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 among economists was that the effect of public investment on subsequent economic output was at best extremely low, and at worst had 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:
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.
– Peter Van Doren, the editor of Regulation, is a senior fellow at the Cato Institute. Chris Edwards is the director of tax policy Studies at the Cato Institute.