Lambert here: You say “expensive toll roads” like that’s a bad thing!
By Marshall Auerback, a market analyst and Research Associate at the Levy Institute. Cross-posted from Alternet.
President Trump presented his infrastructure plan last week. If you’re keen on the idea of out-of-control privatized utilities gouging customers and manipulating energy markets, or consortia building overpriced, expensive toll roads (until they go bust), then you’ll love the president’s proposals. His mooted public-private partnerships are another variant of socialism for the rich and free market discipline for the rest of us. PPPs are like a religion that offers its adherents the promise of capitalist heaven via tax breaks, subsidized funding, and guaranteed returns, minus the discipline of private bank credit arrangements or potential bankruptcy, the costs of which are invariably borne by a public already experiencing the hell of significantly more restricted access (think toll roads and bridges), higher user fees or “slower lane” traffic (think the end of net neutrality), and the costs of bailouts if and when the venture goes bust.
There is no question that Trump is tapping into a big need for the country when he calls for more public infrastructure investment, but as usual with this president the devil is (literally) in the details. The American Society of Civil Engineers (ASCE) estimates that there are $4.6 trillion worth of needed investments to maintain and upgrade infrastructure throughout the U.S. But the president’s proposed plan offers up a mere $200 billion in direct federal funding over the next 10 years. This is to be complemented with another $1.3 trillion in spending from cities, states, and private investors for a total of $1.5 trillion, which is still massively insufficient relative to the needs outlined in the latest ASCE report card (which currently grades U.S. infrastructure at D+).
So why bother to offer a mere $200 billion figleaf? The paucity of direct federal government funding tells you that this is certainly not going to be a New Deal 2.0. In theory, the involvement of the private sector allows the public sector to transfer the risk associated with delivery, obtain ‘value for money,’ and allows an increased quality of public infrastructure compared to traditional ‘inefficient’ public sector provision, where under-investment is the norm. The PPP literature maintains that access to services and utilities remains equitable and that positive benefits associated with the asset continue to flow onto society. In practice, however, the experience with these types of joint ventures is very different: There are major deficiencies in accountability as public goods are converted into private rents, the transition to which substantially increases personal costs and undermines economic efficiency. Value is extracted from the underlying asset in the form of big salaries to CEOs and board directors, dividend payments to private shareholders, while the promised investment is seldom delivered in full. No private market discipline is enforced on management because in most cases they are given control of what was once a public monopoly, which is simply converted into a private one. It’s rentier capitalism, plain and simple.
Back to first principles: Public infrastructure has long been the backbone of the private economy, as any developer knows. Michael Hudson, distinguished professor of economics at the University of Missouri, Kansas City, notes:
“But it’s not like labor, land, and capital, because the role of public infrastructure is not to make a profit. Its role is to provide public services that are basic for the economy’s living standards and capacity to produce, and to provide these at a subsidized rate. That’s how America got rich and came to dominate the world industrial economy: by publicly subsidizing its basic costs: Low-cost roads, and low-cost other infrastructure.”
A good infrastructure enables the economy to maximize productivity (just think of how much is lost today via endless subway delays or traffic jams on the way to work, as a small example). Historically, Hudson continues, “the government… [has borne] these costs so that public infrastructure would subsidize the economy to lower the cost of doing business,” thereby increasing overall prosperity for society as a whole, rather than using the infrastructure to guarantee a profit stream to a limited number of private entrepreneurs or bankers.
Consistent with this goal, government-funded public works projects have long had broad bipartisan respectability from the days of Alexander Hamilton and Abraham Lincoln to those of Franklin D. Roosevelt and John F. Kennedy. If Democrats can brag about the proud heritage of the Works Progress Administration and the Public Works Administration from the era of the Great Depression (under which 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and 1,000 airfields were constructed), there are still a few Republicans who remember the Golden Age of interstate highway construction that commenced in the 1950s with President Dwight D. Eisenhower. The resultant quantum rise in living standards and economic well-being puts paid to the idea that these were wasteful government boondoggles.
In comparison, Trump’s promise “to spur the biggest and boldest infrastructure investment in American history” is modest in terms of funding provision and financially problematic in terms of funding structures. Very much like his own private real estate interests, the president proposes using minimal “equity” (via direct public funding), instead deploying “leverage” to get most of that $1.5 trillion spent (largely by the private sector). That will inevitably drive up the cost as hedge funds, private equity players and bank credit will add interest charges and incur capital gains charges, management fees and other overhead charges (such as exorbitant salaries for CEOs of these ventures). All these costs would be factored into the prices that the new infrastructure would be required to charge its users with a host of tax breaks, all so as to guarantee a fixed equity return that is pledged to induce the private sector to invest. You can see where this is going: Higher costs are ultimately borne by the public, for whose benefits the infrastructure/services were provided in the first place. In many instances, public entities are outright sold to private groups (or the asset is leased for a long period of time, thereby in theory reducing the cost of funding, but in practice enabling the private groups to backload it, while extracting as much value from the quasi-monopoly in the interim).
Surprisingly, for a country that likes to think of itself as a bastion of free-market capitalism, the U.S. has been (thankfully) slow to embrace PPPs, relative to countries such the United Kingdom. So it’s worthwhile considering the experience of the UK to get a sense of what’s in store should Trump’s plan be implemented as he has outlined. Research by the British group Corporate Watch published in 2014 concluded that:
- Households across the UK would have saved £250 each on their electricity, gas and water bills and train fares had the services remained publicly owned and financed.
- Private electricity, gas, water and rail companies were paying out £12bn a year to investors and shareholders in interest and dividends.
- Had these operations remained totally in the public sector, cheaper government borrowing rates would have saved the UK public £6.5bn: £4.2bn on energy, £2bn on water and £352m on rail.
Corporate Watch also noted that on all metrics—reliability, punctuality, attention to complaints, etc.—services deteriorated across the PPPs, even as costs continued to escalate:
“To satisfy investor expectations, the bills and fares charged by the privatized companies continually outstrip inflation. Between 2007 and 2013, household gas and electricity bills rose in real terms by 41% and 20% respectively. In real terms, water bills have increased by 50% since privatisation, while rail fares are 23% higher than they were in 1995.”
All the while, the promises held out by the proponents of private sector participation in these ventures, in the form of better services, more public patronage, higher efficiency and revenue, and lower public outlays, failed to materialize. Thanks to the government’s promise to maintain ongoing public subsidies, the funding structures allowed private investors to lay off risk to the public sector, while maximizing value extraction from the assets themselves. Governments, meanwhile, effectively assumed the operating risk, covering operating deficits and supplying investment funds, all the while maintaining guaranteed profit margins for the private firms that assumed operation of these services.
There are the other problems that are particularly germane to the U.S.: First, the communities with the greatest needs (e.g., Flint, Michigan, and its lead water crisis) are largely those that are poor and minority-dense. And they will likely get nothing because the profits to help these communities is likely to be inadequate to attract sufficient private sector participation. Second, in more affluent communities, local and state governments are often controlled by developers, and the manner in which these PPPs are adjudicated and allocated is rife with cronyism, as the experience of Indiana’s toll road under then-Governor Mike Pence illustrated. In fact, the vice president is leading the charge on Trump’s infrastructure proposals, even as the much-vaunted privatized toll road that he aggressively promoted as governor subsequently filed for a ‘pre-packaged’ Chapter 11 bankruptcy.
We should also recall, as further warnings of what likely lies in store, the experience of recently deregulated electric utilities (recall Enron, which deliberately aggravated California’s crippling 2001 blackouts with the aim of raising prices), as well as the prospects of more pay-through-the-nose broadband charges (the elimination of net neutrality is almost certainly likely to exacerbate this problem, as variable charges are affixed to slow and faster broadband ‘lanes’). Ultimately, the combination of private funding costs, and ever-rising bills used to sustain the PPPs profits, will have the effect of destroying America’s competitiveness instead of contributing to it. The global experience shows that public-private partnerships vastly raise the day-to-day cost of living as public goods morph to private economic ‘rents’—returns in excess of what investments would yield in a competitive economy, where fat margins are quickly whittled away by competition.
Of course, this does not extend to the private firms involved directly. They do very well—enjoying the best of both worlds—a captive monopoly infrastructure, which enables them to gouge consumers via excessive fees, charges, or fares, with no real need to keep the quality of service up to acceptable standards, amid sustained public subsidies and tax breaks. And if that is insufficient, and the operating firms go bust, the government is usually left to pick up the tab and clean up the resultant mess.
In essence, these public-private partnerships are one of the sick jokes that the neoliberal era visited on all of us in the name of economic efficiency and responsible government—a ‘joke’ because the beneficiaries of all this public largesse have been laughing all the way to the bank as stupid public officials continue to fall prey to their lobbying as they joyfully hand over the keys to the public purse. Trump is simply perpetuating the trend of allowing governments to continue to abrogate their true responsibilities to pursue and safeguard public purpose. Governments should never have become agents of private profit. But under PPPs of the sort proposed in Trump’s infrastructure deal, public purpose disappears and governments simply become underwriters of private profit, while assuming any contingent losses. Society gets more expensive toll roads, toll bridges, more sprawl, more cars, more rake-offs and in the end, more financial trouble and more bail-outs. The fact that governments have become active facilitators of this process gives another reason why our huge global economic and social crisis shows no end of respite.
The rich and powerful don’t use our infrastructure directly. They fly over traffic in their helicopters. They are whisked through the VIP sections of airports on their way to their private jets. They have private clinics in Switzerland or private Emergency services (yes, that exists…private ER staff on time-sharing). To them, infrastructure is just a market. The costs are borne by everyone but the profits go directly to the rich and powerful.
I am no longer such an immoral person since I stopped trading, but the man I was ten years ago would have done exactly what they are doing…or trying to do. The big challenge is not to try to change our ruling class (they are pretty much beyond redemption). We must try to educate their supporters. Explain to Trumpeteers that he is really just another rich guy from New York, and he and his band of merry billionaires are here to fleece America again.
I know you don’t like it when I am negative and despondent, Yves, since you find that trollish, but I have little faith in America’s ability to educate enough of its people to make a change. But, why not try, eh?
It was Lambert Strether, bud and not Yves that posted this.
I saw Michael Hudson doing an interview on Real News Network last week. He was scathingly dismissive of this much- vaunted initiative. Has the US learnt nothing from the UK experience of PFI? It’s spelled out here, in detail.
But nobody ever reads these articles, except us chickens … .?
Only that’s not entirely true, I suspect rich Hollywood moguls get stuck in L.A. traffic as well.
But it is their drivers who have to deal with the traffic, whilst the mogul snoozes/canoodles/drinks/makes killer deals on the phone.
Yes, and pretty soon, a certain eccentric billionaire who owns a car company and a rocket company will fix that with exclusive underground high speed sleds for their luxury electric cars.
I actually agree with you completely. I am under no illusion that things will get better anytime soon, if at all. I used to be more optimistic and think that we’ll someday achieve a Star Trek like future; not perfect but as close to it as humanly possible, and achieved through some pain (WW III – 600 million dead). Now, I’m pretty convinced that either Firefly or Elysium will be our future. There is no reason to believe that we’ll suddenly “get it” and turn things around. The Romans certainly didn’t. After all, the dark ages were the first run at something like Elysium and there is no reason to believe that won’t happen again. I don’t like it and I don’t want it to be that way, but I’m just one person screaming in the wilderness. History does tend to repeat.
I’m just going to make the best of it and hope that my kids will be ok in what I’m certain will be an even more hellish future.
As a Brit who has seen at close quarters the whole PPP fiasco I wholeheartedly endorse Marshall’s analysis. The collapse of Carillion which has been reported on this blog ( hat tip Yves ) , the handing back of the keys to its rail franchise by Virgin, the wobbly state of Capita and many more cases should be enough to warn off any sensible country, but for the time being you have Trump and have to contend with every imbecility that emanates from what passes for his brain. But yes PPP is a fleecing of the public realm by the private sector with no benefit whatsoever. In our own case the vast amount of our country’s infrastructure was created over the course of a almost two hundred years and owed nobody a penny, but was sold off on the cheap to provide dividends and votes for Thatcher and her cronies and has continued with every other government since, but like all chickens eventually they come home to roost and now they are coming home . So watch out America if these schemes go ahead you will suffer the same fate.
Round and round. Please take a moment to reflect what American business did to our mass transit system of the early part of the 20th century. Am-buzzard bought the trollies let them fall into disrepair and replaced them with automobiles.
The Republican Plan also…
The alternative to President Trump, and his *style* would have been worse. At least this is blatant; and not doublespeak. Next time around??? Will we have a better choice???(Bernie, anyone?)
We wouldn’t be talking about a Trump infrastructure plan if Team Democrats got their act together and passed a real infrastructure plan in 2010, instead of the band-aid that was enacted.
2009-2011 is a boatload of missed chances when you think about opportunity costs.
I think you mean, 2009-2011 had a serious possibility of meaningful change that was very successful avoided by the Democrat party’s bait and switch. So successfully avoided that most Democrats still don’t know it happened at all.
If memory serves, Obama’s plan was very simaler to Trump’s.
That’s because there’s only one party in America!
I mean… what did Obama really do that was different from Bush the lessor? Oh yea… he implemented the Republican healthcare plan… Romneycare… er… I mean Obamacare.
Right, obviously the sleazy shenanigans of today’s Trumpeteers are the fault of the Democrats in 2011.
Not the fault of Dems in 2011, but the inevitable result of Dems’ “lessor of two evils” policy since Carter embraced deregulation.
Lessor isn’t a typo, BTW. The evil is clearly for lease.
This is also being pushed at the state and local level. Witness the pressure from SC’s governor to sell Santee Cooper.
And now I’m reading that the City of Jacksonville is looking to sell it’s electric utility.
And it doesn’t even need to pass voter approval.
It looks like the city will be spend significant money to simply explore the sale, which is good for the bankers and financial advisers.
Florida appears also to have some strong laws on Solar Panels and Grid disconnect. Will that regime continue if the electricity is generated by a private entity?
That is will the law now be protecting profit?
New Orleans (i.e. Establishment Dems) is deliberately underfunding the Sewerage and Water Board in an effort to privatize it.
Oh, and Big Energy wants a new Gas Plant in exchange for the 50 Million $ Bribe to the New Orleans Tourist Industry.
Many years ago, “Mother Jones Magazine” had an investigative article about the privatization of a major toll road in some state (sorry, forget which one). The upshot was that tolls went up and a large segment of drivers wouldn’t or couldn’t pay the toll. The result was a major upswing in the use of alternative non-toll roads which couldn’t handle the heavy traffic. It cost the state extra money to keep fixing those roads, add extra signs, etc. And of course that money did not come from the toll road since those tolls went to the private companies (at least one of which was foreign based). As usual, costs were borne by private citizens.
We may know about the perils of privatization but the average American does not, thanks to a news media that does not give us the news.
Same thing happened in Pennsylvania. For decades, the main cross-state highway was the Pennsylvania Turnpike, aka I-76.
And, let me tell you, that highway was so ingrained into our Keystone State souls that we’d say things like “You just went through the Blue Mountain Tunnel, but you still have a lo-o-ong way to go.” As in, a long way to go before you would accomplish whatever you set out to do.
Then, during the 1970s, there was this disruption called Interstate 80. It was well north of the turnpike, but once that thing opened, it drained traffic away from I-76 like nobody’s business. I don’t think that the turnpike has ever recovered.
The rich DO use the infrastructure. Their planes and everything they enjoy are produced by the economy which is dependent on the publicly provided infrastructure. Just as all the rest of us depend on this infrastructure as well.
Not maintaining this infrastructure and letting it deteriorate, or degrade to a sub-standard state, imposes costs on the entire society, as stated above, with costly delays, damage to other assets, etc.
I view the current policy of letting it degrade, or extracting its last bits of value for private investors, as eating our society’s nest egg. Once the degradation has reached a certain point, the extractors will have little choice but to separate themselves even more or live elsewhere. It is a downward spiral.
For me the realization, over the last 10 years of my political awareness, of the blind ignorance, meanness and/or petty greed of our ruling elite has been astonishing.
My thoughts exactly.
The Silver Lining being a chance to Organize on a Massive Scale due to citizens traumatized by the Neoliberals.
We must have solutions and answers for these people. We must show them Beautiful Governments.
We must become Society Builders IOW.
They are too greedy and shortsighted to see that they are killing the goose that is laying the golden eggs.
That’s the story over the past few decades. Short term CEOs looting their firms for maximizing quarterly profits, while destroying what made companies successful is another poignant example.
“My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.” – Rashid bin Saeed Al Maktoum, the Emir of Dubai (1958-1990)
I think we’re at the second Land Rover…
I can dodge a pothole, but dodging the gov’t subsidized middle-man, con man posing as businessman, with his hand in my pocket takes a lot more cleverness.
And that’s savings are per year, right? Adds up that way.
West coast electricity grid in cross-hairs. Another bonehead (read, downright criminal) idea to raise rates and transfer wealth.
Malcolm Turnbull to the rescue. Having had such success tollifying Australia’s Roads, airports, etc, he wants to help our oligarchs do the same here!
Stephen Douglas, Bernie Sanders has always favored real and meaningful infrastructure spending: http://feelthebern.org/bernie-sanders-on-infrastructure. That said, your juxtaposition of Trump with bankrupt resonates on many levels.
Are you some kind of counter-factual psychic? You Trump supporters, by way of fantasy based political theories, are so ashamed of the rapidity with which Trump is dismantling as many of the hard-fought/for constraints against the most rapacious forms of “free market” capitalism, that all you can do is pretend you know, with sneering confidence, that it would have been worse with anyone other than Trump.
In your eyes, Trump’s virtue is that he scorns all pretense towards the common good, thereby normalizing the true values of America, which is governance by the rich, for the rich.
What complete and utter bullshit. The fact that you can’t even spell Sanders name correctly is a huge tell.
First, you seem to think that a single Senator who is in the process of engineering either a hostile takeover or fracturing of the Democrats has magical powers. The MSM still tries to bury him. YouTube wouldn’t even run his rebuttal to the SOTU on a timely basis. Yet he still got 2 million live views on a presentation he did on single payer. And you call that weak in voice?
Sanders has been pushing hard on single payer, to the degree that the mainstream Dems are clearly worreid and are putting up Potemkin solutions to divert energy and attention away from it.
Second, Trump’s infrastructure plan is based on “public private partnerships,” an idea Sanders would never in a million years support. It reverses the traditional 80% Federal/20% local split. Trump is also trying to sell TVA transmission assets, the Reagan and Dulles airports, things Sanders would not do either. Trump is also weakening environmental reviews, supposedly to facilitate infrastructure building.
Let me clue you in, since you seem to like to spout off when you don’t know what you are talking about: even orthodox Dems (as in from places that have semi-official standing) have put out infrastructure plans, and they bear no resemblance to Trump’s proposal.
Commenting here is a privilege, not a right. Making stuff up is a violation of our rules. I have better things to do than debunk nonsense like this.
PPPs do socialize costs and privatize profits. No question. But awareness of the environment is everywhere now. Even Judy Woodruff is running clips of the state of the Earth. So even if the old ideas about growth and profit being essential for capitalism are still the model, the reality will cause big changes. We might not need new roads and bridges – we might need trains. We might not need airports. We might not need distribution over long distances. We might not even need surgery and closely monitored poisonings. The infrastructure needs will surely include water management and communication; clean energy. But I always think that under Trump corporations are more enlightened than the government. So are community governments. And let’s face it, the US Congress has always been useless and kleptocratic.
The difference between Extortion and Rent is not always clear cut…
Organized crime is bad, but, delegated government is good???
Meanwhile, over in Agora Fantasyland, they are touting this program as Trump’s replacement for Social Security. Just look at the page of the budget summary they flash up. How does this make any sense? Can’t help you. I stopped expecting sense and reason from Wiggin & Co. long ago.
What I worry about is whether this infrastructure program could be a trojan horse for turning America’s highways, roads, bridges and tunnels into toll collection points. I hate to think what effect that would have on the American economy or its transportation system. It would be a semi-balkanization of the country. The UK introduced toll roads a few centuries ago but the funds collected actually went to maintain and repair the roads for that area – not to enrich the CEOs and shareholders of a distant corporation. An article at http://www.bbc.com/news/uk-wales-32846101 gives a good synopsis but the point was that corruption became so great they they became a very much hated thing and were not missed when they were abolished. Becoming mini-Robber Barons, they were actually starting to strangle local economies until the railways put them out of business.