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writing for godot

Diminishing Returns

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Written by Scott Dunn   
Sunday, 30 January 2011 03:50
The law of diminishing returns states that the closer you get to 100% efficiency, the more expensive each additional percent of efficiency becomes, and as you approach 100%, the expense of each improvement approaches infinity. This principle was discovered through centuries of empirical evidence that shows that there is always going to be waste in any expenditure of effort. The waste is always there, whether it be in a mechanical process, government spending or private spending. There is simply no such thing as a 100% return on investment of energy or money. Scientists know this set of principles as The Laws of Thermodynamics. In the political debate on government spending, most of the debate is on how to cut wasteful spending, but very little attention is paid to how declining infrastructure increases waste.

Eric Cantor, the House Republican Leader, claims to be very concerned about the rate of government spending. He appeared in an interview on Meet the Press Sunday (1/23/11), and during that interview, Cantor said that the growth in the economy should come from private sector investments rather than government spending. In response to questions regarding specific budget cuts posed by David Gregory, Cantor repeated the need to cut government spending and to let the private sector take over, as if it were a mantra. Cantor seems to sincerely believe that private sector spending is superior to public sector spending. Perhaps he thinks that the private sector is less wasteful than the public sector. I happen to think public and private spending are complementary - you can’t have one without the other. It’s worth noting that the idea of raising taxes barely mustered a mention in the discussion because that is something that Cantor and his Republican colleagues would not even consider.

While Cantor expresses great enthusiasm for the investments of the private sector, he seems to have neglected to mention the $3 trillion of investments made by the Fed, in the form of short-term loans and other financial assistance, at home and abroad in the run-up to and the wake of the economic collapse of 2008. All that assistance was given without even a single debate in Congress. Thank you, Senator Bernie Sanders, for helping to make the disclosure of all that assistance by the Fed a requirement in the Restoring American Financial Stability Act of 2010 (S.3217). I doubt the private sector could ever match that kind of investment and assistance, much less be willing to make such an investment, if it was needed. The fact that this gigantic investment in the private sector by the Fed has been obscured by other news suggests that the private sector is suffering at least some embarrassment of riches.

I wonder how much infrastructure could be improved, repaired, expanded or replaced with new technology for $3 trillion. How many schools could we build and how many teachers could we hire? After all, education is infrastructure, isn’t it? There are only a few elected officials willing to discuss infrastructure as something we could do to improve the economy in a political environment where cutting spending is in vogue.

It’s also worth noting that the House Republican Study Committee, to their credit, put together a list of proposed spending cuts. A review of those proposals reveals that a fair number of them are aimed squarely at infrastructure, with many aimed indirectly at infrastructure. One proposed cut would reduce the subsidy for Amtrack, as public rail is one of the most favored conservative punching bags. Another cut would reduce the funding for R&D performed by the Department of Energy. And they do propose cuts in education funding as well. I guess the Republicans really don’t like infrastructure. These proposed cuts at the federal level mirror the cuts made by many states across the country. It seems like infrastructure is the first to take the blows when it comes to cutting spending when it really should be the last. Why should it be last?

The economy cannot grow without continuous and consistent investment in the infrastructure. Heck, the economy couldn’t even run without infrastructure to begin with. For much of the 20th century, investment in infrastructure at all levels of government was either growing or remained relatively constant until about 1990. Between 2003 and 2007, there was a definite drop in total federal infrastructure spending. I think that the current recession we are in now was caused in large part by the cuts in infrastructure spending over the last 30 years.

According to the Reference for Business, in their article on Infrastructure (which can be found here: http://www.referenceforbusiness.com/encyclopedia/Inc-Int/Infrastructure.html), “In 1960 U.S. federal public spending on infrastructure was 5 percent of gross domestic product (GDP); by the mid-1990s, this figure was down to 2.5 percent.” While the article goes on to say that that may not be as significant as it seems, it is not without negative effects.

This timing seems consistent with two other trends: The decline of the middle class in America and the concentration of wealth to the top 1% of the American population. Another way of putting it is this: for the last 30 years, the top 1% chose to take their profits rather than to invest in America.

But this is not just the top 1% of the people. Look at the largest corporations and banks who were among the major beneficiaries of this concentration of wealth. They have benefited handsomely from the nearly $3 trillion in assistance from the Federal Reserve in the wake of the financial collapse and the tax cuts of the Bush Administration. Numerous sources have noted that corporate America is sitting on a pile of some $2 trillion in cash. They too, appear to be unwilling to invest in infrastructure because of “economic uncertainty.”

Businesses that do choose to invest in their own infrastructure, such as new computers, servers, networks, phone systems, trucks and manufacturing equipment will realize a reduction of their return in their investment if public infrastructure languishes. Public infrastructure is to business like soil is to plants. Business cannot grow if the roads are crowed and potholed, or if the trains and planes are consistently late. Manufacturing depends on power and water, and if the infrastructure for power and water are not maintained, resources are wasted and the utilities become more expensive.

I think it can be fairly said that investment in infrastructure has the highest rate of return to society. Infrastructure that is consistently maintained and improved will yield a higher rate of return than any other public investment. Better roads, rail, air traffic control, water, and power transmission and generation will all make a business easier and more cost effective to run. Internet access with higher speeds that are run as a regulated utility will also go a long way towards improving the business climate. As a nation, we are falling behind other countries in terms of infrastructure spending as a percentage of GDP and it shows.

Infrastructure spending is what lifted the middle class out of the Great Depression and carried it through the boom years of the 50s, 60s and 70s. Infrastructure spending means that guys in jeans and hardhats will be spending their money on houses, cars, TVs, groceries and clothing. They will even invest in a college education for their kids. Those construction guys have families, and they all generate expenses which all have to be paid for. They generate demand and they are the backbone of the American economy. Infrastructure spending is great for the local economy because everyone employed by it will spend their money locally. From the construction site gopher to the engineer and project manager, they all make a contribution to the economy.

To Eric Cantor and his followers, I have this to say regarding their perceived need to let the private sector take over: Sorry, the evidence isn’t there. Perhaps in their dreams, they would like to see the privatization of mass transit, power production and transmission, water and sewer services. Maybe Republicans prefer a private, exclusive monopoly to a government monopoly.

There are many good reasons why we prefer utilities and mass transit to be public rather than private. The profit motive is one really big reason in that it tends to perverse the incentive to provide what should be public resources and services. Another is that infrastructure investments span generations - who will tend to it when corporation that owns it is gone? Lastly, infrastructure provides intangible social and economic benefits that the profit motive cannot even begin to address. Given the track record of private investment, I just don’t think that the private sector is going to step in to get the infrastructure work done anytime soon.

Conservatives may express a lot of concern about the massive and rising public debt, but they are looking at public debt in purely financial terms. Another form of debt is failure to maintain infrastructure and that creates a debt for generations to come. Consistent, long-term investments in the public infrastructure will provide a stable base to the economy and a foundation for future generations to build upon. Let us begin it now.
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