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Wednesday, March 1, 2000

More Public Investment Needed?

The Incentives for Private Investment Yield Superior Results

It must be something in the water. Robert Kuttner is the latest writer from the Boston suburbs to complain that Americans don’t spend enough of their hard-earned money on “public investment.” In a column that the Washington Post titled “Public Parsimony, Private Affluence” (November 29, 1999), Kuttner concluded that “paradoxically, a period of unprecedented private affluence is exactly the right time” to start spending yet more money on government projects.

John Kenneth Galbraith, now an emeritus professor of economics at Harvard University, may have been the first to make this complaint. In his 1958 bestseller, The Affluent Society, still a staple of college reading lists, the former World War II economic czar looked around America and proclaimed that he found “private opulence and public squalor.” That is, he noticed that privately owned resources were generally clean, efficient, well maintained, and improving in quality, while public spaces were dirty, overcrowded, and unsafe—and he concluded that we ought to move more resources into the public sector.

In 1995 then-Secretary of Labor Robert Reich, formerly a professor at Harvard’s Kennedy School of Government, told the graduating class of the University of Maryland not to “secede” from public spaces—that is, not to send their children to private schools, live in gated communities, work in the suburbs, and (gasp!) shop in secure suburban malls.

Now comes Kuttner, a former lecturer at the Kennedy School who now lives in suburban Brookline, to make exactly the same kinds of observations. “We’ve gotten used to the idea that things public should be vaguely shabby:’ he complains.

Considering the trillions of dollars spent on government infrastructure since Galbraith made the same point, one begins to wonder whether there’s something inherently shabby about government operations. Indeed, no one thinks that government schools, parks, highways, and buildings should be shabby, but Kuttner is right to suggest that we’ve come to expect that they will be.

Public versus “Public”

We should briefly note the clever use of the word “public” by advocates of bigger government. When we contrast “public” parks, schools, and so on with “private” spaces, there’s always the implication that the “public” spaces are open to us all, while the “private” spaces are closed and exclusive. But of course, most private schools are open to the public, as are most private parks, malls, and transportation systems. The real difference is how they’re paid for: “Public” spaces are paid for coercively, through taxation, while “private” spaces are paid for by those who choose to use them or to contribute to their upkeep.

In fact, that’s precisely what Kuttner and his allies don’t like. They want us to be forced to pay for services that will be open to all, and they chafe at the idea that we might choose how to spend our own money or that a generous donor’s name might appear on a school, a park, or a public sculpture.

Kuttner says that “civilian public investment is now at the lowest share of gross domestic product in three decades.” Of course, with GDP rapidly rising, that lower percentage can still generate more real dollars. But the main reason that taxpayer spending on infrastructure is lower than it was in the 1950s and 1960s in percentage-of-GDP terms is given by John Tatom of the Federal Reserve Bank of St. Louis: “The real capital stock at all levels of government rose from $6,000 per person in 1948 to $10,500 in 1970 and has remained at that level since. The leveling off of infrastructure spending since 1970 is almost entirely attributable to the completion of the interstate highway system and a reduction in spending on school construction as the percentage of the population that is of school age has declined.”

Total spending by state and local governments—which do most of the infrastructure spending—has risen (in real terms) from $599 billion in 1970 to $1.4 trillion in 1996. One obvious reason that states don’t spend more on infrastructure is that they are spending so much more on things that were previously not the concern of government—housing expenditures up 162 percent in that period, health-care spending up 450 percent.

Kuttner notes that “the 19th century was the golden age of public planning for public spaces.” But government was much smaller as a percentage of GDP in the 19th century.

Even since Kuttner’s glory days of the 1950s, government spending has soared. Local governments have taken on every task from special education to grief counseling to public golf courses to city-planning seminars in the Caribbean; they have massively increased spending on various forms of welfare; and they have been forced to comply with reams of red tape and regulation that make every construction project far more expensive than it needs to be.

The 1986 story of Donald Trump and the skating rink is a classic example of the contrast between public and private construction projects. In 1980, New York closed the 30-year-old Wollman Memorial skating rink, saying it would take two years and $4.9 million to restore it. After wasting six years and $12.9 million, the city had to start over; it would need two more years and $3 million more. Enter Trump. After persuading then-Mayor Ed Koch to let him do it, Trump completed the job in three-and-a-half months and $750,000 under budget.

Why do market-provided services generally work better than taxpayer-funded services? Because incentives matter. Investors who put their own money into a project have a great deal to lose if they take six years to complete a four-month project. Employees of private companies are much more conscious than government employees that if they do a bad job they could be fired—or the entire company could fail. And as much regulation of business as there is, there is even more regulation of government projects. New York City has to adhere to New York State’s Wicks law, which requires government agencies to hire separate contractors for construction, plumbing, electrical, and heating and ventilation work. It must use an elaborate bid process to find the lowest bidder—but it must also adhere to the federal Davis-Bacon Act, which requires that federally funded projects (which includes most local construction projects) pay union wages, and it must comply with various gender, race, small-business, and veterans’ preferences.

Kuttner is pleased as punch that the small town of Brookline has “at last” built a retaining wall to prevent the local schoolyard from “turning into rivers of mud every spring.” “How marvelous,” he writes, “to see the public sector doing something so thoughtfully and well.”

Talk about low expectations in our nation’s schools. Private companies are building high-speed information networks, global satellite systems, Disney Worlds around the globe, and 1.6 million housing units every year. And the city of Brookline has done a marvelous job on a retaining wall, at last.

We’ve had another generation of private progress and public deterioration since the publication of The Affluent Society, and it sounds like even our most enthusiastic statists don’t have very high hopes for government services any more. With good reason.

  • David Boaz is the executive vice president of the Cato Institute and has played a key role in the development of the Cato Institute and the libertarian movement. He is the author of The Libertarian Mind: A Manifesto for Freedom and the editor of The Libertarian Reader.