Thursday, July 24, 2014

Rediscovering the Road Less Traveled

It is no secret that most Americans want to spend part of their short time on this planet doing fun things in interesting places. That means they want to travel, and to do so safely, quickly, and, ultimately, efficiently. Unfortunately, getting around this great nation is becoming ever more dangerous, time consuming, expensive, and even unfair.

Transportation woes already accost Americans almost daily and more troubles loom on the horizon. The vast bulk of America’s transportation infrastructure -- the airports, bridges, canals, ports, roads, railroads, and tunnels that speed Americans to their vacation destinations and, more importantly, also allow them to trade with other Americans and the rest of the world -- is aging faster than the government can fix it. The federal highway trust fund is essentially bankrupt, kept temporarily afloat with legislative bandages while commute times and accident rates remain sky high and bridges collapse due to disrepair and poor management.

The best solution to the crisis is to privatize the nation’s transportation infrastructure, i.e., to sell (or lease) it to private companies. Done properly, privatization would make traveling the country safer, faster, more efficient, and fairer, much as it was, adjusting for changes in technology, in the nineteenth century.

For the last century or so, governments, especially the one in Washington, have financed and controlled the bulk of the country’s transportation infrastructure. So it seems natural to look to the federal government to control and finance our bridges, roads, railroads, and so forth. But there are economic and moral reasons why national ownership of transportation infrastructure is in crisis and why Congress cannot find a fix.

One government-based solution is to increase fuel taxes at the pump but that is unfair because such taxes are regressive – they fall hardest on the poor – and inefficient because the number of gallons spent on fuel is a poor proxy for how much wear a vehicle places on roads and bridges, which is mostly a function of speed, weight, and number of axles.

Government could also pay for infrastructure out of general tax revenues but that is unfair to those who do not use the infrastructure. Why should South Dakotans subsidize Amtrak, which has a total of zero stations in their state? Likewise, why should someone who does not own an automobile pay to fill potholes in I-90? Why can’t Americans pay for the infrastructure they use, just as they do with most other things in life?

A private transportation system would be “pay as you go.” That means tolls but lower ones than you might expect. Most tolls collected today go not to private companies but to government agencies that waste them (Google “corruption” and “Pennsylvania Turnpike” for an inkling) or use them to subsidize other parts of the transportation system (for example, Golden Gate Bridge users subsidize Bay area ferry and bus service).

New technology makes toll collection cheap and easy, eliminating one of the major rationalizations of transportation infrastructure nationalization in the early twentieth century. (Tolls can even be adjusted in real time to alleviate congestion.) The differences between competitive and monopolistic markets are better understood today, as well, reducing the risk of “highway robbery” at the tolls. Even local bridges, roads, and tunnels could be privatized, as many were in the nineteenth century.

Amtrak could also be privatized. Passenger rail died in this country after World War II because of government over-regulation and its subsidization of the interstate highway system. Railroads will probably never regain their cultural status or economic importance but they can provide efficient service in some congested corridors. Florida, in fact, recently permitted a private company to build and operate a new rail system between Miami and Orlando that looks promising. Even if it fails, however, the burden will fall on its investors, not taxpayers.

Investors want to generate profits, of course, but that does not necessarily, or even often, mean high prices or shoddy products so long as markets remain competitive. Think of all of the wonderful products you consume, from chewing gum to vodka, that stem from the efforts of entrepreneurs backed by private investors or large, publicly-traded corporations. Imagine what those same products would be like if only the government provided them. (If you can’t, look up what consumer products were like in the Soviet Union or other communist countries, if they could be had at all.) 

Why is transportation infrastructure any different from beds, haircuts, or televisions? Private transportation companies will work hard to get you to use their road or mode of transportation by offering better value and that means safer, faster, fairer, and cheaper travel options.

For additional reading, see two publications due out in the next month or so:
Robert E. Wright, “The Pivotal Role of Private Enterprise in America’s Transportation Age, 1790-1860.” Journal of Private Enterprise 29, 2 (Spring 2014), 1-20.
Robert E. Wright, “Specially Incorporated Transportation Companies in the United States to 1860: A Comprehensive Tabulation and Its Implications,” Journal of Business and Economics 5, 7 (July 2014), 249-66.

Thursday, April 17, 2014

Learning from History

Seems like just about every wit to ever put pen to paper, or finger to keyboard, has said something pithy about learning from history yet we, meaning human beings, continue to suck at it. Recently a new scholarly neo-abolitionist journal listed just about every discipline in academe, except history, as under its purview. Not only can history help to reduce the number of people forced to labor on behalf of others, it can help to prevent shipwrecks, like that heart wrenching tragedy in South Korea. How? In Institutional Revolution (2011), economic historian Douglas Allen explains why captains are supposed to go down with their ships -- it incentivizes them to be the best captain they can be, the type of captain who stays sober, pays attention to weather conditions and nautical charts, makes sure that life boats work, people know how to evacuate the ship, etc. Why do you think that commercial airplanes crash so much less frequently than ships sink these days? Airliner pilots are highly unlikely to be able to escape but ship captains, no longer bound by the old rule of being the last on board, escape with regularity.*

Similarly, my Corporation Nation (UPenn 2014) explains why the Left was right to squelch Social Security privatization during the Bush administration. Yep, corporations these days are governed almost as poorly as governments are! The book explains why, while showing how the U.S. came to have so many corporations. It also offers some suggestions on how corporations could clean up their acts. Alas, perhaps due to the high price (which signals scholarly tome in flashing lights), neither the right nor the left has picked up on the book's core message yet, making it almost as disappointing as Fubarnomics, which offered a completely balanced ("hybrid") view of major policy failures such as Social Security, healthcare, higher education, slavery, and the financial crisis. This tells me that most folks are more interested in scoring (largely worthless) ideological "points" than actually fixing these uber-costly messes.

*The latest news reports say that the captain will be arrested. That is a good start but he should not have been rescued until all the passengers were evacuated in the first place.

Monday, February 24, 2014

Kristi Noem's Justice Against Slavery Summit

Attended Kristi's* anti-slavery summit in Sioux Falls So. Dak. this morning. She made sure to meet everyone in the room but it was not a partisan event. No mention of "he who shall not be mentioned" or his administration or any partisan issues. I continue to be impressed by the genuine-ness of the people in the neo-abolition movement!

*We call our Reps, Senators, and other politicians by their first names in South Dakota, as a sign of respect and an acknowledgement of their humanity.

I hated to do it, but I was "that guy" in the back of the room tweeting away. Here are my tweets, in reverse order, and with my editorial comments in brackets. I'm @robertewright if you want to follow:

  1. Hypothesis: and other forms of directly correlated to income or wealth inequality. Econometricians get on it asap!
    Survivor Carrie: all age both gender @ risk. Vulnerability is individual & manifest. 2 see potential vic look in mirror.
  2. FBI guy says SD has too many small counties for effective enforcement.
  3. Crazy guy from [me!] just said in q&a that more attention needs to be paid to history, economics. [Kristi agreed so I put her onto Stan Engerman]
  4. Brittany says "vacating conviction" 4 trafficking victims better than expungement as they should never have been prosecuted in 1st place.
  5. Brittany says So Dak behind on legal front. Absolutely true but laws don't fix things, action does. Pushes uniform law.
  6. Brittany wants stronger laws. Kids trafficked via child welfare system! Doubt she means gibbeting w/o benefit of clergy.
  7. Brittany [Vanderhoof, Polaris Project] on 1st trip to So Dak happy w size of crowd. Turnout in some bigger states only 10. 50ish here.
  8. Carrie 2 explains "guerilla pimping" perpetrated by native american female gangs. Initiation includes gang rape!
  9. Another Carrie [Kerry Stephenson] helps trafficked Amerindians: sex tourism in Sturgis & huntingcamps. Women on IRs particularly vulnerable.
  10. Survivor "Carrie" says her enslavers have not been apprehended but she must speak out, help others, despite risk. Vics are brainwashed.
  11. FBI guy [I may have this wrong. May be Captain Paul Niedringhaus, Minnehaha County Sheriff’s Department? IDK] says they are working both supply and demand sides of the problem. Great! But how many economists are involved?
  12. FBI guy says we all have to work together ... wonder if 5-O [police] could do more if they weren't chasing drug stats?
  13. Speaker #1: "This is an issue we've never faced before." A USD prof [Elizabeth Talbot, PhD, MSW, MS, CSW-PIP, who approached me later to say she does recognize the problem has a past], obviously not an historian. HAS has work to do!
  14. How often do you see politicians, 5 oh [uniformed police], ACLU, nuns, recent college grads, etc. in the same room agreeing with each other?
  15. Attending Rep Noem's antislavery conference in Sioux Falls today.

Friday, February 21, 2014

Inequality for All = An Inconvenient Truth

Yesterday evening (2/20/14), my college showed Robert Reich's documentary Inequality for All to interested students, faculty, and members of the community and had the good sense to ask me to join a post-viewing discussion panel. The format was not shared with me beforehand so I brought a variety of props (one of which I threw across the stage at one point but not at anyone). I can't reproduce the discussion here, but I can share the remarks that I prepared (and did not have the opportunity to read). In short, Reich's name is very Dickensian as he has produced a (albeit liberal) propaganda film and narcissistic memoir best relegated to Billy Joel's "discount rack like another can of beans."

In his new documentary, Inequality for All, Robert Reich, who is no relation of mine by the way, is trying to match the success of Al Gore’s 2006 documentary An Inconvenient Truth. The documentaries are similar in important ways. Growing income inequality, like global climate change, is undisputable and both are clearly problems, by which I mean outcomes that policymakers should strive to mitigate rationally. The magnitude of both problems, however, remains unclear and, more importantly, the causes of both problems remain contested. The causes are the crucial thing because they lead to policy recommendations and possibly to actual policies with real world repercussions. Policymaking is tricky business even when the causes of a problem are clear. When policymakers have the causes wrong they are almost certain to develop the wrong prescriptions. I think Reich’s analysis is off the mark because instead of following the evidence in a nonpartisan manner, as he promises early in the film, he leans heavily on liberal causes. That was a double entendre by the way.
Please allow me to provide an exaggerated example so there is no mistake here. Reich is doing the equivalent of pointing out that sometimes grain mills explode. Sure enough, that is the case, though he exaggerates the extent of the problem by not dropping mills destroyed by military action or other external causes from the data. Then, Reich ascribes grain mill explosions to an excess of bilious humors that increase the amount of phlogiston to the point that an explosion is inevitable. If you have never heard of bilious humors or phlogiston, good for you as they were concepts long ago abandoned by scientists because they were nothing more than conceptual black boxes that could not predict when grain mills would explode or anything else for that matter. Reich has done something analogous here by pointing to a real problem, income inequality, but exaggerating it somewhat and, more importantly, attributing the wrong causes to it.
First, the exaggeration. Reich uses data on Real Wages, which have indeed stagnated since the 1970s. Real total compensation, however, has continued to increase. The difference is fringe benefits, especially healthcare.  Here is the chart, right from the St. Louis Federal Reserve’s FRED data system:

The core problem on the bottom end of the distribution, then, is not the demise of labor unions or low marginal tax rates on the rich but rising healthcare costs. Reich probably blames healthcare costs on quote unquote markets but in fact the core problem is a hybrid of government and market failures, of which the most important are government tax rules, first implemented during World War II, that encouraged the development of health insurance provided via employers. That led to a whole host of problems, including runaway costs and large numbers of uninsured individuals. I analyze the healthcare crisis more fully and offer solutions in two books, Mutually Beneficial and Fubarnomics.
Real wages have stagnated and real compensation increases have slowed because of globalization, which is just jargon for competition. The 1940s, 50s, and 60s were so sweet because the U.S. emerged from World War II not only unscathed but with tremendous productive capacity and hence was able to extract monopoly rents from the rest of the free world and even from the Soviet bloc to some extent. Unions waxed over that period because there was plenty of free money to go around. By the 1970s, however, the monopoly was gone as evidenced by the disintegration of the Bretton Woods system of fixed exchange rates, and Americans had to compete against Europeans and East Asians at both home and abroad. That competition was a good thing for the U.S. economy as it forced Americans to work harder and smarter but it also meant that the expectations of many Americans, especially those who assumed, for reasons that I’ll never quite understand, that an easy life was their birthright, were more Dickensian than Great. (I sincerely hope that you are enjoying the delectable word stew I have created for you today.)
Of course the disappointment of poorer Americans is relative: better to be in the bottom quintile of incomes in the U.S. than in the middle class, even the upper middle class, in most of Latin America, Africa, Central Asia, or Micronesia. But Reich doesn’t want to consider world income distributions even though there is a wonderful little book out about it, The Haves and the Have Notes, by Branko Milanovic, who points out that the global Gini coefficient, a widely used measure of inequality, is 70, far higher than the 45 that the U.S. currently registers.
The Gini coefficient in South Dakota, by the way, is 33, tied for the lowest in the entire nation and similar to that of the western European democracies that left leaners so love. Clearly, there is more to income distribution than just politics but you don’t hear that from Reich, who wants to concentrate on real wages in the U.S. because that allows him to pull out his Keynesian jargon about consumption and the need for a strong middle class, whatever that is. It’s all as much economic voodoo as trickle down economics ever was. Producers have a good idea what the income distribution in their markets is like and respond accordingly. Where income inequality is high, for example, they target a high margin luxury niche and/or make their wares as affordable as possible in a low margin mass niche. Check out C. K. Prahalad’s The Fortune at the Bottom of the Pyramid for details.
            Another inconvenient truth, unitalicized and uncapitalized of course, about Inequality for All is that Reich also fails to adequately explain the movement at the top of the distribution, to wit why the rich are getting richer. Globalization is at play here, too, at least when it comes to top actors and athletes, who now reach audiences that number in the billions. That is just market forces at work and taking Reich at his word that he is not a socialist there is nothing to be done there. Of course the title of the documentary, Inequality for All, belies Reich’s real views. The Pledge of Allegiance reads “with liberty and justice for all” and says nothing about equality. Reich can’t mention liberty, however, because his policies restrict it and he can’t rely on justice because we can’t agree on what it means.
In any event, when it comes to CEOs, market forces are not at play. Reich can’t see that because he conflates markets with corporations, a mistake that many left-of-center thinkers make. Corporations interact with other corporations and with consumers in markets but within themselves corporations are essentially governments and hence subject to politics and power plays. Due to a combination of market and government failures that I explain in detail in my new book, Corporation Nation, the ability of stockholders to minimize managerial rent seeking has waxed and waned over time. Most importantly, it waned after the Great War and after the Fall of the Wall, leading to increased rent seeking by CEOs and other top executives, variables that Reich is completely oblivious to in his infamous bridge graphic. Let me be perfectly clear here: inequality in the U.S. is rising in part because stockholders and governments have, once again, allowed CEOs to determine their own compensation without effective checks or balances.
            The same loss of checks and balances has made Washington rich as it sucks resources from the rest of the nation into its gaping maw. Suburban Washington now boasts several of the counties with the highest per capita incomes in the nation because they are chock full of high level government officials and government contractors. Reich claims that Americans at all income levels don’t want to pay taxes. I counter that Americans happily pay taxes when they know it is going to provide services that they actually need and in a relatively efficient way. Reich wants to restart his so-called virtuous cycle, which by the way is full of non sequiturs and other half truths, by taxing the rich instead of by trimming back government spending. We don’t need to throw more cash into DC, we need a government that uses what it already has more effectively. That means reforming education, including higher education, and not just shoveling more money at the problem. America already spends more per student than most of its peer nations do, it just doesn’t get as much bang for the buck because its schools and colleges don’t teach independent thinking as well as they could. For details, see my Fubarnomics or my Higher Education and the Common Weal: Protecting Economic Growth and Political Stability with Professional Partnerships, which was so radical that it was only published in India.
In conclusion, Robert Reich is right when he says that income inequality is increasing. He is also right that inequality is problematic but due to its negative effect on incentives to work hard and smart not due to kooky Keynesian concepts. Reich’s analysis of causes and hence his policy suggestions are way off base. If we fix corporate governance, healthcare, higher education, and the social safety net, inequality as measured by the Gini coefficient will decrease to the mid-30s of its own accord. If resorting economic freedom doesn’t work, then, and only then, we can think about increasing tax rates, keeping in mind, however, the inconvenient truth that with the free flow of capital globally actually collecting anything over 50 percent is highly unlikely, which is why the marginal rates were reduced in the first place. Thank you and God bless.