Tag Archives: values

Battling Aging Infrastructure, the Enemy Is Us

Awash in local media headlines about Baltimore’s recent major water-main and sewer failures—and the flooding, street closures and business disruptions the inevitably accompany such events—Maryland’s Senator Ben Cardin and the city’s Mayor Stephanie Rawlings-Blake jointly signed an editorial in the local newspaper calling for reinvestment in our failing water systems. (Baltimore Sun, “Commentary”, 7/31/2012, p. 15)  The need, they wrote, is national.  They did not elaborate, but spectacular failures in other cities—Chicago in December 2011; suburban Atlanta and Washington, DC, in May 2012; and Kansas City in July, to give a few recent examples—offer persuasive support.

That these officials would go on record together in the cause of at least a portion of our nation’s infrastructure is certainly admirable.  However, the scope of their concern is too limited.  The problems of age, obsolescence, and catastrophic failure are not confined to water and sewer systems.  Across the nation bridge closures, natural-gas leaks, potholes, power outages, and erratic data connections have become painfully frequent.

It is also disappointing, albeit understandable, that the senator and mayor failed to acknowledge that we—a profligate citizenry and our elected leaders—are largely to blame for decades of deferred maintenance and failures to upgrade to new technology that have left our infrastructure in many places decrepit.

Parents generally understand that leaving their children a dilapidate house or car is not a great gift, but the typical taxpayer has little knowledge and less redress when a government executive or legislator chooses to satisfy vocal current interests at the expense of silent infrastructure. All residents and businesses suffer from this failure of fiduciary responsibility and leadership. We have systematically squandered a legacy built through the hard work of preceding generations.

Fool me once, so the saying goes, shame on you; fool me twice, shame on me.  If the time has come to reinvest, as Senator Cardin and Mayor Rawlings-Blake wrote, then as voters and taxpayers we should insist on a new deal: First, we should require that adequate funds are dedicated to infrastructure maintenance and upgrading so that decades hence our grandchildren are not confronted with the same crisis we now face.  Second, we should insist that our infrastructure is designed, constructed, and managed to provide reliable service and to be quickly repaired when failures occur.  Finally, we should rebuild with an eye on the future by incorporating smart information technology throughout the system. The people responsible for the infrastructure itself know how to do these things, but it will take leadership from elected officials to get them done.  Calling for reinvestment is only a small first step.

(An edited version of this post was published in the Baltimore Sun web edition in August 2012.)

Are We Selling the Future Too Cheap?

Public concern and even occasional outrage over potholes, broken water mains, sewage spills, and closed bridges have been appearing with some regularity in the U.S. news media and blogosphere. Unemployment has been persistently high, particularly in construction. Interest rates have been at historic lows for several years. So why have we not seen an explosion of infrastructure investment?

Yes, we did have the 2009 American Recovery and Reinvestment Act (ARRA), meant to be a down payment on government action to modernize the nation’s infrastructure, enhance energy independence, and put people to work in the process.  The sudden spending sent government agencies scurrying for “shovel-ready” projects, but the law’s requirements that money be spent quickly precluded any real investment.

Before that, the sale to the private sector of long-term leases on the Indiana Toll Road and Chicago Skyway allowed the government sellers to redeploy some of the proceeds into new facilities, but no new resources were mobilized.

These instances notwithstanding, for the most part we have avoided what Adam Smith described as one of three duties of government, “the erection and maintenance of the public works which facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbours” and the like. (The Wealth of Nations, Book 5, Ch. 1, Part 3)

Public works infrastructure, like a home, represents a commitment to the future.  We use  resources we have now to create something that we imagine will bring us benefits tomorrow.  For infrastructure, as for homes, we expect “tomorrow” to extend for decades.

An easily understood and accepted but nevertheless fundamental principle for making such investments is that we should get more benefits out of the infrastructure than the resources we have to put in for construction and and operation.  Putting the principle into practice, however, deciding exactly what resources we should invest and how, is not such a simple matter.  The future is uncertain.  People’s priorities change.  Our money, time, land, and other resources are limited.  We have many competing demands for using those resources.

So  it is not obvious if future benefits will be greater than the costs of a particular infrastructure investment. We need tools to help us decide.

One of the most widely used tools is “discounted cash flow” (DCF) analysis.  DCF is a way to compare costs incurred and benefits received over some defined time period to judge whether the total benefits exceed the total costs.

Essential to DCF analysis is the idea of a “time value of money,”  that everyone would prefer to have a dollar in hand today rather than waiting until next year for the same amount. We might be willing to wait if we were going to receive a larger amount, say $1.15. The idea is that funds to be received in the future are worth less than funds in hand today.

The measure of money’s time value is the “discount rate,” conventionally the percentage reduction in value per year of waiting.  In the example above, the discount rate is 15%.

Discount rates look a lot like interest rates, the rate to be paid for a home mortgage, for instance, the rate that what banks charge for credit-card loans, or what bondholders receive for lending their money to a corporation. In fact, there is not much difference, except that interest  rates really apply to money only.

Discounting is applied to many benefits and costs to which we assign monetary values. For example, we discount the value of time commuters will save over the next 15 years to a supposedly equivalent present amount to justify building the extra highway lanes that we expect will speed travel.

When the discount rate is larger, investments not likely to yield returns until many years after resources are invested look less attractive.  When the rate is smaller, future returns look more valuable in the present.  Most of the time, the very long time periods over which we expect to realize the benefits of physical infrastructure–three to five decades and longer–do not count for much in the economic analysis because the discounted present values are low. Given a choice between a short-lived but high-benefit investment (attracting a major sports event, for example) and a steady but lower annual return over many years (a new rail transit line, perhaps), high discount rates favor the former.

Very low interest or discount rates should then encourage investment in infrastructure.  For a variety of reasons, U. S. interest rates have been at historic lows for several years. In addition, expressions of public concern and even occasional outrage over potholes, broken water mains, sewage spills, and closed bridges appear with some regularity in the news media and blogosphere.

So, once again, why are we not seeing an explosion of infrastructure investment?

People are thinking about infrastructure as if there will be no tomorrow.  Interest rates may be low, but the discount rates people are using–subliminally–to assess their investment opportunities, are a lot higher.

People who study such matters suggest that rates have three components.  The first component is in fact a financial market interest rate representing the payments that presumably very reliable borrowers—governments and their central banks, for example—must make for the privilege of using other people’s money.  The second component represents a premium presumed to compensate for a possibly less reliable borrower and what risks the lender potentially faces related to the conditions of lending, such as the length of time until the loan is to be repaid and whether the lender has offered any security—the house in the case of a mortgage loan, for example.  The third component is meant to account for the uncertainty of future events and the risk that events will make it  impossible for the lender to recover fully the amount lent.

So if the public loses confidence that people responsible for infrastructure are not likely to be reliable stewards over the coming decades, they will insist on higher rates of return, discount rates. If they feel that the future is less certain to be like the conditions of the past, they will look for a higher discount rate. Sea levels rising, financial crises, political gridlock: higher discount rates demanded.

But we do not have to be paralyzed by such uncertainties. The creators of Iran’s qanats that still supply municipal and agricultural water after nearly 3 millennia, China’s Great Wall, Paris’ Notre Dame Cathedral, and even such recent works as the Panama Canal and the Golden Gate Bridge would not have persisted without a vision that they were building for a long-term future.  We should not discount so deeply our own future.

Sustainable Values and Infrastructure

There seems to be little question that we are now in one of those historically recurrent periods of societal crisis that tell us we must change our ways.  A plethora of recent books present dismal perspectives of our clash of cultures, changing climate, losses of species and languages, and financial crises, and how each threatens our well-being and lastingness.  The threats are very real, of course, but to me are interesting because, if relief is to be found, surely our infrastructure must have an important role.

Seeking to understand this role, I have finally plowed my way through Raj Patel’s modestly titled exegesis on modern economics and human nature, The Value of Nothing: How to Reshape Market Society and Redefine Democracy. (2009, New York: Picador)  With ample reference to both foundational and more radical texts of market economics and Western social theory as well as more personal accounts of current populist movements, the book has definitely generated buzz and expanded its author’s reputation to sometimes messianic proportions.  (For a review, see “Are You the Messiah? A political economist gets a following he wasn’t expecting,” by Lauren Collins, New Yorker magazine, November 29, 2010)

The reading took longer than expected, because as page after page turned I felt compelled to pencil in questions, opposing references, and outright objections to Patel’s perspectives. Where he sees elemental democracy in the masked pronouncements of a Zapatista Junta, I see the tyranny of the mob. When Patel disparages the possibility of getting prices right—or having any prices at all—for clean air and water, I despair at the idea that humans will forsake the desire to improve their lives, however privileged they may be, satisfied that their needs—defined by others—are being met. While Patel finds it essential to feed the world’s growing population by rationing necessarily limited food production, I wonder why humanity might not be happier and arguably better off limiting population to levels supportable with an abundant and varied food supply.  I suppose I must recommend the book at least because it offers the attentive reader ample intellectual stimulation.

Patel’s message seems to be that for two key reasons a market-based, democratic society is essentially unsustainable and revolutionary change is essential. First, there is no hope of getting the prices right for clean air, pure water, cultural diversity, historic associations, and myriad other resources we humans use in pursuit of comfortable lives. Second, our abilities as humans to work together toward success in this pursuit are hopelessly subverted by the existence of corporations, disembodied entities that behave with the legal rights and powers of a person but lack a person’s moderating moral and ethical judgment.   Without the restrictive forces of either appropriate prices or moral imperatives, corporations and people ruthlessly seek exclusive control of collective resources and private gain from exploitation of these resources.

Hope lies, for Patel, in a Buddhist theory of value.  “The real value of something,” he writes, “is not its ability to satisfy a craving, a desire, a vanity, but to meet the need for well-being.”  With enlightenment, we will recognize that our desire for cell phones, shoes, and other such “baubles and fripperies” is nothing but illusion created by hidden persuaders.  Corporations will somehow adapt, I suppose, and we will lose our lust for more, all settling happily for just “enough.”

British economist Diane Coyle’s book The Economics of Enough: How to Run the Economy as if the Future Matters. (2011, Princeton, NJ: Princeton University Press) takes a similar stance on the problems but offers a more moderate assessment of the underlying issues and, to my mind, a more practical prescription for what must be done.  She focuses her attention on the inevitable necessity of making tradeoffs among efficiency, fairness or equity, and freedom in how people are able to pursue and manage their resources.  Our values and our governance, as individuals and groups within our society, determine how the balance is struck, and today we have “tilted too far”—in Coyle’s view and my own—“in favor of individualism and the gratification of immediate wishes,” toward freedom at the expense of fairness and even efficiency. Where previous generations made investments, we now are consuming our assets.

Regarding values, Coyle’s views are not so different from Patel’s: We need a change of values to guide our behavior.  In Coyle’s analysis, however, a revival of what Max Weber termed the Protestant ethic, principles that guided people to work for the future rather than immediate gratification, could be effective.  Neither author has much to say about how we are to decide what is “enough” for individuals and groups in a pluralistic society. Patel would no doubt be the more austere judge.

To Patel’s call for changed values, Coyle adds changes in measures of achievement and in our institutions of governance.  The ways we measure economic growth, productivity, and well-being are simply inadequate for dealing with our growing understanding of the importance of intangibles. With the revolution in information and communications technologies, services account for an ever larger share of production; we do a poor job of measuring  quality of services, and the shortcoming is especially severe regarding what we term quality of life matters.  The  technology revolution is also transforming how individuals, corporations, and political entities relate to one another. Coyle imagines that societal decision making can be shifted from centralized agencies to “involve a more productive  and thoughtful interplay between markets and governments than we’ve typically had in the past…”, but here I could not quite make out her image of that future. Perhaps she envisions social networking platforms supporting grass-roots participation, a sort of Swiss direct democracy via telethon or Facebook.

Development of such a participatory system would certainly signal the integration of a new set of technologies into our infrastructure.  In past decades, new infrastructure technologies have been accompanied by—and arguably enabled or perhaps caused—changes in how society operates. Rail and then highway transportation changed the patterns of human settlement; piped supply of clean water changed the way households operate.  These changes in turn have been accompanied by changes in our fundamental values, on the scale contemplated by Patel and Coyle.  If we are to have the change in values these authors argue we need for a sustainable future, then I believe we must expect to reshape our infrastructure.