Sat, 31 May 2008

Investment, fine. But in what?

Last week, Governor Carcieri convened a meeting of the newly-reconstituted Economic Policy Council to ask the question, what's going on with our economy and how can we make it better? He was quoted in the Providence Journal this way:

The state is "making some real progress," he said, in making large investments in its infrastructure. He said that the relocation of Route 195, the rebuilding of the Washington Bridge, as well as other major projects amounts to a total investment of $5 billion to $6 billion over four to five years.

This is an impressive figure, but a bit less so when you consider that not a dime of it has gone to create new capacity.

We have the I-195 and Sakonnet River bridge projects, both intended to replace bridges that already existed but needed repairs. There's also the highway access to Quonset Point, designed to replace a road with just one stoplight, on which people routinely traveled at 50 miles per hour. This new road shaves about a minute or so off your travel time to Quonset. Then there's the new freight rail to Quonset. There already were rails, but new and taller freight cars and a busier Amtrak schedule were in danger of making them obsolete. We are making the Washington Bridge wider, and that will be of comfort to the commuters of Barrington and Rehoboth, but to whom else?

In other words, all that money went to defending the current capacity of our transportation system, not to creating anything new. When it's all finally done, exactly what will you or any business be able to do that you couldn't do twenty years ago?

The whole point of investment is that when you're done with the investing, you can do more and better stuff than you could before. If that's not true, you may as well be digging holes and filling them in again. Six billion dollars isn't chicken feed, and it paid a lot of construction workers, but what did we get for it?

When you talk to people about the economic impact of investment, you'll often hear World War II used as an example. It was the government spending of WWII that pulled us out of the Great Depression, you'll hear. I heard that in my first economics class. That's also where I learned that economists love to talk about the importance of big aggregates: the aggregate demand of the US is all the goods we buy in a year, the aggregate production is all the stuff we make. But hidden in those aggregates are some pretty important details, and we overlook them at our risk.

Government spending on WWII and the Cold War pulled us out and kept us out of the Great Depression, but look at what that spending did. Spending on aircraft created a new domestic aviation industry. Spending on nuclear energy created a new nuclear power industry. Spending on high-speed electronics and communication technology created a new electronics industry and ultimately created the computer. All this spending, and much more, was investment that transformed our lives, and the nation. It's no wonder that the 1950's were a boom time in the American economy.

According to the textbook macroeconomic analysis, however, all that really mattered was the aggregate level of government spending. The theory is that high enough spending will spur investment, even if the spending isn't investment itself. But to imagine that market-driven investment would have been as transforming is missing the trees for the forest; the details are important. We might have created minor improvements to existing products, or invented self-freezing popsicles instead. Unfortunately, to a typical US-trained economist, government spending is government spending is government spending. The bottom line is all that matters, and don't bother us with details.

And this is why someone like our Governor can boast about spending $6 billion on roads as if it will make an ounce of difference to our economy over the long term. Sure that's a lot of construction crew salaries, but what else did it get us?

A couple of times a week lately, I find myself navigating the high-tech canyons of Kendall Square, in Cambridge, hard by MIT. As I walk down Main Street, I'm surrounded by research institutes and technology companies of every stripe. Huge new buildings have sprung up (and are springing up) since I last spent much time there, 15 years ago. The growth and activity are nearly breathtaking. MIT is a phenomenal place, in many ways, but one thing it isn't is an accident. MIT happened because people who cared about science and technology invested time and money to make it happen.

Here's what they didn't do to create MIT: skimp on the library's book budget; encourage the early retirement of dozens of faculty who will be "replaced" with adjunct faculty Ftwithout research funding or even a campus presence; fail to support research faculty between grants; close departments that weren't making "enough" money; and build shiny new buildings without a commitment to staff them. But we do all that at URI. Our university could be an economic engine -- check out the industrial area near the oceanography school sometime -- but we need to support it.

So when you hear the Governor boasting about our investment in roads and bridges, think to yourself what our state might be like had we just patched those bridges and used the leftover money to invest in a real transformation of our higher education. At the same EPC meeting, Robert Carothers, the president of URI put it best:

"Last year, we were 50th in the nation in investment and research. We were the only state in the nation that didn't increase higher education funding from year to year... No amount of smooth talking makes those things go away."

00:32 - 31 May 2008 [/y8/cols] link

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