditional explanation, but it’s very difficult to conceptualize what exactly is not being internalized. Kuehn eventually admits that “So let’s say all roads are private. This is fine. Road use is allocated by tolls, and the marginal cost of building and maintaining a road can be set equal to the marginal willingness to pay for the use of that road. Congestion pricing even becomes more feasible with lots of private tolls. All wonderful stuff.” That is the end of the story if we are economists and not ideologues looking to invent new excuses so you do not need to change your priors.
- Social justice. Wouldn’t this fall disproportionately on the poor? Well yes – especially the rural poor who are being subsidized to live in the middle of nowhere for absolutely no reason. This is what Kuehn is really getting at when he starts going on about this imaginary distinction about why actual demand curves don’t count, so screw it. The “wedge” he is referring to is also known as “money,” but it sounds much less sexy when you phrase it like that. “It’s very plausible that there are lots of people of lower means out there whose benefits would exceed the toll but who really couldn’t pay it five days a week to get to their job, particularly if it means maintaining a car on top of it.” No, it’s not plausible, Daniel. Price theory tells us that is implausible by definition – have you learned price theory? If you are concerned about disproportionate effects on the poor, you increase transfers to the poor when doing this. If you are worried about them blowing that money, you give them transportation vouchers. To go from that to NATIONALIZE is ridiculous.
- Monopoly. Eh, kinda plausible. But that’s grounds for regulation, not nationalization.
- Asymmetric information. Now we’re grasping at straws.
- Business cycles. Still grasping at straws.
There are two counterarguments that have not been made. They are strong enough to maintain skepticism of the libertarian solution, but they aren’t strong enough to really justify the status quo.
- Transaction costs. We need eminent domain to break a few eggs in order to get growth really happening. e.g. Singapore. Still not grounds for keeping the land in government hands once it is seized.
- Empirical data. Economists seem pretty convinced that infrastructure spending, done right, is beneficial to economies. It could be true even if we have no good theoretical understanding of why that is the case. But this could be subsidized better by just offering tax credits for infrastructure. You don’t need to nationalize the damn thing.
In reality, I would be happy if we followed the rubric I’ve given in the past. Have the government do a cost-benefit analysis, audit it with an outside firm, arbitrarily multiply the costs by 10, and do the project if the benefits still outweigh the costs.