Monday, January 26, 2015

Infrastructure maintance and suburban development

One does not normally think of suburban developments as being financially bad ideas.  I often see these building patterns as contributing to urban sprawl (wiping out wildlife habitat), congestion on roads, and inequality but being a way to make housing affordable.  But this piece has a strong opinion on even the long term financial viability of this development pattern:
In each of these mechanisms, the local unit of government benefits from the enhanced revenues associated with new growth. But it also typically assumes the long-term liability for maintaining the new infrastructure. This exchange — a near-term cash advantage for a long-term financial obligation — is one element of a Ponzi scheme.

The other is the realization that the revenue collected does not come near to covering the costs of maintaining the infrastructure. In America, we have a ticking time bomb of unfunded liability for infrastructure maintenance. The American Society of Civil Engineers (ASCE) estimates the cost at $5 trillion — but that's just for major infrastructure, not the minor streets, curbs, walks, and pipes that serve our homes.

The reason we have this gap is because the public yield from the suburban development pattern — the amount of tax revenue obtained per increment of liability assumed — is ridiculously low. Over a life cycle, a city frequently receives just a dime or two of revenue for each dollar of liability. The engineering profession will argue, as ASCE does, that we're simply not making the investments necessary to maintain this infrastructure. This is nonsense. We've simply built in a way that is not financially productive.
Interestingly, this hypothesis suggests that tax flight is more effective than one might think at protecting people from paying taxes (municipal taxes being the easiest to avoid by relocation) but that this has long term consequences in terms of infrastructure.  And, of course, this same mobility will let people leave an area after the infrastructure begins to decay and cannot easily be maintained.

While this does seem overly simplistic as a complete explanation for what is happening with US infrastructure, it certainly cannot be helping matters.  It's also pretty hard to decide what to do about.  My best bet is to make people bear more direct costs -- but congestion and mileage taxes don't strike me as especially politically palatable. 

But it does bear thinking about.


  1. Joseph:

    Are these developments "bad ideas" or are they transfer payments? I guess what I'm saying is: to the winners in these deals, they're not "bad ideas" at all. The city official who approves a new development at a low tax rate is not the same person as the city official who, decades later, is short of funds to keep the public facilities in good repair.

  2. Andrew,

    I agree that the incentives are well aligned for this pattern to development. I am just worried that the net result is worse off than we'd be if there was more long term planning. I'm thinking of this as a classic "tragedy of the commons" dilemma.

  3. «to the winners in these deals, they're not "bad ideas" at all. The city official who approves a new development at a low tax rate»
    «thinking of this as a classic "tragedy of the commons" dilemma»
    It is not quite a "tragedy of the commons", it is the simple accounting fraud that has been the foundation for welath and power in the USA in the past 30 years in particular, but arguably for centuries.

    It is the best accounting fraud: to front-load the benefits, and to back-load the costs, minimizing them via suitable discounting options.

    In other words it is the standard accounting fraud of insufficient depreciation of capital, that results in capital drawdown, or equivalently in asset stripping.

    But since accounting fraud resulting in insufficient depreciation and asset stripping is enormously profitable and not just for city officials, but also for the current suburban residents and the finance industry that serves both, it is very popular, and those who argue against it are reviled as jimini crickets and uptight nerds.