Many politicians throughout the world,
not just on the centre and left, are arguing for increased spending on infrastructure. This was one of the key proposals of Donald Trump during his election campaign. In his election manifesto he pledged to “Transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains”.
Increased spending on inffrastructure has both demand- and supply-side effects.
Unless matched by cuts elsewhere, such spending will increase aggregate demand and could have a high multiplier effect if most of the inputs are domestic. Also there could be accelerator effects as the projects may stimulate private investment.
On the supply side, well-targeted infrastructure spending can directly increase productivity and cut costs of logistics and communications.
The combination of the demand- and supply-side effects could increase both potential and actual output and reduce unemployment.
So, if infrastructure projects can have such beneficial effects, why are politicians often so reluctant to give them the go-ahead?
Part of the problem is one of timing. The costs occur in the short run. These include demolition, construction and disruption. The direct benefits occur in the longer term, once the project is complete. And for complex projects this may be many years hence. It is true that demand-side benefits start to occur once construction has begun, but these benefits are widely dispersed and not easy to identify directly with the project.
Then there is the problem of externalities. The external costs of projects may include environmental costs and costs to local residents. This can lead to protests, public hearings and the need for detailed cost–benefit analysis. This can delay or even prevent projects from occurring.
The external benefits are to non-users of the project, such as a new bridge or bypass reducing congestion for users of existing routes. These make the private construction of many projects unprofitable, except with public subsidies or with public–private partnerships. So there does need to be a macroeconomic policy that favours publicly-funded infrastructure projects.
One type of investment that is less disruptive and can have shorter-term benefits is maintenance investment. Maintenance expenditure can avoid much more costly rebuilding expenditure later on. But this is often the first type of expenditure to be cut when public-sector budgets as squeezed, whether at the local or national level.
The problem of lack of infrastructure investment is very much a political problem. The politicians who give the go-ahead to such projects, such as high-speed rail, come in for criticisms from those bearing the short-run costs but they are gone from office once the benefits start to occur. They get the criticism but not the praise.
Articles
Are big infrastructure projects castles in the air or bridges to nowhere? The Economist, Buttonwood’s notebook (16/1/17)
Trump’s plans to rebuild America are misguided and harmful. This is how we should do it. The Washington Post, Lawrence H. Summers (17/1/17)
Questions
- Identify the types of externality from (a) a new high-speed rail line, (b) new hospitals.
- How is discounting relevant to decisions about public-sector projects?
- Why are governments often unwilling to undertake (a) new infrastructure projects, (b) maintenance projects?
- Is a programme of infrastructure investment necessarily a Keynesian policy?
- What accelerator effects would you expect from infrastructure investment?
- Explain the difference between the ‘spill-out’ and ‘pull-in’ effects of different types of public investments in a specific location. Is it possible for a project to have both effects?
- What answer would you give to the teacher who asked the following question of US Treasury Secretary, Larry Summers? “The paint is chipping off the walls of this school, not off the walls at McDonald’s or the movie theatre. So why should the kids believe this society thinks their education is the most important thing?”
- What is the ‘bridge to nowhere’ problem? Why does it occur and what are the solutions to it?
- Why is the ‘castles in the air’ element of private projects during a boom an example of the fallacy of composition?
Investment is crucial in all sectors of the economy. With growing demand for travel abroad, airports across the world have begun implementing investment strategies to increase capacity. Airport bosses at Heathrow are currently considering a 5 year investment plan that is expected to cost £3 billion.
Although investment is certainly needed and passengers will benefit in the long run, the cost of this investment will have to be met by someone. If these plans are approved by the airport bosses, it is likely that ticket prices will be pushed upwards to pay for it. Any increase in charges will have to receive approval by the Civil Aviation Authority (CAA). The plan at the moment would see ticket prices, via landing charges, increase by £19.33 per passenger before a further rise to £27.30. The impact on customers has already been raised as a key concern.
If the investment plans proceed, Heathrow expects to see its passenger numbers increase by 2.6m over the next 5 years, despite the proposed price hikes. This would naturally increase revenue and this money would provide at least some of the funds to repay the cost of the investment.
The price rises have been described as ‘incredibly steep’ and there are concerns that they will penalize customers. Airlines, such as Virgin Atlantic have recognized the need for more investment, but are more focused on finding ways to provide it without the price rises.
However, Colin Matthews, the Heathrow Chief said:
Heathrow faces stiff competition from other European hubs and we must continue to improve the service we offer passengers and airlines.
Passengers have already seen prices rise and Heathrow’s cost base has been described by British Airways as ‘inefficient’. Despite the fact that the decision by the CAA is not expected until January 2014, speculation will undoubtedly continue until any decision is reach. The following articles consider this case.
Heathrow hits turbulence over airport charges The Telegraph, Nathalie Thomas (12/2/13)
Heathrow Airport proposes ‘to raise ticket prices’ BBC News (12/2/13)
Heathrow investment to raise ticket prices Sky News (12/2/13)
Cost of Heathrow flights to rise by £27 in five years thanks to investment surcharge plans Mail Online, Helen Lawson (12/2/13)
Airlines fly into a rage as Heathrow warns charges must climb steeply Independent, Simon Calder (12/2/13)
Heathrow investment plan may lead to ticket price rise Reuters (12/2/13)
Heathrow calls for rise in airline tariffs Financial Times, Andrew Parker (12/2/13)
Questions
- If you had to undertake a cost-benefit analysis concerning the above investment proposal, which factors would you consider as the private and external benefits?
- Which factors would have to be taken into account as the private and external costs for any cost-benefit analysis?
- How important is it for the CAA to consider external costs and benefits when making its decision?
- If prices rise as the plans propose, what would you expect to be the effect on passenger numbers? How would this change be shown on a demand and supply diagram?
- According to Heathrow, they are expecting passenger numbers to increase, despite the price rises. What does this suggest about the demand curve? Illustrate your answer.
- Would you expect such an investment to have any macroeconomic impact?
There has always been relatively widespread agreement that the best method to produce and finance education is via the government. Education is such a key service, with huge positive externalities, but information is far from perfect. If left to the individual, many would perhaps choose not to send their children to school. Whether it be because they lack the necessary information, they don’t value education or they need the money their child could earn by going out to work – perhaps they put the welfare of the whole family unit above the welfare of one child. However, with such large external benefits, the government intervenes by making education compulsory and goes a step further in many countries and provides and finances it too.
However, is this the right way to provide education? People like choice and the ability to exercise their consumer sovereignty. The more competition there is, the more of an incentive firms have to provide consumers with the best deal, in terms of quality, efficiency and hence price. We see this every day when we buy most goods. Many car salesrooms to visit – all the dealerships trying to offer us a better deal. Innovation in all industries – one phone is developed, only to be trumped by a slightly better one. This is only one of the many benefits of competition. Yet, education sectors are largely monopolies, run by the government. Many countries have a small private sector and there is substantial evidence to suggest that education standards in it are significantly higher. Research from Harvard University academics, covering 220,000 teenagers, suggests that competition from private schools improves achievement for all students. Martin West said:
“The more competition the state schools face for students, the stronger their incentive to perform at high levels…Our results suggest that students in state-run schools profit nearly as much from increased private school competition as do a nation’s students as a whole.”
The study concluded that an increase in the percentage of private school pupils made the education system more competitive and therefore more efficient, with an overall improvement in education standards. With so much evidence in favour of competition in other markets in addition to the above study, what makes education so different?
Or is it different? Should there be more competition in this sector – many economists, including Milton Friedman, say yes. He proposed a voucher scheme, whereby parents were given a voucher to cover the cost of sending their child to school. However, the parents could decide which school they sent their child to – a private one or a state run school. This meant that schools were in direct competition with each other to attract parents, their children and hence their money. Voucher schemes have been trialed in several places, most prominently in Sweden, where the independent sector has significantly expanded and results have improved. Is this a good policy? Should it be expanded and implemented in countries such as the UK and US? The following articles consider this.
Articles
School Competition rescues kids: the government’s virtual monopoly over K-12 education has failed Hawaii Reporter, John Stossel (30/10/11)
Private schools boosts national exam results Guardian, Jessica Shepherd (15/9/10)
Can the private sector play a helpful role in education? Osiris (10/8/11)
Voucher critics are misleading the public Tribune Review, TribLive, Joy Pullmann (30/10/11)
Vouchers beat status quo The Times Tribune (29/10/11)
Why are we allowing kids to be held hostage by a government monopoly? Fox News, John Stossel (26/10/11)
Free Schools – freedom to privatise education The Socialist (26/10/11)
Anyone noticed the Tories are ‘nationalising’ schools? Guardian, Mike Baker (17/10/11)
Publications
School Choice works: The case of Sweden Milton & Rose D Friedman Foundation, Frederick Bergstrom and Mikael Sandstrom (December 2002)
Questions
- What are the general benefits of competition?
- How does competition in the education market improve efficiency and hence exam results? Think about results in the private sector.
- What is the idea of a voucher scheme? How do you think it will affect the efficiency of the sector?
- What do you think would happen to equity in if a scheme such as the voucher programme was implemented in the UK?
- How do you think UK families would react to the introduction of a voucher scheme?
- What other policies have been implemented in the UK to create more competition in the education sector? To what extent have they been effective?
Globalisation is a word we hear a lot of. The world economy is constantly changing and the financial crisis, from which the world is still recovering, is a prime example of just how interdependent nations are. Tony Blair has extended this idea of interdependence in the context of universities and the so-called knowledge economy. As technology advances and economies become more interdependent, international competitiveness is becoming increasingly important and this is one area where universities are vital.
“If you look at the world’s current and emerging superpowers, nearly all have either well-established or are currently establishing university systems that will help them compete in the global economy.”
Just how important is a country’s higher education system and what has been the impact of globalisation on them?
Tony Blair’s global ‘battle of ideas’ BBC News, Sean Coughlan (7/3/11)
Top schools face globalisation challenge Financial Times, Jonathan Doh and Guy Pfefferman (6/3/11)
Questions
- What do we mean by a ‘knowledge economy?
- What is globalisation and how is the interdependence of nations relevant to this concept?
- Tony Blair says that the world’s superpowers all have well-established or are currently establishing university systems. Why is it this helps them to compete globally?
- What are the benefits of higher education? Do they accrue mainly to the individual receiving the education or to society? On which factors does your answer depend?
- What role does information play in making the global education environment more competitive?
Anyone who lives in the South West can argue that they get a raw deal. Not only are the average salaries in this region lower than in the rest of the United Kingdom, but their water bills are 40% higher than those elsewhere in England and Wales. South West Water is the only provider of water in the South West and hence there are no other competitors that households or businesses can switch to, despite the extortionate prices.
Many households and businesses in the region are struggling to cope with the unfair bills, as people are forced to sacrifice other things in order to find the money. Furthermore, it can be argued that these higher bills are actually used for the benefit of everyone else in the United Kingdom. Since privatisation, South West Water are responsible for cleaning and maintaining over one third of the UK’s beaches and the prices they are charged by SW Water reflect this £2 billion cost. Moreover, with a relatively low population, this large cost cannot be spread across many people. Instead, the small population has to pay larger bills. A hairdresser, who does use a lot of water, is finding herself crippled by water bills of some £2,500. And this bill will pay to clean the beaches in the South West so that people living elsewhere can benefit from the beautiful surroundings.
There is now wide recognition of how unfair this scenario is and proposals have been suggested, ranging from a government grant (hardly likely given the state of public finances) to a levy on other regions’ bills to compensate SW Water for their clean-up costs. However, no decision has been made about how to progress and so for now, residents of the region must just simply grin and bear it, while sacrificing expenditure on other areas and seeing residents from across the UK benefit from their sacrifice.
P.S. If you hadn’t guessed it, yes I do live in the South West!
Why is water so expensive in the South West? BBC News (13/7/10)
North Devon MP Nick Harvey tackles unfair South West Water charges Barnstaple People (14/7/10)
Questions
- What is privatisation? Assess the advantages and disadvantages of the privatisation of water some 20 years ago.
- Does South West Water have a monopoly?
- Which of the 3 proposals is the most beneficial to those a) living in the South West, b) businesses in the South West c) the government and d) the rest of the country?
- Which proposal would you recommend and why?
- Is it fair that those in the South West should pay disproportionately more to clean and maintain beaches, which are used by everyone?
- Is the concept of market failure relevant in this case? Explain your answer.