Leonhardt on investment

By John H. Cochrane.

"David Leonhardt's pean to investment in the Sunday NY Times Magazine starts well:

A cross-country trip today typically takes more time than it did in the 1970s. The same is true of many trips within a region or a metropolitan area....Door to door, cross-country journeys often last 10 or even 12 hours.

Compare this stagnation with the progress of the previous century. The first transcontinental railroad was completed in 1869... revolutionizing a journey that had taken months. People could suddenly cross the country in a week. Next came commercial flight... Finally, the jet age arrived: The first regularly scheduled nonstop transcontinental flight occurred on Jan. 25, 1959, from Los Angeles to New York, on a new long-range Boeing jet, the 707....

In the more than 60 years since then, there has been no progress. Instead, the scheduled flight time between Los Angeles and New York has become about 30 minutes longer.  Aviation technology has not advanced in ways that speed the trip, and the skies have become so crowded that pilots reroute planes to avoid traffic. Nearly every other part of a cross-country trip, in airports and on local roads, also lasts longer. All told, a trip across the United States can take a few more hours today than in the 1970s

(If you want to skip to the snark, it's in "review" below.) 

On the surface too, 

In 1969, Metroliner trains made two-and-a-half-hour nonstop trips between Washington and New York. Today, there are no nonstop trains on that route, and the fastest trip, on Acela trains, takes about 20 minutes longer than the Metroliner once did. Commuter railroads and subway lines in many places have also failed to become faster. When I ride the New York City subway, I don’t go from Point A to Point B much faster than my grandparents did in the 1940s. For drivers — a majority of American travelers — trip times have increased, because traffic has worsened. In the California metropolitan area that includes Silicon Valley, a typical rush-hour drive that would have taken 45 minutes in the early 1980s took nearly 60 minutes by 2019. 

Why?

Why has this happened? A central reason is that the United States, for all that we spend as a nation on transportation, has stopped meaningfully investing in it.... Historically, the most successful economic growth strategy has revolved around investment. It was true in ancient Rome, with its roads and aqueducts, and in 19th-century Britain, with its railroads. During the 20th century, it was true in the United States as well as Japan and Europe. 

The latter is not quite true. The most successful economic growth strategy is productivity, gained from new ideas embodied in new products and new companies. But it would be quite useful to get from place to place faster. 

Leonhardt makes a decent case for government investment in basic research and public goods: 

Investments are expensive for a private company, and only a fraction of the returns typically flows to the original investors and inventors. Despite patents, other people find ways to mimic the invention. Often, these imitators build on the original in ways that are perfectly legal but would not have been possible without the initial breakthrough. Johannes Gutenberg did not get rich from inventing the printing press, and neither did Tim Berners-Lee from creating the World Wide Web in 1989....

The earliest stages of scientific research are difficult for the private sector to support. In these stages, the commercial possibilities are often unclear. An automobile company, for example, will struggle to justify spending money on basic engineering research that may end up being useful only to an aerospace company. Yet such basic scientific research can bring enormous benefits for a society. It can allow people to live longer and better lives and can lay the groundwork for unforeseen commercial applications that are indeed profitable.

True but overstated. We might see a lot more private investment if we didn't tax its returns after all. A perfectly logical case for eliminating corporate income taxes and individual taxes on investment returns follows, but of course you won't hear it in the pages of the NYT.

He goes on to laud military spending for its speeding of technical progress. A perfectly logical case for much larger military spending also follows. 

Yes, 

Without a doubt, government officials make plenty of mistakes when choosing which projects to fund. They misjudge an idea’s potential or allow political considerations to influence decisions..

He excuses these, a bit too quickly I think:

Yet these failures tend to be cheap relative to the size of the federal budget, at least in the United States. (The risks of overinvestment are more serious in an authoritarian system like the old Soviet Union or contemporary China.) Even more important, a few big investment successes can produce returns, in economic growth and the resulting tax revenue, that cover the costs for dozens of failures. IBM and Google can pay for a lot of Solyndras.

Without a Cold War it is easy to throw immense down ratholes. More on that coming. 

Just as important, government can reduce its involvement as an industry matures and allow the market system to take over. After the government creates the initial demand for a new product, the sprawling private sector — with its reliance on market feedback and the wisdom of crowds — often does a better job allocating resources than any bureaucratic agency.

I'm grateful for the acknowledgement, but though the government can, will it do so? Car companies are headed down an infernal abyss of crony-capitalism. Energy subsides do not seem headed for free market Nirvana. Tech companies are becoming government controlled. 

Education also fits the definition of a program that requires spending money today mostly to improve the quality of life tomorrow. In the middle of the 20th century, education was the investment that turbocharged many other investments.

Yes. An eloquent case for education follows.  And education seems the poster child for how the government can send endless money down larger and larger ratholes to no effect. 

The stagnation of investment does not stem only from the size of government. It also reflects the priorities of modern government, as set by both Republicans and Democrats. The federal government has grown — but not the parts oriented toward the future and economic growth. Spending has surged on health care, Social Security, antipoverty programs, police and prisons. (Military spending has declined as a share of G.D.P. in recent decades.) All these programs are important. A decent society needs to care for its vulnerable and prevent disorder. But the United States has effectively starved programs focused on the future at the expense of those focused on the present.  ...

This great American stagnation has many causes, but the withering of investment is a major one.  

Yes. 

Review:

At this point, the essay could easily have segued straight in to a techno-optimist manifesto, like the eloquent one posted by Mark Andreesen. Certify supersonic planes! Hyperloop. A rapid push for self-driving cars. Repeal Davis-Bacon, and other measures that drive up costs. Reform zoning laws and environmental review. Sure, increase federal research and R&D spending, but reform it as well. Driving it all, get back to energy abundance with a vastly deregulated nuclear regulatory commission. Focus transportation on speed. (It's a tragedy that we build light rail and subway lines with no express trains, so they take longer than totally jammed freeways. Could it all be just for show?) 

It did not. Instead, too predictably for The New York Times, it went on to cheer "Bidenomics," 

President Biden has made investment the centerpiece of his economic strategy — even if that isn’t always obvious to outsiders. He has signed legislation authorizing hundreds of billions of dollars to rebuild the transportation system, subsidize semiconductor manufacturing and expand clean energy. These are precisely the kinds of programs the private sector tends not to do on its own. All told, Biden has overseen the largest increase in federal investment since the Eisenhower era. Notably, the infrastructure and semiconductor bill both passed with bipartisan support, a sign that parts of the Republican Party are coming to question the neoliberal consensus. As was the case during the 1950s, the threat from a foreign rival — China, this time — is focusing some policymakers on the value of government investment.

Just about every word of this epitomizes why we are in the sorry state we are. The Biden Administration's Federal Highway Administration declared (see previous blog post)  that none of the "infrastructure'' money would be used to expand road capacity, or, most scandalously, "have significant impacts to travel patterns!"  Rebuild, perhaps, but not if it solves any of the problems in the first paragraph. No, the private sector will not "subsidize semiconductor manufacturing." Wasn't that exactly the sort of activity that Leonhardt just said is best for the private sector to do? Semiconductor manufacturing is doing just fine abroad. The massive money is earmarked to bring it to the US, where we will do it more expensively. This is simple protectionism on steroids; do to chip manufacturing what the Jones Act did for the Merchant Marine and sugar subsidies do to them. "Expand clean energy" with mind-boggling subsidies and protection -- on the order of a Trillion dollars, largely for current generation battery powered electric cars, which save no carbon, and which China can also make more cheaply if you care about the environment. 

And most deeply, US chips and green energy subsidies don't make anything cheaper, faster, or better. They  just do what we already do in the US, at vastly greater cost, and in a different way. Even if electric cars did save carbon, they would not get you to the airport any faster. 

The problem with US public investment is not just lack of money. It is that the money we do spend goes down ratholes, so not spending is wise. Public teacher unions that deliver generations of children, mostly already disadvantaged, who cannot read or count. $4 billion dollar per mile subways. Leonhardt mentions other countries' success with high speed trains, without mentioning the poster child for all that is wrong with US public investment: the California railroad. 15 years and counting, $100+ billion dollars, not a mile of track laid yet. SNCF, the French state railroad company smelled so much rot it wouldn't touch the project.  

If it were not so perfectly obvious to voters that money will be wasted, they might support a lot more investment."