Tuerck: Support "Cut, Cap and Balance"

Having reviewed the House-passed Cut Cap and Balance Act of 2011, I have reached the conclusion that the Senate should adopt this legislation and send it on to the President. The Act provides the only effective solution to the country’s budget crisis, which is to cap federal spending well below current levels. The provision to cap spending at 19.9% of GDP by 2021 would bring spending back toward its historical norm and prevent the kind of binge spending that we have witnessed over the past two years. This is the only way to prevent a repeat of the misspending that has brought us to this point. I urge Senators Brown and Kerry to vote yes.

David G. Tuerck
Executive Director, The Beacon Hill Institute
Professor and Chairman, Department of Economics
Suffolk University

Infrastructure Spending

Reading that close to 1 million people are currently without power, a posting by Alex Tabarrok at Marginal Revolution came to mind. In his posting, he notes how when people typically think of government spending on infrastructure, new bridges and highways come to mind and he makes a persuasive argument for a different type of spending.

"Even more valuable than transportation infrastructure would be greater investment in electricity infrastructure, a smart grid."

This could include numerous national projects to put in place a "smart grid." This type of grid would be able to have "smart pricing" enabling prices of electricity to go up when demand is high, a basic economic requirement, reducing the maxium load on power stations at peak times. Additionally, this grid would be much more robust then the current system, allow at least some of the people currently effected by the ice storm to have heat and lights.

Mr. Tabarrok states that power outages cost the U.S. $100 billion a year, suggesting there could be gains if the incoming administration thinks outside the box. Additionally, a "smart grid" would be a requirement for the transportation of energy, a key pillar for the expansion of green power.

The validity of government spending and its effect effect (or multiplier) has been debated recently, including this interesting article that places the Multiplier at 1.0, but looking into the short term, I suspect there will be an expansion of federal spending, in an attempt to shorten the current resession.

Homeland Inefficiencies

Interesting paper on aviation security from a couple of Aussies at the University of New Castle:

In particular, significant expenditure has been dedicated to two aviation security measures aimed at preventing terrorists from hijacking and crashing an aircraft into buildings and other infrastructure: (i) Hardened cockpit doors and (ii) Federal Air Marshal Service. These two security measures cost the United States government and the airlines nearly $1 billion per year. This paper seeks to discover whether aviation security measures are cost-effective by considering their effectiveness, their cost and expected lives saved as a result of such expenditure. An assessment of the Federal Air Marshal Service suggests that the annual cost is $180 million per life saved. This is greatly in excess of the regulatory safety goal of $1-$10 million per life saved. As such, the air marshal program would seem to fail a cost-benefit analysis. In addition, the opportunity cost of these expenditures is considerable, and it is highly likely that far more lives would have been saved if the money had been invested instead in a wide range of more cost-effective risk mitigation programs. On the other hand, hardening of cockpit doors has an annual cost of only $800,00 per life saved, showing that this is a cost-effective security measure.

That's not pocket change. Any idea on how this has gone unnoticed?

You Ain't Seen Nothing Yet

The Globe is breaking a big story in today's paper on the Big Dig, the gift that keeps on giving. (Warning: If you have high blood pressure, read no more.)

What started out as a $2.8 billion project in 1985 is today projected by the Globe to cost $22 billion (that's $7 billion more than the last estimate). And to think some of the Big Dig boosters still think it's a bargain!
The Big Dig, officially known as the Central Artery/Tunnel Project, has been beset by financial and other problems including the death of one person. It's funding has also rested on a myth, says the Globe. The state taxpayers' share of the mega-project is a staggering 73 percent. And it's going to get worse. State transportation officials are considering increasing tolls on the turnpike and adding them on I-93.

Hindsight being 20/20, there are many unintended consequences on staking the state's future on what's nothing more than an urban beautification project that happens to serve as a road. One reason for the Big Dig's high cost can be traced to its
project-labor agreement(PLA) status. What's a PLA? Find out here.

Crumbling Infrastructure: It's Not a Lack of Funding

Today's Boston Metro has a frontpage story on the release of a new report by the DC-Based TRIP which found:

• More than a third of major roads are rated in fair or poor condition.
• Driving on roads in need of work in Massachusetts costs the average driver about $156 in added repairs and extra gas;
• Traffic on major highways in Massachusetts is expected to jump 20 percent by the year 2025;
• Car crashes cost the state $6.3 billion a year in medical bills, delays, lost productivity and insurance costs; and
• 35 percent of interstate bridges in Massachusetts are one rating point away from being structurally deficient.

This is pretty scary stuff and the conditions of the Bay State's roads and bridges can no longer be ignored. I am a little bit skeptical of the authors' conclusion:

"The deficiencies cited in this report are not a reflection of the effectiveness of state and local transportation agencies, but a lack of adequate funding."

Oh right, our problem was that we just didn't throw enough money into that boondoggle we call the Big Dig.
But really, inadequate funding? You're telling me it has nothing to do with police details, project-labor agreements, or prevailing wage laws, all of which drive up the costs of public construction?
I doubt it.

Handouts in Maryland

Not to be outdone by Massachusetts' $1 billion life science initiative, the governor of Maryland has just unveiled his own initiative to the tune of $1.1 billion. Following the logic of Governor Patrick, this means that Maryland will soon be the most attractive state for the biotech industry.

On the other hand, if you're like us and you believe industries are attracted by good infrastructure, an educated workforce, low taxes, and unobtrusive regulations then you might think that Maryland's governor just made an even worse mistake than our own.

Budgeting Waste

I tend to be very skeptical whenever I hear the term "budget deficit". Back in May, my hometown of Lowell projected a deficit of $6 million for the upcoming fiscal year. Half of that deficit came from our trash collection program which is expected to increase to $4 million next year if no changes are made.

As we all learned in Economics 101, incentives matter. The problem is that everyone is charged the same standard fee each year regardless of how much trash they actually produce. Why bother to reduce the amount of waste you produce or increase the amount you recycle (Lowell has a 7% rate) if you're going to pay the same cost either way?

In response, Lowell's city manager has proposed a new flat fee/pay-as-you-throw system which could lower the deficit, increase recycling, and bring about more fairness in trash collection. The idea is that when you charge people something closer to the actual cost then they will tend to change their behavior.

This is a step in the right direction (even my nemisis at Left in Lowell agrees), but why not go all the way? The city manager is still projecting a $2.5 million trash deficit at a time when cities are struggling to balance their budgets. A complete conversion to pay-as-you-throw could totally eliminate the budget deficit and perhaps result in a surplus.

Patrick Signs Life Sciences Bill

Governor Patrick signed his life sciences initiative into law on Monday. The 10-year $1 Billion dollar initiative is supposed to stimulate the state's biotechnology sector and create more jobs for Massachusetts.

Unfortunately, as the Beacon Hill Institute testified several months ago, the initiative will only burden taxpayers without adding any real benefits to the economy. Politicians have never, and never will be, good at picking winners. Companies like Genzyme and Novartis did not come here because of corporate handouts. Irrespective of any handouts, the biotech industry has already decided that Massachusetts is a great place to locate and expand.

Instead of trying to pick winners, the state needs only to simplify the tax code to make Massachusetts competitive.