Scott Sumner  

Private affluence, public squalor, high taxes

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Uncertainty Can Go Both Ways... My Small Victory...

Every time I visit New York I think about John Kenneth Galbraith's famous remark about American private affluence and public squalor. There is impressive new residential construction. Townhouses in areas like Brooklyn are being fixed up. But the subway system is appalling, the worst I have ever seen. It's as if a Hollywood movie director tried to create a nightmarish underground set for a film. New York's airports are lousy and the roads seem to have more potholes than solid surface. Overall, just a disgraceful set of public facilities.

Were he alive today, Galbraith would probably say that the problem is insufficient tax revenues. But does the data really support that assumption? Here's a table of tax revenue by state. What's most surprising about the data is the very small variation in tax revenue.

Screen Shot 2014-05-28 at 11.04.04 AM.png
The lowest taxed state (South Dakota) has a tax burden of 7.3%. The second highest taxed state (Hawaii) comes in at 11.3%. A range of just 4.0%. And then there is New York, in a class by itself---14.0%. (Note: this data source excludes taxes that are similar to user fees.)

Yes, even New York taxes (state and federal combined) are low by French standards. But that doesn't explain why New York has much worse public facilities than average states like Massachusetts (9.6% taxes.) New York has been trying to build a new subway line for 80 years, while Beijing and Shanghai (far poorer cities) open opulent new lines about once a year.

You might argue that China is not a good comparison, as they have cheap labor. Yes, incomes are lower in China, but so are tax revenues. One difference is that Chinese subways are built with workers who earn low wages by Chinese standards, whereas New York subways are built by highly paid union workers.

I think a better comparison for New York would be a high income, world-class city like Singapore or Hong Kong or Dubai. Those places are able to build very good infrastructure quickly and at low cost. They might use Bangladeshi migrant workers at $1/hour instead of American "prevailing wage" workers at $50/hour. Indeed even cities like Paris and Berlin build new subway lines at 1/7th the cost of the New York project. A small part of this cost gap may be due to physical differences between the various cities, but by no means all of it. Nor is it all wages, work rules and nationalistic contracting also play a role. American firms are less experienced than foreign firms at building subways and unions require over-manning. Regulations also seem stricter in the US. The comment section of this article has some useful information.

This demonstrates one of the many internal contradictions of American progressivism. (And by the way, American conservatives have just as many internal contradictions.) You can have your strong public employee unions, "prevailing wages" and restrictive work rules, or you can have nice infrastructure. New Yorkers have (perhaps unknowingly) made their choice. Now they must live with the consequences. Few progressives (with the notable exception of Matt Yglesias) understand these internal contradictions.

BTW, the Hong Kong subway system has a 99.9% on time rating and is highly profitable. It is also a private company. Of course progressives prefer to talk about the Paris subway.

PS. After I wrote this I read a post on infrastructure by Matt Yglesias. His post is better. He points out that there are also lots of wasteful transportion boondoggles being built by conservative midwestern governors.


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COMMENTS (21 to date)
Ricardo writes:

I almost always agree with Scott Sumner, but not this time. New York's subway system is awesome. Not perfect, but still awesome.

Floccina writes:

It seems to me that Democrats are so in love with government action that they will support any action and so their politicians take advantage of them is really bad ways. One example that comes to mind is CAFE standards. I would support a carbon tax but CAFE is a very inefficient way to reduce CO2 emissions and so I will fight against it. (See below) But when blocked on a crbon tax, Democrats will take any action not realizing that there own politicians are very willing to scam them therfore you get CAFE and ethanol.


I and other scientists at the Massachusetts Institute of Technology estimate that the new standards will cost the economy on the whole — for the same reduction in gas use — at least six times more than a federal gas tax of roughly 45 cents per dollar of gasoline.

Not only that, CAFE means a company cannot easily specialize in large cars. CAFE is a scam, it hides the tax but is a tax just the same.

Also consider the ethanol program and all the hidden taxes. Consider the fact that administration seems to absorb all the additional money that politicians pump into education and healthcare but democrats do not call for reducing administration costs but rather call for more funding! Even in the big programs like SS and Medicare they love the programs so much that are unwilling to:
1. Show all the SS taxes on employees pay stub i.e. include matching FICA.
2. Admit that SS is a welfare program and pay the same amount to recipients. Savings would be enormous without hurting low earners!
3. Make Medicare use it size to squeeze providers on price.
4. Make Medicare refuse to pay for treatments that show no benefit benefit.

With there more funding is the solution attitude they are asking to be scammed and their politicians know it and take advantage.

BTW with Conservatives it is military spending, long prison sentences.

Scott Sumner writes:

Ricardo, I guess it's just that almost every single time I've used it I had the bad luck to observe incompetence on the part of the people running the system. Maybe when I'm not around it's great.

Floccina, Good points.

Bostonian writes:

One factor affecting the quality of public facilities is the quality of people using them. I have read about run-down schools in poor areas, with for example non-functional bathrooms. One reason may be that some schools have students who commit more vandalism.

Singapore may have better public facilities than the U.S. because their people are less likely to litter and vandalize, partially to avoid punishment but also because they take pride in the cleanliness of their country.

Since the Belmont Stakes is being run this week-end, this post is timely. Because; financier August Belmont built the original NYC subway as a business venture in 1904. After failure after failure by NY's politicians to do so.

Belmont made so much money with it--combining fare box revenue with property development along its path--those same politicians thought they were being very clever, and cut the city on in the second line. That is, the city became a partner.

Therein the seeds of destruction of NYC's system. Belmont's heirs eventually gave their share in the system to the city in the 1940s, when it had become impossible to run it profitably thanks to politics (the sacred five cent fare).

Virtually all American public transit was at one time private business, often built by suburban property developers to make it easy for people to buy homes away from where they worked.

Steve Roth writes:

An even better comparator might be Germany. How are they doing on the infrastructure front?

If Berlin, with German's quite...comprehensive labor policies, does much better than New York (?), what does that say for this "public employee unions, 'prevailing wages' and restrictive work rules" argument?

Ditto for Scandanavian cities, Netherlands, etc. Are they better or at least valuable additional comparators?

How 'awesome' was Belmont's subway? See for yourself..

Chandeliers, grand pianos. Pretty cool then. Now....

John Thacker writes:

Steve Roth:

Germany has "works councils" that are banned in the US as a form of company union. The tighter integration of unions with management in Germany actually leads to much less restrictive work rules than in union jobs in the US where adversarial relationships are common. (Also, Germany until just this past year had no minimum wage.)

In general, the point is well taken that it's difficult to ascribe the enormous higher costs of US infrastructure to just one thing. (It is interesting that the UK also does fairly poorly at infrastructure costs.) The environmental regulations brought about by NEPA play a role as well. NEPA was designed in reaction to the Interstate Highway System aggressively putting into place a national plan over local objections. What I tend to see with it is that whatever people want to build still gets done (since the required environmental review and planning is tweaked to get the "right answer,") it just takes a long time to do the planning.

There are, naturally, other issues.

Steve Roth writes:

@John Thatcher:

Right. Those works councils are the very type of communalist solutions to tragedies of the commons that seem to seriously outperform the alternative (privatization) in many cases. Think: fishing quotas for diminishing stocks.

And I find it interesting to see these arrangements, which some sociologist types have dubbed "corporate concertation," delivering what appear to be serious economic benefits:

http://www.asymptosis.com/labor-power-and-economic-growth.html

The economic subrealm of infrastructure might derive similar benefits.

Shame that Republicans hate these solutions so much.

Steve Roth writes:

Oops, sorry to get your name wrong, John.

ThomasH writes:

I doubt that a privately owned subway system could attract investment in a much less dense city like New York (or Paris) compared to Hong Kong, but congestion taxes would certainly make privately owned buses (and self-driving cars when they become available) more attractive as a form of urban mass transit. A privately owned subway would also need eminent domain for right of way which could run afoul of the push-back to Kelso.

Scott Sumner writes:

Everyone, Lots of good points, I mostly agree.

Thomas, I can't imagine Kelso pushback having any impact. No one disputes that subways are public infrastructure--just what eminent domain was intended to address.

Ben writes:

I disagree, Matt's post is not better.

Thomas Hutcheson writes:

@ Floccina
I try to avoid partisanship, but admitting that both parties are far from perfect on climate change policy, which party would be MORE opposed to a carbon tax to replace ethanol subsidies and green energy tax credits, CAFE etc.

KLO writes:

Building all new infrastructure is cheaper than maintaining existing, very old infrastructure while simultaneously upgrading that old infrastructure.

sam writes:

If you want to have the government competence of Singapore or Switzerland, you're going to need a country full of Singaporean or Swiss cultural norms.

Lorenzo from Oz writes:

I like to blame land rationing on discouraging infrastructure (since it raises costs and reduces revenue returns over and above the magnifying effect of the land rationing on property and related taxes), but I guess Hong Kong is a good counter-example. Except that tunnels are perhaps not subject land rationing ...

Not that it is really an either-or question. Australia also provides some support for the restrictive work practices thesis. The Howard Government brought in laws to inhibit construction unions being too outrageously extortionary, and it helped reduce infrastructure costs. (The Labor State Governments dutifully denounced this attack on union "rights" while clearly being grateful for the cost savings on projects.)

On work councils, there is a bit of an Elinor Ostrom feel to the notion as Steve Roth suggests (except command-and-control is the other alternative, privatisation is not the only one), a point in their favour.

Scott Sumner writes:

KLO, Yes, but note that the new subway line in NYC is also extremely expensive.

Sam and Lorenzo, Good points.

Adrian writes:

A few points, Scott:

- The NYC subway system is really the "worst you have ever seen?" A simple Google search for NYC subway pictures from the 70's and 80's will show how much they have improved. The fact that there is no graffiti and drastically reduced crime levels from that era should change your mind.

- Please elaborate on the "incompetence on the part of the people running the (subway) system." Do you mean the driver and conductor on the actual train itself? Did you run in to another train? Did the conductor announce an incorrect transfer? Did the doors close too quickly? Who do you believe is "running" the subway system?

- Can you please provide proof that MTA workers (non-executive laborers) are being paid $50/hour?

Thank you

Scott Sumner writes:

Adrian, I've only used the NYC subways a few times:

1. Once it was extremely hot, maybe 95 degrees. Wearing a suit, I was soaked in sweat.

2. Once I stood on the platform 10 minutes, waiting for a train, and no train came by. It turns out the station was closed. The subway didn't bother to tell us.

3. The employees are rude and unhelpful.

4. The stations are cramped and extremely dirty.

5. The layout is poorly designed.

6. The maps are much more confusing than subways in even non-english speaking countries.

7. I had to swipe my card 5 times to get it to read properly.

8. It smells like a sewer.

Other than that it's fine.

I never claimed MTA workers made $50/hour.

hanmeng writes:

My limited understanding is that public transportation almost never breaks even. Is it likely the Hong Kong model (using real estate ventures to subsidize transit development) would work elsewhere?

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