Infrastructure or entitlements?

Over at Econlog I have a new post praising Hong Kong, which I recently visited. (BTW, I’d love to discuss the Mont Pelerin Society meeting I spoke at (which was excellent) but am not allowed to–it’s off the record.)  At Econlog I positively gushed about the Hong Kong infrastructure, which was recently ranked number one in the world.

On the other hand the Bible teaches us “everything in moderation.”  And so does economics (corner solutions are rarely optimal.)  So maybe Hong Kong is spending too much money on infrastructure.  (This discusses a proposed third runway for the airport):

Having been happy to see white dolphins made the centre of opposition and having seen this opposition vanish on schedule, the lobbyists reasoned that the runway would be certain to go ahead. Events are now falling right in line with that game plan.

As a fall-back ploy, however, they also came up with the stratagem of saying that we must first decide whether we need a third runway and only then discuss the funding of it.

It is somewhat akin to my saying that I must first decide whether I really need a Ferrari and only then look at how I will raise the money for it.

It’s a great idea if I can then say that I can’t afford it and someone else must pay, as the lobbyists think they can make taxpayers pay for the third runway. The purchase has been irreversibly determined – too bad for the taxpayer, too bad for the people who must pay for my Ferrari.

And if the lobbyists say the comparison is inapt, as I don’t really need a Ferrari, well, neither did they need to clog our runways by subsidising minor airlines to operate small aircraft to minor mainland towns in competition with Shenzhen. Their cynicism extends to misuse of the facilities we bought for them.

The fact is that we immediately take into account the cost of anything we want to buy in the decision of whether to buy it or not, and when that cost is HK$200 billion, as in the latest projections for the third runway, it is rank negligence to separate the cost from the purchase decision.

Think about it. Recently our government rejected (but has not yet admitted doing so) a scheme to pay everyone over the age of 65 a pension of HK$3,000 a month. I myself thought it a poorly considered scheme, but I accept that old-age poverty is a problem.

Now let us assume that we put HK$200 billion into an old-age investment fund and target a return of 2 per cent a year, which is not high in ordinary times.

This would yield HK$4 billion a year, enough to pay 111,000 old people that pension of HK$3,000 a month, and we could keep doing it year after year without touching the capital. It would go a long way towards addressing the needs of our indigent elderly.

Should we do it? Would it make more sense for use of the money than building a third runway so that our airport can keep competing with Shenzhen in microlight traffic?

I accept no answer from the third-runway lobbyists. Their only stance can be that we must first decide whether to pay 111,000 people HK$3,000 a month and only then discuss how we would fund the scheme.

There is only one way to do things here. It is to fold a share of the cost of that runway into the airfare of every air traveller who uses our airport. Any investment banker can tell the lobbyists how to do it. But they won’t. People would then go to Shenzhen for microlight flights, and our two runways would be enough again.

That piece hints at corruption, with powerful special interest groups like builders and aviation overriding the broader interests of the elderly.

My first reaction on reading this essay was that a social security system for the poor must surely cost more than a runway; even more than twice as much, if you prefer to double the payments to $6000/HK dollars per month (which is $800US.) The problem is that once you start providing public pensions, you end up discouraging people from saving. You end up with a country where most people have earned really high incomes by international standards (even adjusting for cost of living), but were somehow unable to put money away for retirement. A country where even people making $100,000/year somehow find it impossible to save. In other words, you’ll end up like the US. There won’t be 111,000 Hong Kongers in need, there’ll be 2 million elderly “in need.”

But then I did a bit of research, and discovered that Hong Kong instituted a compulsory saving scheme for retirement in 2000.  Presto!  No more moral hazard problem.  Yes, by all means divert the money from the runway to the elderly poor, who built modern HK with their hard work. It’s a no-brainer for a utilitarian.

And yes, you can have too much infrastructure.

PS.  The discussion of the Golden Mean reminds me of this remark by Thomas de Quincey from On Murder Considered as One of the Fine Arts:

No, upon my honor””no. And that was the very point I wished to argue for your satisfaction. The truth is, I am a very particular man in everything relating to murder; and perhaps I carry my delicacy too far. The Stagirite most justly, and possibly with a view to my case, placed virtue in the  Ï„ò µÎµ´ÏƒÎ¿Î½ or middle point between two extremes. A golden mean is certainly what every man should aim at. But it is easier talking than doing; and, my infirmity being notoriously too much milkiness of heart,  I find it difficult to maintain that steady equatorial line between the two poles of too much murder on the one hand and too little on the other. I am too soft; and people get excused through me—nay, go through life without any attempt being made upon them—that ought not to be excused.  I believe, if I had the management of things, there would hardly be a murder from year’s end to year’s end. In fact, I’m for peace, and quietness, and fawningness, and what may be styled knocking-underness. A man came to me as a candidate for the place of my servant, just then vacant.  He had the reputation of having dabbled a little in our art; some said, not without merit. What startled me, however, was, that he  supposed this art to be a part of his regular duties  in my service, and talked of having it considered it his wages. Now that was a thing I would not allow; so I said it once, “Richard, (or James as the case might be),  you misunderstood my character.   If a man will and must practice this difficult (and, allow me to add, dangerous) branch of art— if he has an overruling genius for it—why, in that case, all I can say is that he might as well pursue his studies whilst living in my service as another’s. And also I may observe that it can do no harm either to himself or to the subject on whom he operates that he should be guided by men of more taste than himself. Genius may do much, but long study of the art must always entitle a man to offer advice. So far I will go—general principles I suggest. But, as to any particular case, once for all I will have nothing to do with it. Never tell me of any special work of art you are meditating””I set my face against it in toto. For, if once a man indulges himself in murder, very soon he comes to think little of robbing, and from robbing he comes next to drinking and Sabbath-breaking, and from that to incivility and procrastination. Once begin upon this downward path, you never know where you are to stop. Many a man dated his ruin from some murder or other that perhaps he thought little of at the time. Principiis obsta“”that’s my rule.” Such was my speech, and I have always acted up to it; so, if that is not being virtuous, I should be glad to know what is.



16 Responses to “Infrastructure or entitlements?”

  1. Gravatar of David R. Henderson David R. Henderson
    20. September 2014 at 09:52

    Scott, The way to comply with the Chatham House rule is to:
    (1) talk about what you said: this is completely legitimate, and
    (2) when you want to attribute something to someone else, get that person’s permission.

  2. Gravatar of BC BC
    20. September 2014 at 10:37

    Why are all or almost all large commercial airports, as far as I know, owned by governments? Airports are both rivalrous and excludable and, thus, are not public goods. What would be the argument against auctioning off airports to private ownership? (“Auction” includes taking the Airport Authority public in an IPO and selling the government’s shares over time.)

    Are airports even natural monopolies, e.g., is one big airport in a city better than two small ones? Answer this question the next time you are caught in traffic while driving to an inconveniently located airport.

  3. Gravatar of Major.Freedom Major.Freedom
    20. September 2014 at 10:45

    Making the whole world composed only of city states would be a vast improvement.

  4. Gravatar of Brett Brett
    20. September 2014 at 11:40


    There’s only a finite amount of airspace overhead, and some fixed costs – such as necessary ground and air traffic control staff – that every airport needs. The more airports you have, the more you have a coordination problem between them. That’s not even getting into residential complaints about planes going overhead.

    It’s the type of thing where all the necessary restrictions push you towards one or two locations, which in private hands is a major risk for rent-extraction. It’s like if you auction off the water system to an unregulated private owner – the sheer difficulties involved in putting up an alternative system of plumbing and water distribution means that you could have a lot of rent extraction for many years.

  5. Gravatar of benjamin cole benjamin cole
    20. September 2014 at 16:44

    Excellent blogging.
    The question of saving, both for the individual and for the larger economy, is fascinating. I think saving is good – but is it good for the whole economy? What if there is a global glut of savings? Should the Japanese save more?

    I propose a holiday on FICA payroll taxes and that the Federal Reserve print up the money and give it to the Social Security and Medicare systems. QE-financed Social Security and Medicare. Is that saving, or not?

  6. Gravatar of Michael Byrnes Michael Byrnes
    20. September 2014 at 17:43


    Here is a great interview with Michael Woodford, who discusses NGDPLT and the Evans rule among other things – I suspect you’d agree with him on quite a bit of it:

    Found it via Bill Woolsey’s blog – he has a couple of brilliant posts up, including a response to your back and forth with Lars Christenson on whether the Fed is doing implicit 4% NGDPLT:

    And another on whether “injection effects” are a concern under an NGDPLT regime:

  7. Gravatar of Rajat Rajat
    20. September 2014 at 19:10

    Without knowing exactly what or who the blogger (Jake) is responding to, I presume that by ‘funding’, he means ‘who pays’. I think that is a separable question from whether a monopoly asset should be extended. If a cost-benefit analysis shows that the benefits of a third runway well-exceed the costs (perhaps a big ‘if’), then the runway should go ahead and who pays can be determined separately. Infrastructure investments that earn positive net economic returns do not entail an opportunity cost in the same way as entitlement spending, which mainly acts to transfer wealth rather than make it. Perhaps Jake is just saying that the third runway would not yield net economic benefits because it would just divery low-value traffic from elsewhere; but if that’s his view, it can be tested at the CBA stage.

  8. Gravatar of Rajat Rajat
    20. September 2014 at 19:58

    Michael B, it’s interesting that Woodford says that on the Evans rule, “I think they [the FOMC] were hoping things would evolve in a way that no tension between the two criteria arose, and that turned out to be right, but it was a gamble. If, say, it had begun to appear that the inflation threshold could be breached before we were anywhere close to the unemployment threshold, there would have been a lot of uncertainty about how policy might develop.”
    Arguably, a tension has evolved and uncertainty has developed, because the unemployment rate has fallen farther and faster than one might expect given the rate of inflation. If the FOMC were solely concerned about PCE inflation, it’s unlikely they would be flagging (further) tightening at this point.

  9. Gravatar of david david
    20. September 2014 at 21:57

    What is the economic value of having industrial infrastructure independent of volatile politics in the mainland?

    The game in Hong Kong and Singapore is persuading the Chinese to launder their money through infrastructure projects, in any case. It is accepted that there are mainland investors who will do so even at a massive loss, if it will allow them to move funds out of China.

  10. Gravatar of ssumner ssumner
    21. September 2014 at 05:21

    Thanks David.

    BC, A good example is the NYC area, which has three airports–all lousy.

    Many European airports have been privatized.

    Brett, Try visiting Europe sometime and checking out their airports.

    Rajat, Don’t forget that the “cost” of a project depends to some extent on who pays for it. For instance, there is a deadweight cost to taxation, so if you want to raise $200 billion from taxpayers ($25 billion US) it might cost $300 billion, when including the excess burden of taxes.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. September 2014 at 07:09

    In fact, bridges and highways are provided privately around the world. Even in France, where Communists had the idea of allowing private enterprise to build the Millau Viaduct;

    Just another business venture, as all similar projects ought to be, if we’re interested in efficiency.

  12. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. September 2014 at 08:01

    “BC, A good example is the NYC area, which has three airports-all lousy.

    Many European airports have been privatized.

    Brett, Try visiting Europe sometime and checking out their airports.”

    It’s true that most, if not all, major airports in Europe are a better experience than NYC area airports (JFK, LaGuardia, Newark). So, what’s wrong? I doubt that most airport spending gets picked up as government spending or the fees that go to support them get picked up as taxes. Most airports around the world are financed through user fees (rents, landing fees and taxes on tickets) and not from general revenues. What you really want to look at would be the amount of money spent on those airports versus what you get for your money. It’s pretty difficult to make a good comparison of spending on airports around the world (that’s probably not accidental); but, in eyeballing just the airline ticket taxes and landing fees, it appears that the US is no bargain. Landing fees are highest in Japan in dollar terms, but LaGuardia is right up there and more expensive than European airports.

    While several European airports have recently been partially privatized, those airports have, in my experience, always been better. Take Schiphol, one of my favorite and most frequently used airports. It was partially privatized in 2008, but ever since I first landed there in 1973, it has been a great airport.

    The problem here for the United States is much the same for schools (i.e, education, not merely bricks) and airports and all other types of public infrastructure. No matter how much the US spends, a lot of it seems to get wasted. There seems to be a lot of inefficiency and downright corruption that Americans are not willing to face up to. It’s a sad irony, but the more money you just throw at those things, the worse it gets.

  13. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. September 2014 at 08:36

    This is off topic, Scott, but I thought you might find the following post interesting:

    It would be interesting to have your thoughts on the same subject. FWIW, I’ve occasionally scanned the comments at TBP, and the quality here is definitely better (on average, of course). 🙂

  14. Gravatar of TravisV TravisV
    21. September 2014 at 21:18

    Sept. 10th: “”There’s already a lot of money in the pool, and we can’t rely on monetary stimulus to spur economic growth,” said China Premier Li Keqiang overnight after the M2 money supply rose 12.8% in August, down from 13.5% in July. His comments, says one money manager, suggests the economy isn’t in good shape, but that the government will be focusing on reform rather than short-term boosts.”

  15. Gravatar of Nick Nick
    22. September 2014 at 04:29

    Yes! I agree with almost all of those comments. Even if regulated monopoly or semi-privatization is more optimal than central control (hard to determine for sure) it is pretty clear that there is something else the USA is doing worse and it would probably transfer over to the new format.
    As to comments and trolling on the web, TBP just got too big for comments. A blog a ton of people visit for investing advice is just too juicy a target.

  16. Gravatar of ssumner ssumner
    22. September 2014 at 04:56

    Vivian, Thanks for that link, I agree with most of the comments by Ritholtz.

    Good point about the US and infrastructure. Maybe we should see what the private sector could do–it can’t be worse than what we have.

Leave a Reply