Townhall.com::A Bridge Too Far Gone::By Thomas Sowell
Here is a provocative piece by Thomas Sowell who says that the solution to deteriorating public infrastructure is to privatize it. I understand how the theory works: if there is profit in it, private investors do what is necessary to realize that profit, and that produces greater efficiency. He also trots out the age-old economists argument about the electoral incentives that lead politicians to spend our money in a self-serving fashion. Sometimes privatization saves money and improves service, and I would be first in line to advocate it for goods where pricing will work. That would likely be true where it is possible to prevent people from acquiring the good without paying, such as with bridge tolls, and where you don't have market failure, significant symbolic concerns, humanitarian issues, or externalities that militate in favor of public provision. But it seems that sometimes the incentives end up not being exactly what the economists envision. Deregulation of the savings and loan industry worked out a bit differently than planned. Do you like the way airline deregulation has worked out? And whenever people point out examples like this, the answer is that government was still a little bit involved, instead of being entirely excluded. So it seems like economists never will have to admit that privatization has failed, anywhere, until government goes away entirely. In other words, never.
In the case of the massive amount of private infrastructure we already have in CIDs, I think we are looking down the barrel of a major problem caused by incentive structures that favor inadequate reserves, an insufficient supply of quality volunteer leadership, and a number of professionals (by no means all of them) who are enriching themselves by focusing on their own interests rather than those of the communities they are supposed to be serving. But when it happens, watch the privatizers blame the whole thing on government regulation. And to some extent, there may well be truth in that argument at some point--but it will never be the whole problem.
4 comments:
Evan:
Of course government is not the whole problem, nor is it the whole solution. Unfortunately, people want simple solutions (or simple scapegoats) to complex problems.
Certainly CIDs should reserve appropriately for future expenses. Lord knows we spend a substantial amount of time trying to teach people that. But then you have to deal with the board members and homeowners who don't want to put the money aside for a wide variety of reasons. For example, Florida requires reserves by statute, but then lets the majority membership of a CID vote each year to essentially ignore this rule and provide little or no funding.
It is also important to remember that government regulation (at whatever level the individual deems appropriate) has costs. Associations in California are spending hundreds of $ per resident per year just to comply with their new and extremely complex election law. That means assessments have to go up or some other expense has to be foregone. Unfortunately, it is a zero-sum game.
Tom
PS: As regards the airline industry. The principle goals of deregulation were to increase access and reduce costs. I would argue that these have been achieved. Fares are much lower than pre-deregulation and the number of flights and Americans traveling has increased dramatically, as had the number of cities served. Unfortunately, that doesn't guarantee the ability of any of these companies to manage in a deregulated environment, nor does it solve how to transition pre-deregulation cost structures into a new business model. Once again, a complex problem in search of something more than a sound-bite answer.
It's difficult to balance private incentives and the public interest when it comes to vital infrastructure.
Take a look the the U.S. telecommunications system, which was once the world's best but is now falling behind those of other developed nations that are providing more and better broadband Internet access at a lower cost to end users.
It also suffers from numerous broadband "black holes" because while there are both broad public and private benefits from making broadband more widely available, the telco/cable duopoly has no incentive to take these into account, leaving many Americans on the wrong side of the digital divide.
Tom:
I think you make a lot of sense. I have been saying for some time that the micro-regulation approach seen in California recently is questionable. How are volunteers supposed to do all this, and how are they supposed to pay for election monitors, etc.? On the reserves, I agree--there is an individual incentive to set reserves too low. Why should I pay today for somebody else's roof 20 years from now? One (self-interested) answer is "because your home will be worth more if the association has adequate reserves today." But that is kind of remote from many people's minds. And that is why I am concerned about the future of private infrastructure. On the public side, Sowell has great confidence in individual investors keeping everybody sharp, but smart investors walk away from what they think are bad investments, and we don't want that to happen with infrastructure.
The other challenge of the micro-management that we see in California (and increasingly elsewhere) is the overall impact it has on the cost of doing business. Starting a new business and keeping it going in California is more costly than almost anywhere else in the USA. All of the excess regulation is the reason. That has the potential to fuel a tremendous exodus of people, businesses, and capital from the state if not managed carefully.
Regarding reserves, here is an extremely scary corallary regarding individuals or groups not investing in the future of their homes. According to my sources at FEMA over 50% of the homes in Florida carry NO homeowners insurance at all. Why? Because folks retire there and frequently buy their homes for cash, so there is no mortgage requirement for insurance and then they play the odds. The chances of their particular home being destroyed by a hurricane or other disaster in the remaining years of their lives is relatively small. Of course when it does happen you and I and the rest of the taxpayers end up holding the bag.
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