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Wider economic benefits of infrastructure projects – EP136

Jakarta Mass Rapid Transit system (under construction), an example of a public transport program which could deliver wider economic benefits.

Wider economic benefits are increasingly being estimated in the economic assessments of infrastructure projects. In Episode 136 of Economics Explored, show host Gene Tunny and his colleague Arturo Espinoza Bocangel chat about how some infrastructure projects, particularly transport projects, can stimulate new economic development, increasing the density of businesses and workers in an area. This can boost innovation and productivity through knowledge transfer and greater specialisation, among other mechanisms. The expected wider economic benefits of the Cross River Rail subway project in Brisbane, Australia are discussed.

You can listen to the conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps. A transcript and relevant links are also available below.

Transcript of EP136: Wider economic benefits of infrastructure projects

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored. The more we engage with each other the more knowledge is shared, the more we learn from other people. And this actually helps us in an economic sense.

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia and I’m a former Australian Treasury official. This is Episode 136, on wider economic benefits. I’m joined this episode by my Adept Economics colleague, Arturo Espinoza Bocangel. Arturo and I chat about how some infrastructure projects can stimulate new economic development, increasing the density of businesses and workers in an area. We talk about how this can boost innovation and productivity, through knowledge transfer, and greater specialisation among other mechanisms. Please check out the show notes for relevant links, clarifications and details of how you can get in touch with any comments or suggestions. I’d love to hear from you. Also, check out our website economicsexplored.com. If you sign up as an email subscriber, you can download my e-book, Top 10 Insights from Economics. Righto, now for my conversation with Arturo on wider economic benefits. Thanks to my audio engineer, Josh Crotts, for his assistance in producing this episode. I hope you enjoy it. Arturo, good to be chatting with you again.

Arturo Espinoza Bocangel  01:33

How are you? It’s my pleasure to be here.

Gene Tunny  01:36

Excellent. Yes, keen to chat with you about wider economic benefits. So you helped me out regarding that presentation I gave last month in March to the Indonesian government officials. So as part of a short course, through University of Queensland international development, so you helped me get ready for that. And yeah, that was great. And you dug up some really interesting studies on wider economic benefits, and it helped me understand what they are and how you might measure them. So I thought that was really useful. I thought it could make a good conversation. And hence, I thought, well, let’s chat about it on the programme.

So yes, I guess where we should begin is just this. What is this idea of wider economic benefits? It’s benefits that are additional to the standard ones that you estimate in a cost-benefit analysis, isn’t it?

Arturo Espinoza Bocangel  02:41

Yes, that’s true.

Gene Tunny  02:42

It’s benefits that are in addition to the travel time savings, for example, or the reduction in greenhouse gas emissions that you might get, or the reduction in vehicle operating costs that you would get if you invest in public transport, for example, or if you make the roads more efficient, if you build a new road, you increase road… Actually, that’s probably going to… Yes, that would. That should reduce greenhouse gas emissions to an extent if people aren’t stuck in traffic as long. But yeah, it’s something additional to those normal benefits that are counted in a cost-benefit analysis. And it’s things like an improvement in productivity that comes from what they call agglomeration effects, that sort of thing, isn’t it, and having more people in a region, a thicker labour market? I think that’s how they refer to it. There are all these benefits that they try to estimate, in addition to the standard benefits, is that right?

Arturo Espinoza Bocangel  03:55

Yes, that’s right, Gene. And also, those wider economic benefits can involve some potential impacts on the market, the labour market. They can create more jobs in terms of supply and demand. So that is another WEB that we can consider too.

Gene Tunny  04:17

Right. So yeah, the idea is that there’s some sort of development or infrastructure investment, typically a transport infrastructure investment, and it opens up a new area, or it increases the access to a particular area. And we know that there’s been a bit of focus on what’s called transit-oriented developments, the TODs, whereby if you have a new railway station or subway stops, so you have a new subway system, then the idea is that this can activate new parts of the city. It can create little hubs, little clusters of activity and we see that with what is called the Cross River Rail project here in Brisbane. So this is a subway system.

Now, I’ve questioned in the past the economic viability of it, but they did manage to produce a cost-benefit analysis which had a positive benefit-cost ratio of over 1.4. And they also looked at, well, what could the wider economic benefits of this project be. And if you look at what the government says about the project, a lot of how it sells the project relates to what you might call wider economic benefits. So it talks about revitalised inner city precincts ready to connect, create and advance the region globally for generations, connect industry talent and major facilities, create communities employment and economic value, advance global competitiveness, livability and visitation.

So these are really sort of high level, or these are ambitious benefits, and not just your standard, oh we’re building a new subway system, and people will be able to get to work faster. And so they won’t be wasting time on a congested train network anymore. So that’s one of the ideas of Cross River Rail. Their concern was that there was a bottleneck at this railway bridge in Brisbane, the Merivale Street Bridge. Do you know that one? It connects South Brisbane and the city, so via Roma Street Station. I don’t know if you know that railway bridge.

Arturo Espinoza Bocangel  06:45

Probably yes, I pass by that bridge, but I’m not sure.

Gene Tunny  06:51

That’s okay. That’s okay. But apparently there’s some congestion issue there. And they needed to build this subway system to take pressure off of that. And there’s a bit of a debate to what extent that’s actually the case and whether that is such a serious issue. But anyway, let’s just take their word for it. Let’s just accept that that’s the case for now.

And it’s interesting that in selling this project, probably because perhaps they realise that the actual benefits in terms of travel time aren’t really that great. They have to make this bigger case for Cross River Rail. And it’s all about… Well, it seems to me a lot of it is about the wider economic benefits. And it’s about activating or revitalising some of these inner-city precincts, and they’ve got an interesting document, and I’ll put this in the show notes about Cross River Rail.

And they talk about their Boggo Road precinct. So that’s out near the… There’s an old jail that they’re no longer using, or an old prison at Annerley called Boggo Road. There’s no Boggo Road. Boggo Road was Annerley Road. And because once upon a time, it didn’t have any bitumen on it, it would just get muddy if it rained. And people would get bogged in the road, you know, in their horse and cart or their horse and buggy. And so they call the Boggo Road.

Arturo Espinoza Bocangel  08:30

That’s funny.

Gene Tunny  08:31

We’ve got this area of Brisbane now called Boggo Road, even though there actually is no such thing as an actual Boggo Road. But anyway, and what the government’s tried to do there is it’s tried to create, they call it a world class innovation precinct specialising in health science and education jobs of the future.

So I guess this is consistent with this idea of agglomeration effects, because if you make it easier to get to this Boggo Road precinct where you’ve got this cluster, this health sciences or biotech cluster, then that might encourage biotech firms to locate there or suppliers to biotech firms to locate there. And then you get these conglomeration benefits these efficiency benefits from colocation of businesses that can benefit from being near each other, the synergies so to speak. Economists talk about increasing returns to scale from having more economic activity and having the sum of the parts, sorry, the actual outcome being greater than the sum of the parts, so you get more than the components. Does that make sense? I probably didn’t explain that very well. You get more than the actual sum of the parts. That’s the idea, isn’t it? You get all these synergies.

Arturo Espinoza Bocangel  10:01

Under economic theory, when we talk about economies of scale, that mean a firm or an industry is operating under decreasing cost per unit. So as soon as you use more input, could be labour, capital, etc, that mean, as you increase in that proportion, let’s say a given proportion of those inputs, your return is going to be rather than that. So that is when we talk about when we are under economies of scale.

Gene Tunny  10:42

Yeah, yeah. Yep. So, there’s this idea that you get these benefits from greater density, this clustering. And I mean, we’ve got it to some extent in our cities. I mean, all cities have clusters of some kind, or many cities do, and they’re talking about this health sciences cluster at Boggo Road. They’ve got some other examples. Wooloongabba they want that to be a vibrant world class centre for community sport and health. So that’s centred around the Gabba Stadium, the Wooloongabba Stadium, which is a cricket ground. They play Australian rules football there, Aussie rules as well. And it’s going to be where the opening ceremony of the Olympics is going to be held in 2032. So there’s going to be a lot of investment there. I think they’re going to spend over a billion dollars upgrading that stadium. Yeah. Again, whether that’s economic or not, who knows? But let’s put that aside for now.

Yeah, so this idea that we sort of have all of these clusters, and we’re going to get similar firms locating with each other, and there are all these stories about what benefits this brings. And so as part of getting ready for this and getting ready for the short course presentation, I mean, we had a look at how do you explain these wider economic benefits, these agglomeration effects, these benefits from greater density? We know they exist. I mean, we know there are regions such as Silicon Valley, which specialises in tech, and you get the benefits from having firms and, you know, co-located near each other, you’ve got the workers from the firms talking to each other. They’re learning from each other informally. Yeah, there could be more formal learning between, say, a business and its suppliers. I mean, businesses could be learning from suppliers who are helping them out on something. But there’s informal learning, there’s the watercooler effect that they talk about. And so we had a look at what are some of these wider economic benefits, how do you explain them, and there are some really great articles out there.

There’s one I found by Gerald Carlino, Gerry Carlino. This is one of the best ones I’ve found. He was an economic adviser in the research department of the Philadelphia Fed, so the Philadelphia Federal Reserve Bank. He’s still got some emeritus professor there now, but I don’t think he’s active as he was when he wrote this article in 2001. Knowledge Spillovers: City’s Role in the New Economy. So this is terrific. I’ll put it in the show notes. And I mean, he gives some great examples, particularly from tech because a lot of the really good examples are from that technology industry.

And he refers to a book by AnnaLee Saxenian. In the 1994 book, I’ll have to look that up, she described her gathering places such as the Wagon Wheel bar, located only a block from Intel, Raytheon, and Fairchild Semiconductor. This is in Silicon Valley. She wrote about how they served as informal recruiting centres as well as listening posts. “Job information flowed freely along with shop talk.” So that’s what she wrote. And then other examples of high-tech hotspots include the Route 128 Corridor in Massachusetts, the Research Triangle in North Carolina, and suburban Philadelphia’s biotechnology research and medical technology industry.

And then Gerry Carlino goes into some other examples and he talks about Los Angeles he talks about Hollywood. “The geographic concentration of the motion picture industry in LA offers a network of specialists, directors, producers, script writers, set designers, each of whom focuses on a narrow aspect of moviemaking. The network allows easier collaboration, experimentation and shared learning among individuals and firms.” And then he gives some other examples. Talks about medical research, facilities and teaching institutions having concentrated along York Avenue on Manhattan’s Upper East Side. And so he goes into these different examples. So that’s a great article.

And that’s an example of where you’ve got benefits from firms and workers in the same industry clustering together. So that’s a particular type of agglomeration benefit or knowledge spillover. So there’s a knowledge spillover. The knowledge spillover is driving the benefit there, isn’t it? It’s the fact that there’s this knowledge being transferred from people who have the knowledge to people who don’t have it, obviously. And so what Carlino, how he describes this, he calls it an MAR spillover, and he names it after three famous economists, Alfred Marshall, Kenneth Arrow. Can you guess who R is, Arturo? It’s Paul Romer. Sorry, that was a…

Arturo Espinoza Bocangel  16:39

I am not sure.

Gene Tunny  16:40

It’s all right. I was just wondering if it was obvious, but it’s… You know Paul Romer, did all that work on endogenous growth theory?

Arturo Espinoza Bocangel  16:49

Oh Paul Romer.

Gene Tunny 16:50

Yeah, Paul Romer.

Arturo Espinoza Bocangel 16:51

Definitely, yeah, I know him.

Gene Tunny  16:53

Yeah.

Arturo Espinoza Bocangel  16:54

Thanks to him I learned about endogenous growth, economic growth.

Gene Tunny  17:00

Oh, right. Yeah, yeah. So he’s one of the big names in that literature. Love to cover that in another episode. I guess this is related to it. I mean, this is about increasing returns to scale. In part, so, I mean, that’s relevant to endogenous growth. So that’s what we’ve been talking about here. So Carlino, what he writes is in 1890, Alfred Marshall… So Alfred Marshall was one of the great British economists at Cambridge University at Trinity College at Cambridge. He was a teacher of John Maynard Keynes. So he developed a theory of knowledge spillovers that was later extended by Kenneth Arrow and Paul Romer, hence the name MAR spillovers. According to this view, the concentration of firms in the same industry in a city helps knowledge travel among firms and facilitates innovation and growth. Employees from different firms in an industry exchange ideas about new products and new ways to produce goods. The denser the concentration of employees in a common industry in a given location, the greater the opportunity to exchange ideas that lead to key innovations. And that’s what we were talking about just before. There were these common places that people would get together such as this Wagon Wheel bar in Silicon Valley, and that was a source of knowledge exchange, people learning from each other.

Arturo Espinoza Bocangel  18:31

That’s interesting.

Gene Tunny  18:34

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  18:39

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Gene Tunny  19:08

Now back to the show. So we’ve talked about the MAR or MAR spillovers. There’s another concept of spillovers, which is called Jacobs spillovers, which is named after Jane Jacobs and this is the idea that you get benefits when people from different industries are different sectors clustered together or are co-located and you get synergies in that way. So that’s another concept. And just because you’ve got that flowing of ideas, so of things that people may not have thought about before. And one of the one of the points that Carlino makes in his article is that refers to some other authors here. As John MacDonald points out, both Jane Jacobs and John Jackson… So Jane Jacobs is the – I think she was a journalist, but she became famous for writing that book The Life and Death of American Cities. And she had a really interesting take on what made for a good city and she was very much into the medium density type of city you want to have. You don’t want to have tall towers, because they’re really lifeless. You want to have some intensity, some density. So it’s medium density. So similar to what you see in the apartment buildings in New York City, but not the really tall ones, not the Trump Tower. But you want people to have eyes on the street. So you want enough people that it’s vibrant, and exciting, but you don’t want too many that it just becomes lifeless and soulless. So she’s got a really interesting take on the life of cities.

But anyway, as John McDonald points out, “Both Jane Jacobs and John Jackson have noted that Detroit’s shipbuilding industry was the critical antecedent, leading to the development of the auto industry in Detroit. In the 1920s, Detroit exported mainly flour. So Detroit exported flour because of the industry was located north of Lake Erie along the Detroit River, small shipyards developed to build ships for the flour trade. The shipbuilding industry refined and adapted the internal combustion gasoline engine to power boats on Michigan’s rivers and lakes. As it turned out the gasoline engine rather than the steam engine was best suited for powering the automobile.” Okay, and so that’s interesting. And so because they had that sort of knowledge to begin with, and that sort of led on to the motor industry. So that’s an interesting example.

And there’s another great example in this book by Cal Newport, Deep Work. So Cal Newport’s got a great podcast, Deep Questions, which I thoroughly recommend to anyone is interested in productivity and working on the right things. So doing the things that matter. And he’s got this great example of building 20 at MIT, which was this temporary structure that they built during the Second World War. It was meant to house the overflow from the school’s bustling Radiation Laboratory. It wasn’t a very well made building. And they just put all of these different departments in it, people who couldn’t fit it in another building. And this is how Cal Newport describes it. “The result was a mismatch of different departments from nuclear science to linguistics to electronics. They shared the low-slung building alongside more esoteric tenants, such as machine shop and a piano repair facility. Because the building was cheaply constructed, these groups felt free to rearrange space as needed. Walls and floors could be shifted and equipment bolted to the beams.” And there was an article in The New Yorker where the author pointed out regarding the scientist Gerald Zacharias, his work on the first atomic clock, it was important that he was able to remove two floors from his building 20 lab, so he could install the three-storey cylinder needed for his experimental apparatus. So that’s pretty interesting.

But in MIT law, so in the stories they tell at MIT, it’s generally believed that this haphazard combination of different disciplines thrown together in a large reconfigurable building, so this is the important bit, that led to chance encounters in a spirit of inventiveness that generated breakthroughs at a fast pace, innovating topics, as diverse as Chomsky grammars, so that’s what Noam Chomsky contributed to linguistics, the Loran navigational radars. I think that’s how you pronounce it or Loran, and video games all within the same productive postwar decades. So he’s saying that this sort of odd mix of people from different disciplines led to these breakthroughs because people were talking to different people, perhaps that that encouraged them to think differently. Does that make sense? That sort of thing?

Arturo Espinoza Bocangel  24:35

Yeah, that makes sense? Yeah. That’s a very interesting point. I think the most popular example is all the technology developed in the military side was then, for example, in the case of microwave, that is a technology developed by the military side on military technology. And then that was applied for civil life. So I think that is the most popular example that we can use. But it’s true. You enrich your thoughts, your knowledge, when you have information from other fields, for example, in this case rather than economy.

Gene Tunny  25:28

So guess what all these stories are trying to show is that there are benefits from having people interact. I mean, it sounds obvious, doesn’t it when you think about it? Well, yeah, I guess that that makes sense, doesn’t it? I mean, the more we engage with each other, the more knowledge is shared, the more we learn from other people. And, you know, this actually helps us in an economic sense. And I mean, this is very difficult for… Well, you can’t really model this or predict this, but it’s something that occurs. And so hence, there can be benefits from getting people in the same place, making investments that can create these hubs, so improve the density, increase the density of particular areas. I mean, we know that density does matter to an extent because we know that cities develop central business districts and over the decades firms have found it advantageous to be in the CBD. I mean, it used to be more obvious that there was a benefit from being in a CBD, or a major activity centre somewhere in the city. It used to be more obvious than it is now. We can chat about that in a moment.

But I guess, if we’re talking 20 or 30 years ago, you could say, well, if you want to be in the CBD, or in an activity centre, say in Brisbane, Toowong or if you’re in Melbourne, it could be Box Hill or wherever, or if you’re in Sydney could be Parramatta. So you want to be in a place like that, because then you’re close to the bank, you’re close to the post office, you’re close to the stationery shop, you might be close to your clients. And so therefore, you’re going to get benefits that way, it’s going to make your life, your business easier to run.

Arturo Espinoza Bocangel  27:28

Exactly.

Gene Tunny  27:29

Yeah. And so that’ll make you more productive. Now, of course, now, we’ve discovered with COVID that, and this is one of the questions that one of the course participants asked, well, what do you think’s gonna happen with everyone’s working from home now? I mean, are these agglomeration benefits as big a deal now that we’ve discovered that we can work virtually and, you know, maybe there aren’t the same benefits to colocation as there once were? And I think that’s an interesting question. I mean, I think that’s something we probably do need to explore and look at what the evidence is over the next couple of decades or so. So I thought that was a good question. I mean, I don’t have the answer to that at the moment. All I know is that pre-COVID It did appear that regions which were denser, where there was a greater concentration of workers, and businesses seem to be more productive. And there were real benefits from this colocation. Do you have any thoughts on that, Arturo?

Arturo Espinoza Bocangel  28:37

Yeah, I remember that. I heard something about that, how it will be the impact of working from home in terms of productivity. I remember that. The results were positive, some cases, and the people now is more productive than before. So definitely, that topic is very interesting and it should be studied.

Gene Tunny  29:11

I think where we’ll end up is that it’ll turn out that that hybrid mix is probably optimal. I mean, you want the best of both worlds in a way. Now, I found this write-up of a study on the Vox EU website so Working From Home: Too Much of a Good Thing. So this is by Kristian Behrens and some of his coauthors. And this is on 13th February 2021. So Kristian Behrens, he’s a professor of economics at the University of Quebec in Montreal. And their abstract of this article, “Containing COVID 19 has required more people to work from home accelerating the trend towards telecommuting. This column uses a general equilibrium model to analyse the long-term effects of this trend, and finds that it may prove to be a mixed blessing.” I think that sounds right. So they go on. “Working from home saves time that would be spent commuting, but deprives firms of the benefits from information and knowledge spillovers. Firms use less office space, but workers require more space at home. Overall GDP will likely be maximised when working from home occurs one or two days per week.” Okay, so I think that sounds pretty much what I would expect. So I’ll put a link to that in the show notes. Do you have any reactions to that, Arturo?

Arturo Espinoza Bocangel  30:55

I need to check that papers in detail.

Gene Tunny  31:00

Yeah, of course. Yeah, it’d be worth having a look at. This one I just found preparing for this conversation today. But yeah, I’ll send that to you. And I’ll put a link in the show notes. So if you’re listening, and you want to check that out. But that sounds fairly sensible to me. So there will still be benefits of agglomeration, there are, but you may not need to be in the office five days a week. You’ll get a benefit if you come in three days a week or something and you’re mixing with your colleagues. You want some mixing with your colleagues. But you don’t need to be mixing with them all the time.

Arturo Espinoza Bocangel  31:45

That’s right.

Gene Tunny  31:47

And that’s what we’re finding, people are just, you know, they’re coming in for a few days a week. And it seems to be that the days people don’t come in… And I think this is replicated in cities across the world, or at least Australian cities. I’ve seen a study of this. People don’t come in Fridays. I mean, there are always fewer people coming in Fridays anyway. But that was because people tended not to… They wouldn’t have a part-time work day on a Friday. But now we’ve got a lot of people working from home on a Friday or Monday too.  People who want to have those days that adjacent to the weekend. So you can have a long weekend. Yeah. So that’s increasingly popular. But I guess there is still that recognition that you need to be working together for some time. There are these benefits from colocating. And so yeah, I don’t think the pandemic has wiped out the argument in favour of wider economic benefits. I think that’s still there. And this is what these authors, Kristian Behrens and his coauthors are arguing that you wouldn’t want people working from home all the time, because then you will lose these benefits. Yeah.

Okay. So, what I thought we should chat about… What else? Oh, what are actually these benefits from agglomeration? I mean, how substantial are they? And there was this great paper by Peter Abelson where he reported that the average elasticity of output to employment density, so this is the percentage by which output… So the value added, the percentage by which that changes for every percentage point increase in employment density. So he reported the average elasticity of output to employment density appears to be in the order of 0.02. Doubling employment would increase output per worker by 2%. So if you have twice as many people in an area, so, say a square kilometre, or say a pocket of the city, precinct of the city, you have twice as many people, then you can increase your output by worker by 2%. So that was the empirical finding.

And it appears that the most important mechanisms, so this is from our presentation, from our slides, the most important mechanism is that both scale and density created an environment where firms and workers can develop highly specialised products, services and skills, e.g. these typically are inputs to firms from specialised  suppliers. Okay, so more firms, more businesses, specialisation and you get efficiencies from that specialisation. So that’s the general idea, isn’t it?

Arturo Espinoza Bocangel  35:15

Yep, that’s the general idea.

Gene Tunny 35:17

Good one. Okay. And then we also note that a further mechanism arises as competition is likely to be intense in a large and dense cluster. So monopolistic pockets of inefficiency are less likely to survive. Okay, so there’s that idea that you get more people in an area, it’s a bit of a hothouse, isn’t it? There’s more competition. Everyone’s striving, everyone’s working harder to compete against the others. And then that benefits everyone through greater efficiency and productivity. So I think that’s a good point. What did you think of the whole agglomeration economies argument and these estimates such as what Abelson reported, that if you double the amount of people in an area, you’re going to increase output per worker by 2%? Do you think that sounds reasonable?

Arturo Espinoza Bocangel  36:08

Yeah, I think so. Isn’t that depend on which area you going to study? Right? Each country, each city has its own features. And you need to take into account that. Of course, you will have different electricity from each cities or areas.

Gene Tunny  36:33

You need to take into account the specific circumstances. But I think generally, it sounds reasonable. It’s not over the top. I mean, if he was saying that it increased productivity by 10%, maybe I’d be sceptical. But there certainly are some benefits from increasing density.

Cost-benefit analysis studies, one way they estimate a dollar value for wider economic benefits is through looking at how density and productivity for particular industries appear to be related across the city or across different cities. And that’s what they did in that cost benefit analysis of Cross River Rail. So I’ll put a link to that in the show notes. They’ve got a bit of a discussion, not as much detail as I would have liked on wider economic benefits, but they do mention that they’ve estimated these wider economic benefits by looking at how much Cross River Rail could increase the density, the effective employment density, or the business to business effective density, they call it, how it could increase that in those particular clusters. So places like Dutton Park, or the Boggo Road precinct there, or RNA or in other places, and it looks at well what could that… It makes some assumptions as to what that could do to productivity, and then estimates a dollar value based on that. So that’s an interesting approach.

They estimate that that if you take that into account, then that increases the benefit-cost ratio of Cross River Rail from something like 1.4 to 2.2. That’s one of the major benefits. And I think there are a couple of other types of benefits they estimate in their wider economic benefit analysis, but it’s something that’s on top of the standard cost-benefit analysis. They report the normal cost-benefit analysis. And then they say, well, okay, there are these other things you could take into account. They’re not standard. They’re additional lists. They’re a supplement to this. They bolster the case. They enhance the case. That’s the idea with wider economic benefits. They’re not your standard benefits you include in a cost-benefit analysis. But you can estimate them. Your estimates of your wider economic benefits are probably more… Would you say they’re more speculative, more of a guess? You could say they’re a guess. They probably aren’t as robust or reliable as your normal estimates of travel time savings, because what they’ll be doing with the travel time savings is they’ll have a detailed transportation model for the city. So they’ve probably got more confidence in our estimates of what it means for travel time savings. If you build a new road or you have a new subway system, they probably got more idea what that means for travel and how much time people save than they do of what is this actual benefit from creating this new activity centre.

Look, to some extent, what happens is you open up a new regional, you make it easy to travel to one particular part of the city. You’ll just have firms moving from another part of the city to that part of the city, right. So, you know, the benefit has to come from this increased density, so a greater density than you’d get otherwise, because these… I mean, how much benefit is that really? Like, it’s hard to know. I mean, you can tell stories about knowledge transfer, but I mean, does that always happen? I don’t know. I often wonder how much confidence we can place in these wider economic benefits. I would say you’d probably have a very wide confidence interval, a very wide gap between the lower and the upper bound of the estimates.

Arturo Espinoza Bocangel  41:05

Yeah. Those are estimates. You need to take into account some source of potential benefit that perhaps they’re not going to accrue.

Gene Tunny  41:18

Yeah. Yes. Right. So yeah, wider economic benefits. And the one other thing I wanted to mention was that you discovered this great paper from the World Bank on wider economic benefits of transport corridors. And this is something that the world, the World Bank, has been interested in these wider economic benefits, because the World Bank has a mandate to improve developing economies, emerging economies to promote economic development. And they’re looking at well, are there investments, we can finance transport projects that can increase economic growth opportunities. And one way you can possibly do that is building railroads or building ports or building roads.

And they’ve done this great study where they looked at a few dozen, or maybe it was over 40 transport corridor projects in developing economies. And they looked at the nightlight data from satellites, and they use that to assess how successful these different projects were. And then they determined Well, what are the markers of success, what actually contributes to the success of a project? And in a way, what they found was, I guess a little bit obvious. I mean, if there’s a project that connects with the sea, then that actually is more likely to lead to additional economic activity as measured by the nightlights, more nightlights. And that’s probably obvious, I guess, in a way because, well, if you’ve got that port, then what you produce, you can easily export. And that’s one way that we know that export led development. That’s been important for quite a few developing economies that ended up going into middle income or advanced economy status around the world.

And another thing that mattered a lot was the actual logic behind the investments. So did they have a real theory of how this would deliver benefits? And in a way, that’s just the rationale. Was this a sensible thing to invest in to begin with? And so I guess that shows that you got to do the thinking about, okay, do we actually have a legitimate reason for building this project? Does it make sense? It’s not just if we build it, they will come. You need to think about are we actually providing something that is delivering real value. This transport corridor is, say, connecting important city centres or it’s connecting a hinterland to an urban area to a port where the products can be exported. I mean, is it actually delivering some real benefit like that?

So I think this is a really great paper. And it begins by talking about how there’s a number of ongoing and proposed initiatives for transport corridors. One ambitious proposal is to revive the Grand Trunk Road from Kabul, Afghanistan to Chittagong, Bangladesh, connecting areas that are home to a significant share of the world’s poor. That’s probably on hold now that you know what’s happened in Afghanistan with the US pullout and Taliban taking over. An even more ambitious initiative is the Belt and Road Initiative proposed by China.

Okay, now, again, look, there are all these geopolitical issues related to these projects we can’t go into. But it’s interesting that the World Bank, they’re examining it, they’re thinking about these wider economic benefits. Can we develop new roads, new railways that open up regions, that encourage investment, foreign direct investment, for example, that create jobs, that lead to additional economic activity, and, you know, help these economies grow? So I thought that was a really great paper, and I’ll put a link to the show notes. So yeah. Well, that’s me having rabbeted on a little bit about wider economic benefits. Is there anything we should add before we wrap up, Arturo?

Arturo Espinoza Bocangel  45:54

Well, I think you have covered the most important WEBs, the wider economic benefits related to [unclear 46:02] and productivity. Also, you mentioned some positive impacts on labour markets. Also, you should have mentioned some important things related to land. In the case of, for example, when you improve on infrastructure, for example, this case, a corridor, the land use, for example of some bar or close to that in infrastructure improvement, possibly that will cause more investment. For example, new households, new unit can be built after improving that corridor, let’s say. So I think that is another thing that we need to take into account, some potential effects in terms of change of land.

Gene Tunny  47:04

Yeah, right. I think that matters a lot in developing economies in particular, so if you’ve got land that’s being used for agriculture, and maybe not used very productively, and then suddenly you open up this new… You’ve got this new road, or this new rail line, and then that encourages industrial development and urban development. And that’s a higher value use. And you mentioned the labour market. So this is this idea of a thicker labour market, or say, for example, Silicon Valley, if you’ve got Silicon Valley as a cluster, and then you’ve got, you know, all the specialised tech firms, all the people who are interested in tech or have got the qualifications in tech or experience, they move to Silicon Valley. And so it’s easier for the firms to find the people they need. That’s that sort of thing. That helps with the firm’s finding the people. You could have a transport investment that makes it easier to get to a particular area, or a particular cluster or an activity centre. And that increases the supply of labour. People might be more willing to work because it’s easier for them to get to work, to travel. So I think that’s an important benefit.

Okay, that was a bit of a whirlwind tour of wider economic benefits, agglomeration effects, increasing returns to scale. I think we’ll have to come back to this again, because there’s so many… There are a lot of different economic concepts here. And they’re important ones, and I think probably need to cover this again, to really do it justice and get that conceptual framework right. These are very important concepts, very important issues. And I think I might have to come back to really explore this again. So any final words, Arturo?

Arturo Espinoza Bocangel  49:14

No. Thank you again for having me here. Was a pleasure again. Thank you.

Gene Tunny  49:19

Very good. Thanks, Arturo. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Links relevant to the conversation

Cross River Rail business case

Cross River Rail project benefits

Knowledge Spillovers: – Cities’ Role in the New Economy – article by Jerry Carlino Gene quotes from in the episode

The wider economic benefits of transport infrastructure paper by Peter Abelson 

Working from home: Too much of a good thing – article by Kristian Behrens and others

Wider Economic Benefits of Transport Corridors : Evidence from International Development Organizations – World Bank paper using nighttime lights data

Clarification

In the episode Gene didn’t get the title of Jane Jacobs’s famous book on cities right. The correct title is The Death and Life of Great American Cities

Credits

Big thanks to EP136 guest Arturo Espinoza Bocangel and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

Transcript of EP125 on price controls w/ Larry Reed, FEE

This post contains a transcript of EP125 on price controls, infrastructure, and other topics with President Emeritus of the Foundation for Economic Education Lawrence W. Reed. Also, note we’ve published a new video clip from the interview, featuring Larry talking about his article Why I wish we could put Chester Arthur and Joe Biden in a room together to talk infrastructure spending.

Transcript of EP125 w/ Larry Reed, FEE

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close.

Gene Tunny 00:01

Coming up on Economics Explored.

Larry Reed 00:04

When government comes in and says, “We don’t like prices rising as fast as they are. We’re going to impose controls to prevent that from happening.” First of all, it is treating a symptom of something else. It’s not dealing fundamentally with the issue at hand that produced the rising prices in the first place. It’s a political diversion.

Gene Tunny 00:25

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury Official. This is episode 125 on price controls, which some commentators are suggesting could be used to reduce inflation. We also explore some other topics, such as whether Jesus was a socialist, why Joe Biden arguably should look back to the 21st president Chester Arthur, and why the separation of bank and state is so important.

My guest this episode is Lawrence W. Reed, President Emeritus of the Foundation for Economic Education, a leading pro-free market educational nonprofit headquartered in Atlanta, Georgia. Larry has authored nearly 2000 newspaper columns and articles and dozens of articles in magazines and journals in the United States and abroad. His writings have appeared in The Wall Street Journal, The Christian Science Monitor, USA Today, The Epoch Times, and The Washington Examiner among many other places. Larry is frequently interviewed on radio talk shows and TV, including on Fox Business News.

Please check out the show notes for the links to materials mentioned in this episode and for any clarifications. You’ll find the show notes via your podcasting app or at our website, economicsexplored.com. If you sign up as an email subscriber, you’ll be able to download my new eBook, Top 10 Insights from Economics, so please consider getting on the mailing list. If you have any questions, comments, or suggestions, please either record them in a message via SpeakPipe. See the link in the show notes or email them to me via our contact at economicsexplored.com. I’d love to hear from you.

Now, for my conversation with Larry Reed from the Foundation for Economic Education. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.

Lawrence W. Reed, President Emeritus of the Foundation for Economic Education, welcome to the programme.

Larry Reed 02:45

Thank you very much, Gene. It’s a pleasure to be with you.

Gene Tunny 02:47

It’s great to have you on, Larry. I have been reading a lot of your writings lately. You’ve started off the year very well and coming on important issues, crazy proposals such as price controls. We might chat about that a bit later. But first, I’d like to ask you about the Foundation for Economic Education. Could you tell us a bit about what its role is and the type of activities it engages in place?

Larry Reed 03:16

Your listeners and viewers can learn a great deal more by visiting its website, which is FEE.org. The foundation was created in 1946 by a great man named Leonard Read. He was no relation to me. He spelled his name R-E-A-D. But after World War Two, he looked around and realised that there was no organisation in the world that was full-time devoting itself to explaining and defending how free enterprise, the profit motive, private property, how that system works. He created the foundation for the purpose of spreading those ideas.

Over the years, our message and our principles have not changed. But the focus of our message and principles has somewhat changed. It’s become a bit more focused on young people, specifically high school and college age. We do that through programmes in-person all over the country, in the US, and abroad, as well as the website videos, on the website courses, you name it. All designed to explain how freedom and free markets work.

Gene Tunny 04:31

You mentioned Leonard Read? Did he write that famous essay, “I, Pencil”?

Larry Reed 04:37

Yes, he did in December of 1958. That has had a remarkable impact on people all over the globe.

Gene Tunny 04:45

Absolutely. I think it shows how complex even products that we think of as simple are and there’s no way any central authority and this is what we discovered with the Eastern European socialist economies with the Soviet Union. You can’t plan this sort of thing. You need to rely on the market mechanism to be able to produce even something that we might think as mundane as a pencil. I’ll put a link in the show notes to that essay because I think it’s brilliant. I think Milton Friedman quotes from it in Free to Choose, if I remember correctly.

Larry Reed 05:23

After someone reads it, they are well-armed to take on a central planner type. Every time I run into somebody that thinks that he knows enough that he can plan an economy of millions of people, I always say, “Wait a minute. You don’t even know how to make a pencil, let alone an entire economy.”

Gene Tunny 05:44

That’s right. You got to think about it. You’ve got to get the timber, you’ve got to cut it, you’ve got to get the graphite, etc., combine them all together. A great essay. Is Hazlitt associated with the foundation? He wrote that book, is it “Economics in One Lesson”? Is that one of the books that you promote?

Larry Reed 06:07

Yes, it is one of the more popular offerings from FEE in the last 70 years. Henry Hazlitt was long associated with FEE. He was one of the charter members of its board of trustees, a good friend of our founder, Leonard Read, and was on the board for decades. I’m happy to say that I knew him personally for the last decade of his life.

Gene Tunny 06:33

That book has had a big impact too. He must have been pleased with how that was received.

Larry Reed 06:40

Yes.

Gene Tunny 06:42

Very good. We might get on to some of the topical issues. The big economic issue at the moment is inflation. We’re seeing accelerating inflation in advanced economies. In a way, this probably should have been expected, given the big expansion in the supply of money that we’ve seen in United States, United Kingdom, Australia, to a lesser extent, but still a substantial increase.

Now, we’re starting to see that in inflation. Some people are saying it’s temporary. There could be some temporary element, there’s a supply-chain disruption. Who knows? My view is that it is something we’ve got to worry about. People are starting to talk about, “What do we do about it?” There’s a monetary policy response. But there are people who are thinking, “Let’s be careful because we don’t want to constrain economic growth and cost jobs. Why don’t we look at price controls?” You’ve written a great article, “Price Controls: Killing the Messenger If You Don’t Like the Message”, could you talk about what you mean by that please?

Larry Reed 07:51

Yes, I’d be happy to. We should think of prices as conveying immense amounts of information. Prices result from the free interplay of supply and demand, which in turn reflect the individual choices, ambitions, opportunities, tastes, and you name it of endless consumers in the marketplace. Prices don’t accidentally arise. The notion that you can fiddle with them by government decree with no consequences is ridiculous. It’s anti-science. It’s anti-economics. Prices are what they are in free markets for good reason because they’re reflecting conditions of supply and demand and people’s preferences and tastes and so forth.

When government comes in and says, “We don’t like prices rising as fast as they are. We’re going to impose controls to prevent that from happening.” First of all, it is treating a symptom of something else, it’s not dealing fundamentally with the issue at hand that produced the rising prices in the first place. It’s a political diversion. It’s politicians, who on the one hand, have got their hand on the printing press cranking out easy money at low interest, easy credit, and pumping up prices. At the other hand, they got a club in their fist and they want to beat people for responding the way you would.

If at any time you massively increase the quantity of something, it will affect the value of every single unit and they’ve been expanding the money supply immensely. If they put on price controls to prevent prices from being at some higher level, all that does by treating a symptom not the cause, is to create economic problems of their own. It creates shortages, for instance, if the market price of something would be $10. But government says, “No, you can’t charge any more than $7.” What happens is at $7, more people want the stuff and fewer suppliers will provide it. That would be the case at $10. You got a double whammy. You got less of the stuff coming on the market and more people wanting it at that artificial price. Bingo! Long lines at stores and shortages. People who propose price controls are ultimately anti-economic science and oblivious to the effects that we have seen historically, literally for centuries with no exception.

Gene Tunny 10:22

One thing about this issue, it seems to be something that the vast majority economists seem to be in agreement on which is good. You quoted in your article, there was an Op-Ed in The Guardian. The title was, “We have a powerful weapon to fight inflation price controls, it’s time we consider it” and Paul Krugman responded, “I am not a free market zealot. But this is truly stupid.” Absolutely. You’ve had experience in the US in living memory of price controls? Was it in the 70s that Nixon’s Whip Inflation Now and then Carter, perhaps with their controls on the price of gasoline that did lead to these big lines at gas stations in the States?

Larry Reed 11:21

The Whip Inflation Now thing actually was Gerald Ford. That was a campaign to get people to wear buttons that said, “whip inflation now” as if that would somehow whip it. Before him, it was Richard Nixon, who actually imposed wage and price controls. First, in the form of a 90-day freeze on virtually all wages and prices and then followed by government directed prices that limited by how much they could rise.

Every economist worth his salt knows that that produced disaster. That was no solution to anything. It gave us long lines at the gas pump and empty shelves in the stores. It was ridiculous. I used to know a man, he’s deceased now, but he was chairman of the Council of Economic Advisers, Paul McCracken, great economist. He cautioned Nixon not to do this. He said it’s never worked in 4000 years, don’t even think of it. Nixon went ahead anyway and shortly thereafter, McCracken resigned.

We’ve had lots of experiences. Lots of countries have had experiences with it. Revolutionary France in the 1790s, the government imposed the so-called Law of the Maximum, which said that government will fix the maximum price of things and the penalty for violating that will be death. They guillotined a lot of people for that and it did not make anybody produce more of anything.

Gene Tunny 12:55

That’s a negative supply shock too, isn’t it? Killing your producers? Terrible. That’s some good stuff there. I take it your view would be that inflation is a monetary phenomenon. Therefore, the key to controlling it is to get your monetary policy, right? This isn’t about monetary policy, but I’m guessing that’s where you’re coming from. There’s a big debate about what that means and role of the Fed, etc. But would that be your view?

Larry Reed 13:33

Inflation, Milton Friedman famously said, “is anywhere and everywhere a monetary phenomenon.” I’m sympathetic to that but I also point out that there’s another dimension here. Prices ultimately reflect, to a great extent, what’s going on in people’s minds. There are extraordinary circumstances, but there are occasions when you could have soaring prices without an increase in the money supply. One of the examples I like to point to is the Philippines.

During World War Two, when the Japanese had occupied it, they imposed their currency on the Philippines. General MacArthur was attempting to ultimately take the Philippines and he was jumping from island to island, getting closer and closer. The Japanese weren’t dumping any more of their paper money into the Philippines and yet, prices would leap every time word came that MacArthur was now a few hundred miles closer. That’s because people’s estimate of the value of that money declined because they knew if he gets here and takes the Philippines back, the Japanese currency will be completely worthless. Given that prospect, we’re happy to pay any price to get anything now while it’s worth something. That’s a rare occasion.

We’re not facing that circumstance today. We do have to fall back on the fact that today’s inflation that we’re witnessing is not a Philippine-style rise in prices. It is a monetary phenomenon, reflecting the massive increase in money and credit that our Federal Reserve in the US has manufactured. Many central banks around the Western world have done as well.

Gene Tunny 15:21

That’s a great story about the Philippines. I’ll have to look that up. MacArthur is a great hero to many of us in Australia because there’s a view that he essentially saved Australia. He based himself in Australia after he fled from the Philippines and he had an office a little bit down the road from where I am here in Brisbane in the ANP Building during World War Two. That was one of the locations from which he waged the war in the Pacific. Great story. Very good. That’s a good discussion of price controls, Larry.

I’d also like to ask you; you’ve also written about whether Jesus was a socialist. I’d like to ask you about that. Also, I don’t know if you saw the recent controversy around Dave Ramsey’s comments. Dave Ramsey, the esteemed financial commentator in the US.

Larry Reed 16:21

Yes. Although I may not be aware of recent comments that you’re bringing up.

Gene Tunny 16:26

Essentially, someone asked him a question, “As a Christian, should I feel bad if I raise the rent on my properties to the market rent, and then that means that some of my tenants can’t afford to live in those properties anymore. It causes them financial hardship.” Dave Ramsey’s comments weren’t received by many, particularly on the progressive side of politics because he said, “There’s no problem with doing that because it’s not me that is evicting you. It’s actually the market.” He was appealing to the market. I’d like to ask you about that. If you haven’t seen his comments, and it’s probably worthwhile considering the whole context of them, feel free not to comment on that.

But I would like to ask you about your work on, was Jesus a socialist? Could you take us through what your analysis of that question has revealed, please, Larry?

Larry Reed 17:29

I’d be happy to, Gene. In fact, the best way to begin that is to tell the story from the New Testament that answers your first question. Along the lines of what Dave Ramsey apparently said. Jesus Himself told nearly 40 parables and most of them deal with things like eschatology and salvation and so forth. But at least three of them have very strong economic content.

One of them that’s relevant to what you’ve just raised is the parable of the workers in the vineyard. This is about a man who apparently owns a substantial vineyard and he needs to bring the grapes in, it’s harvest time. Jesus tells a story of how he gets a group of workers together first thing in the morning and he says, “I’ll give you each a denarius for a full day’s work.” They say, “Okay.” They go out and they start picking grapes.

Around noon time, the owner realises, “I’ve got to get even more out there.” He gets another group together, and he says, “Look, I know that the day’s half-gone, but if you’ll go out for the rest of the day and pick grapes, I’ll give you each a denarius.” Finally, at the end of the day, with maybe an hour before a dark and he still has grapes that have to come in, he calls another group of workers and says, “If you’ll take time out, go out for an hour and pick some grapes, I’ll give you a denarius.”

Later, according to the story, the owner gathers all these three groups of workers together to pay them. The first group is very angry, because they’re saying, “We worked a full day and you’re giving us the same as those guys who showed up at the later, even the ones that only worked for an hour.” You would think that if Jesus were a socialist, he would have the vineyard owner saying, “You’re right, this is unfair. I’m sorry about that.” But instead, Jesus has the vineyard owner say to these guys, “It’s my money. You signed the contract. I’m giving you what I promised. Now, take it and get out of here.”

That’s Jesus basically saying, private property, voluntary contract, keeping your word, honest dealings, and I think supply and demand all defend what the vineyard owner is saying. Presumably, he had to pay that last group of workers a hefty premium to get them. They probably worked for somebody else all day and now, they’re being asked to go for yet another hour, he has to pay them a premium to do that to bring the grapes in.

Jesus does not say, “Let’s be compassionate and give this group the same as that group or in proportion to their time.” Instead, he says, “Each man is getting what he was promised when he agreed to by contract.”

I think Dave Ramsey is essentially right. There is no obligation, moral or otherwise, for someone to endure a loss or to get less than he could for property that’s his when market conditions suggests that a higher rent is worth it. It’s the higher rent that will likely bring more housing units into the marketplace, which will solve the problem in the long run anyway.

Gene Tunny 20:47

By inducing more supply, more investment in rental properties. That’s a good point. I’ll put a link to the article on Dave Ramsey. I thought it was a fascinating discussion. Also, I’ll find something to link to that. Was it a parable?

Larry Reed 21:12

The parable of the workers in the vineyard. I discuss that in more detail in my book, “Was Jesus a Socialist?” if anybody cares to look at it from that perspective.

Gene Tunny 21:25

It’s an interesting question. I must say, I’m surprised that it is something that’s up for debate. Is this because a lot of people on the left side of politics have appealed to Christianity as a way to support what policy positions they’re advocating for?

Larry Reed 21:51

I think so. I don’t give the left much credit for their economics, but I do give them credit for their marketing, because they’re always out there saying, “Go with us because our way of thinking will produce more for people. We’re going to take care of people. We’re going to give them stuff. It won’t cost them anything, they won’t have to worry about where it’s coming from.” The rhetoric is always very promising, but the results and the outcomes are pretty dismal and miserable.

A lot of people come to this mistaken conclusion that Jesus may have been a socialist because He talks so much about helping the poor. But I think in capitalist countries, where more wealth is produced, you have more giving and more caring and more philanthropy than you have in socialist countries. In fact, even government-to-government foreign aid is primarily from the predominantly capitalist countries to the predominantly socialist recipients.

If Jesus came back today and spoke to a large audience of people and said, “I was interested in the poor. Tell me what you all did for the poor?” If you raised your hand and said, “I voted for all the politicians who said they’d take care of that.” I don’t think He’d be impressed. I think He would say, “You’ve resorted to theft? I told you not to steal and I told you furthermore that the poor are folks that you, from the generosity of your hearts and your own resources, ought to help. I never told you you could pass it off to politicians. If they solved the problem, it’ll be at 10 times the price.”

Gene Tunny 23:33

Yes, that’s a good point. I’ll have to come back to this in a future episode and looking at what are the best ways to reduce poverty of it if we’ve actually figured that out? Clearly, the welfare state that we’ve got in countries like Australia, the UK, to a lesser extent, the US, you could argue it has relieved some absolute poverty. But at the same time, it does, arguably, traps many people in poverty in a way.

Larry Reed 24:07

To make a long story short, you can’t solve poverty if the pie is shrinking. You have to make a bigger pie and there is no known system in the history of mankind that makes a bigger pie faster than the system of freedom and free markets.

Gene Tunny 24:24

Absolutely. We’ll take a short break here for a word from our sponsor.

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Gene Tunny 25:03

Now, back to the show. The other things I wanted to chat with you about before we wrap up are some recent articles of yours. There was a piece, “Why I Wish We Could Put Chester Arthur and Joe Biden in a Room Together to Talk Infrastructure Spending”. I’d love to hear about that, particularly about Chester Arthur, because he’s one of the lesser-known US presidents.

Larry Reed 25:34

Yes, he is one of the lesser-known ones. He served less than one full term. He took office as vice president, became president when James Garfield was assassinated in the middle of 1881. He served about three and a half years, the rest of Garfield’s term. He’s often written off as sort of—he was tied to the corrupt Tammany Hall machine in New York and so forth. On the good side, historians will remember that he did support civil service reform and made the federal government a little less corrupt. That was a good thing.

But he also understood the Constitution and appreciated it more than Joe Biden does. I wrote that article pointing out what Arthur’s view on infrastructure spending was compared to Joe Biden’s in America. We recently went through a national discussion, a bill passed, supposedly bipartisan. It was a massive, almost $2 trillion in infrastructure spending.

An equivalent bill was called a Rivers and Harbors Act and Arthur vetoed it. In his veto, he raised some great objections, all of which are applied to the bill that Biden recently signed. He said, “This is way too much. There’s no way that a government of our size can know where all this money’s going to go. It looks like a small portion of it is even earmarked for infrastructure. There’s a lot of pork barrel stuff in here. Quit doing this, loading our bills and all this other nonsense.”

That’s what Joe Biden should have said about the recent infrastructure bill. But he was all for it from the start. I think about 10% was aimed at infrastructure, the rest is pork barrel and progressive agenda stuff. I would like to put Joe Biden and Chester Arthur in the same room and say, “Chester, go at it. Tell this guy what infrastructure is and why it’s wasteful to spend so much on.”

Gene Tunny 27:46

At the same time, would you say that there is an issue with infrastructure in the US with the quality of infrastructure? This is something I’ve chatted with Darren Nelson about in a previous episode and Darren’s view was, “We need to get the private sector more involved in public-private partnerships, perhaps.” Do you have any thoughts on that, Larry? What is the quality of infrastructure like? Is there a problem to solve and how would you go about it?

Larry Reed 28:19

With infrastructure, I think there has always been some measure of problem, because government has assumed from the start that this is a legitimate profits of government. Once you do that, you have to at least expect that they’ll keep it up and do it right and keep an eye it to prepare for when it falls apart. But politicians come and go and they’re more interested in the flash in the pan. They show up to cut the ribbon at the start of a bridge that’s being built. But once it’s built, it’s no longer politically sexy to stand around and keep an eye on it in case it collapses because they figure, “If that happens, it’ll be a long after I’m gone. Why should I care?”

You do end up with politicians putting more focus on the construction of the stuff and less on its repair and maintenance. That’s where you can get a bigger bang for your dollars or if you will, by writing contracts with the private sector that require ongoing maintenance and inspection and so forth. I wouldn’t want the government with its own employees and its own infrastructure monopoly becoming a bridge builder. They don’t know about bridges. That’s best done by the private sector. They should be contracting with private sector providers to do it and monitor the contracts. Put all the provisions in those contracts that would require proper maintenance.

Gene Tunny 29:52

That’s a good point. It’s one of those great challenges, how do you get the infrastructure that you need cost-effectively? In Australia, one of the problems we’ve got, there’s a lot of government investment going into infrastructure at the moment that it seems to be at very inflated prices all over the country. There’s a powerful construction union, which is allied with the government in the state that I am, Queensland, which has ended up inflating the cost of any infrastructure project by 30% or 40%. It’s quite extraordinary and taxpayers end up wearing that.

Larry Reed 30:43

I wouldn’t be surprised if you have some of the same kind of history in Australia, as we do in the US. But there’s a lot of history in America of government spending on infrastructure that produced disaster, because it dangled subsidies in front of private contractors, who then went after the subsidies and cared little about how well the infrastructure itself was actually built. The best example is America’s transcontinental railroads.

There were five of them built across the country. Four of them got extensive federal government land grants and subsidies. Not only land grants, but they got subsidies on a per mile basis. Four of them threw down tracks just to get the goodies. And in fact, the two famous ones that met at Promontory Point, Utah, as they were getting closer, they were crossing over to the other companies’ territory and blowing up the tracks because they wanted to get more subsidies by laying more track down. There was only one transcontinental that got no government subsidies. That was James J. Hill’s’ Great Northern. It was not by coincidence the only transcontinental that never went bankrupt because they had to put down tracks when it made economic sense, not because the government was throwing money at them,

Gene Tunny 32:06

Another good example I’ll have to investigate. This is the last question; I’d like to ask about some of your other writings and it looks like you have been prolific or regular traveller. Obviously, COVID cut back on all of our travels, but you’ve written some great pieces. You’ve made observations on what we can learn from other countries around the world and in some places that you generally don’t hear about. One of your articles is, “The World’s Oldest Republic Reveals the Secret to Peace and Prosperity”.

Larry Reed 32:46

Yes.

Gene Tunny 32:48

You’ve also drawn lessons from economic history in Italy. I think it was in Italy, your article, “Why the Separation of Bank and State is Important”. Would you be able to explain what is that secret to peace and prosperity? How that’s revealed by the world’s oldest republic and also the point about the separation of bank and state, please.

Larry Reed 33:13

Both of these articles, you can at FEE.org and you can find them also on where I blog on lawrencewreed.com. With regard to the oldest constitutional republic, we published that last Sunday, it’s about the tiny country of San Marino. It’s the fifth smallest country in the world. It’s entirely enveloped by Italy. It’s in the northeast of the Italian peninsula. Right in its middle is this big rock called Mount Titan.

It’s the oldest Republic in the world, dating back to the early fourth century when that chunk of territory was gifted from its private owner, a woman in Rimini, now part of Italy. She gifted it to a Christian stonemason who had fled there to avoid the persecutions of the Emperor Diocletian. She said, “You can have this property.” He, in effect, declared the first, and now the oldest constitutional republic.

Only twice in its history has it been invaded. In both cases, within a matter of months, the pope ordered the invaders out, lest they be attacked by papal forces. They maintained their independence all these years. They have a GDP per capita that’s a shade below that of the United States. The secret is that they have kept themselves economically free.

Freedom House is non-profit that rates countries as to their degree of economic freedom and they rate San Marino as the 12th freest country in the world. Its capital gains tax is only 5%, which is a third of what ours is in the US. It’s much lower than it is in the European community. A great little success story in that quiet little enclave in the Apennine Mountains.

The other example or article that you’re referring to comes from Genoa, on the other side of northwest Italy. Genoa was, for hundreds of years, an Italian city state, much as Pisa and Venice and Gaeta and some others were. The secret to its success, more than any other single entity, was a private bank that was so private, it was in effect, a country within a country. It was called the Bank of St. George.

When it was chartered in 1407, the separation between the bank and the government of Genoa was as complete as it could get. It basically said, “We’re not paying any attention to you and you don’t have to pay any attention to us but you need us.” Because the bank consistently bailed out the state when it got in trouble. But the bank was very firmly on a gold standard, it had a policy of not issuing any paper for which you did not have gold coin on deposit. It was reliable, it was honest, and for hundreds of years, until Napoleon invaded and shut the bank down, it was a rock of stability and a big reason that Genoa became a maritime trading giant in the Mediterranean.

Gene Tunny 36:37

This wasn’t something positive Napoleon brought then. That’s interesting, I have to read more about it. How does it illustrate that the separation of bank and state is important? How does it illustrate that?

Larry Reed 36:52

The Bank of St. George exerted an anti-inflationary pressure on the government of Genoa. Governments love to inflate, and the moment they get in charge of banking, that’s what they do. They print the stuff and makes it easier for them to pay their bills and to run deficits and so forth. The Bank of St. George did not abide by that. They wouldn’t have recognised any coin or paper from the city of Genoa if it hadn’t been sound. Their example spoke volumes to the people of Genoa and across Europe. Here’s a bank that’s in great shape. It has to bail out the government of the region every now and then because they’re profligate, but the bank is not.

I think the separation of bank and state is an issue I wish we spent a lot more time on these days. We’ve assumed that government should be orchestrating the banking system, but the history of government and banking is not a positive one. They take over banking whenever they can because it’s their avenue to depreciating and debauching currency.

Gene Tunny 38:06

I think it’s a big concern when governments set up these banks or shadow banks to promote particular policy objectives. I remember, back in the late 2000s, there was a lot of talk about an infrastructure bank that was something the Obama administration was looking at but didn’t go through with. There were similar moves here in Australia that didn’t amount to anything because it reminded people of what happened in the 80s with the state banks of South Australia and Victoria, the Tricontinental merchant banking arm and they got heavily involved in speculative property development, if I remember correctly, and ended up going bust and costing taxpayers billions of dollars. People still remember that. There’s a risk if governments get involved in banking and financial shenanigans.

Larry Reed 39:06

Too often anyway, we judge government by the stated intentions rather than by actual outcomes and results. If a government came to me and said, “What do you think about us getting into the banking business?” I would probably say to them, “Aren’t you in the post office business already? Aren’t people complaining about that? Why don’t you get that right before you go into banking?” In US, everybody complains about the post office. What makes you think the same entity can manage a nation’s banking system?

Gene Tunny 39:38

Exactly, very good. Larry, any final words? Anything you think we should be thinking about or looking out for?

Larry Reed 39:48

I would say this thing that people everywhere should be thinking more than they are about the importance of individual liberty. We take it for granted in places where we’ve had a lot of it. But there’s nothing about it that’s either automatic or guaranteed, and it can disappear with bad ideas almost overnight. And yet, life without liberty, in my estimation, is unthinkable. We better think about it. I can’t imagine a life in which you aren’t living yours. You’re not making your choices, somebody else is imposing their choices on you. They’re living their lives through you.

I can’t imagine living in that environment as they, to a great extent, do in places like North Korea or Cuba. Liberty is precious, it’s rare in history. It’s never guaranteed and it deserves the conscious deliberation, and sometimes sacrifice of everyone wants to be a free person.

Gene Tunny 40:50

Absolutely. It just occurred to me, we probably should have touched on the pandemic. Feel free to respond to this if you like. Otherwise, we can wrap up. In Australia, we’ve had quite severe restrictions relating to COVID at times and they’ve raised eyebrows around the world. People have thought, “What’s going on there in Australia?” But what a lot of people in Australia say is that’s necessary for the public good.

You may bang on about civil liberties and I have, at times, think some of these restrictions have been excessive. But you get a lot of pushback and people say, “You think you’ve got the rights to do that but you don’t have the right to spread a deadly virus and spread the disease.” That’s how they push back. I agree, I think we’ve lost the original commitment, a strong love of liberty that we’ve had. I think we’ve lost that. People are terrified of this virus and they push back with that line, “You don’t have the right to spread the virus.” I don’t know how to win those arguments, to be honest.

Larry Reed 42:12

There’s something to be said for this and that is that this circumstance was unprecedented and it’s not over yet. That the jury may not yet be completely in with all irrelevant verdicts. I have a sense though, that the more we learn, the more of this we go through, the more experience we have with it, the more we’re likely to look back and say, “Those lockdowns were counterproductive. The mask mandates went on far longer than they should have, if they ever should have been in existence in the first place.” I think a lot of the tools that government employed will come under more scrutiny and questions.

If you’re a cheerleader for them now, I would say, “Why don’t you hold off because you may be embarrassed in the not-too-distant future?” But what concerns me the most is that all of this totalitarian impulse sets dangerous precedents because people who love power, who want it to be concentrated in government and think that the right people will do the right things, they don’t stop with the power that they get. They usually say, “It’s necessary now, I’ll hold on to it.”

In the long run, if we allow this COVID experience to set the new norm for government intervention, radical intervention in our lives across a broad front, we may look back and say, “We would have been a lot better off if we simply endured COVID.” Because one of the worst things that people can do is to consign their lives to politicians. There are a lot of things they end up regretting whenever they do that.

Gene Tunny 43:51

I think that’s a good point, Larry. We might end there. Thanks so much for your time. I enjoyed that conversation. Some great points and excellent historical examples that I’m going to have to look up and add to my arsenal of historical examples that I can bring up. Very good. Lawrence W. Reed, President Emeritus of the Foundation for Economic Education. Really enjoyed the conversation. Thank you so much.

Larry Reed 44:20

My pleasure. Thank you, Gene.

Gene Tunny 44:22

That’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to Contact at economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

Price controls to fight inflation a bad idea + infrastructure lessons from POTUS 21 – EP125

Price controls are being suggested by some commentators as a way to fight inflation. But price controls would be a really bad idea, as Lawrence W. (“Larry”) Reed, President Emeritus of the Foundation for Economic Education (FEE), explains in Economics Explored EP125. Larry also chats with show host Gene Tunny about whether Jesus was a socialist, why banks and the state should be kept separate, and why President Biden would benefit from lessons on infrastructure from the 21st President Chester A. Arthur. You can listen via podcast apps including Google Podcasts, Apple Podcasts, Spotify, and Stitcher or via the player below.

Here’s a video clip of Larry discussing the Parable of Vineyard Workers and whether Jesus was a socialist:

About this episode’s guest – Lawrence W. Reed

Lawrence W. (“Larry”) Reed became President of the Foundation for Economic Education (FEE) in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. He previously served for 21 years as President of the Mackinac Center for Public Policy in Midland, Michigan (1987-2008). He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

In May 2019, he retired to the role of President Emeritus at FEE and assumed the titles of Humphreys Family Senior Fellow, and Ron Manners Global Ambassador for Liberty. 

He holds a B.A. in economics from Grove City College (1975) and an M.A. degree in history from Slippery Rock State University (1978), both in Pennsylvania. He holds two honorary doctorates, one from Central Michigan University (public administration, 1993) and Northwood University (laws, 2008).

Reed has authored nearly 2,000 columns and articles in newspapers, magazines and journals in the United States and abroad. His writings have appeared in The Wall Street Journal, The Washington Examiner, Christian Science Monitor, Intellectual Takeout, USA Today, Baltimore Sun, The Epoch Times, Detroit News and Detroit Free Press, among many others. He has authored or coauthored eight books, the most recent being  Was Jesus a Socialist? (a major expansion in 2020 of an earlier essay) and Real Heroes: Inspiring True Stories of Courage, Character and Conviction.  Additionally, he co-authored and edited five e-Books. See the “Books” section of this web site for more info. He is frequently interviewed on radio talk shows and has appeared as a guest on numerous television programs.

Larry’s article “Price controls: killing the messenger”:

Larry’s article “Why I wish we could put Chester Arthur and Joe Biden in a room together to talk infrastructure spending”:

https://fee.org/articles/why-i-wish-we-could-put-chester-arthur-and-joe-biden-in-a-room-together-to-talk-infrastructure-spending/

Larry’s article “The World’s Oldest Republic Reveals the Secret to Peace and Prosperity”:

https://fee.org/articles/the-world-s-oldest-republic-reveals-the-secret-to-peace-and-prosperity/

Larry’s article “Why the Separation of Bank and State Is so Important”:

https://fee.org/articles/why-the-separation-of-bank-and-state-is-so-important/

Leonard E. Read’s article “I, Pencil”:

https://fee.org/resources/i-pencil/

Article on “Is It Wrong for Christians to Raise Rent on Tenants? Dave Ramsey Sparks Controversy With His Answer”:

The parable of the vineyard workers:

https://www.bbc.co.uk/bitesize/guides/zd76rj6/revision/5

Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

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EP85 – Business cases for public infrastructure projects

Episode 85 of Economics Explored is a conversation on business cases for public infrastructure projects, featuring a case study of an Australian dam project. It includes a discussion of the requirements and processes for the development of public infrastructure business cases in Australia, with a case study of a current business case process relating to an irrigation dam which program host Gene Tunny is involved in. While Australian examples are used, the insights and lessons are relevant internationally. In many respects, Australian processes and requirements for developing public infrastructure business cases are world-leading. 

Links relevant to the conversation:

Business Case Development Framework of Building Queensland

Paradise Dam Improvement Project

$2.4 billion cost to economy if Paradise Dam not fixed

Australian lungfish

Please check out our conversation and let us know what you think via email: contact@economicsexplored.com.

Economics Explored is available via all the usual podcast providers including Apple Podcasts and Google Podcasts.