Saturday, May 31, 2008

Production vs. Redistribution

One of the major achievements of the Conservative Movement, and its fellow-traveling economists, has been to convince the Conventional Wisdom that Production is accomplished by the Private Sector (and that the Private Sector is identical with Corporations), whereas the Public Sector (assumed to be identical to Government, sometimes called "The Government" despite our multijurisdictional Federal system) is good for nothing but Redistribution, sometimes called "Transfer Payments," but almost always sneered at as "taxes," or "tax and spend."

Such are the power of magic words that this fantasy image dominates the political landscape. There's also the "dog whistle" aspect of it all, since "The Government" is also that Thing that does all the bad stuff like interfering with Free Enterprise, Forced Busing of School Kids, coddling criminals, and the like. Putting pot growers in jail, enforcing copyrights, or criminalizing abortion, those are done by "The Legal System," which somehow avoids being part of "The Government."

But I'm going to keep to economics here, so I'm going to use a simple model. I'm not even going to put the math onto it, but rest assured, there's some math lurking just below the surface.

Let's consider an island, a chunk of attractive real estate that sits off the coast of some mainland somewhere, maybe even in the middle of a large river, or, best of all, in the mouth of a large river or some other natural harbor.

As I say, it's attractive real estate, having a large coastline relative to its size, so there's natural portage, perhaps some nice beaches, and some natural exclusivity and scenery that can be put on the housing brochures. In the natural course of things, depending upon history, other situations, etc. there would first be some ferry service of some sort to the island, then someone would decide that there should be a bridge.

Long story short, the bridge gets built. Most probably, it is built and maintained by the authorities that run the rest of the transport system, i.e. "The Government," or at least an organization with governmental powers, like a Port Authority or a Transportation District. Conceivably, the job might be driven by a Private group of some kind, or at least contracted to one, but it doesn't matter that much really. If the bridge is big enough, it will probably be a toll bridge, both to recoup the cost of building it, and also to offset its costs. If a quasi-governmental organization is responsible for its operation, the tolls might be used to cross subsidize some other transportation methods, such as mass transit, or even parts of the old ferry line, if it had any sort of clout.

As an aside, I'll note that quite often bridges are built by governmental agencies with the secondary purpose of enriching private contractors. See The Great Bridge by David McCullough for a good description of this.

All well and good. The existence of the bridge, and the transportation that it provides, makes the land on the island, and on the nearby mainland, more valuable. Some of this value is recovered by the tolls, some in property taxes, but most of it winds up in private hands, which is to say those who own the land on the island and mainland. Some of the wealth also flows through the hands of the new businesses that are created to service the increased populations, any port services that obtain, and so forth.

Inevitably, the bridge begins to see some congestion at some point. It's done its job, creating wealth by providing transport, but now more transport is called for.

Or is it? After all, building a new bridge is a risk. Suppose there isn't enough demand to support the additional traffic? Will the new bridge undercut the cash flow from the old bridge? Besides, bridge building is expensive, carrying other risks.

So we might just raise the tolls on the old bridge, especially at rush hours, thereby moving to what is called "congestion pricing" of the resource, which is "efficient," in economics terms. What "efficiency" means here is that the resource is rationed by price, meaning that those with the greatest wherewithal get served, while those with shallower pockets do not.

Alternately, someone could build another toll booth. This seems silly, but it's perfectly acceptable if there are access points to the bridge that are in hands other than those who own the original bridge. This would be the case if the bridge were actually something like say, an oil production and delivery system, where tankers or refiners might raise their rates even if the oil fields are still underutilized. I'm just using the island/bridge as an analogy, after all.

And let's be clear about this, the higher tolls or new toll booths are by far less risky an "investment" than building a new bridge. So if your vision is just to accumulate more money via investment, higher tolls are the way to go.

What happens when the highest returns on investment go to investments that do not create wealth, but merely move money from one pocket to another? What happens when "economic growth" is calculated based on the rate at which this money is transferred around? What happens when people confuse redistribution with production, merely because the redistribution is done by organizations and people who are nominally "private?"

I'm not entirely sure, but I have a feeling that we've been finding out for the past 30 years or so. Or at least the last seven.


black dog barking said...

In this part of the world renting a parking place for a day generates as much revenue as growing a couple of bushels of corn. "Value" and "produce" and "worth" as defined by an accountant make sense in a narrow context. I can't remember the last time a decent film review appeared in our local paper but they tell us every week which movies generated the most box office revenue. Worth. Value.

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