In the field of accounting traditionally assets were “hard” assets, like land, cash on hand, factories, and other similar items. You could “touch” an asset, and you saved up capital in advance and then “invested” it into projects that would expand your capacity to do business or do it cheaper than your competitor (improvements). This “traditional” view of assets came under attack in the 2nd half of the 20th century, as accountants pointed out that brands had value (the classic example – the “Golden Arches” at McDonald’s). As the economy moved more towards services, the public accounting firms also noted that people did not have value in this model; the famous line was “all my assets go out the door each night”.
The traditional view of government was that they 1) built things like roads, bridges, schools, and jails 2) provided critical services like police, fire and military protection. In this manner citizens could see with their own eyes the value of the taxes that they were paying to the government; with it came roads, schools, and essential services.
Analogous to what occurred with accounting practitioners, those lobbying for higher taxes, which mainly go to transfer payments to favored constituencies, re-defined what an “investment” means. An investment used to be something tangible, like a highway extension or a new school; but now it is an investment in people, meaning that you as a citizen are in effect paying for a transfer payment to someone else.
It is astounding to see the degree to which the “traditional” view of government investment has been crowded out by the new view of investment being a transfer payment to someone else. In the City of Chicago we see the rotting, rusting hulk of the “L” tracks over our head every day, with holes in the streets and bridges and the only things that are new are the buildings erected with private funds that comprise our skyline.
Meanwhile in China they are building ENTIRE CITIES the size and scale of Chicago FROM SCRATCH. Now that is the traditional view of investment; power plants, roads, bridges, and all manner of hard assets to boot. It is amazing to think of what they are constructing there vs. the pathetic state of our infrastructure in the United States. And yet our government spends much more, but we direct it into transfer payments to other citizens or for retired government employees, rather than those “old school” ideas of traditional investments.
This rhetorical sleight of hand has gotten out of control; we need to re-label transfer payments as transfer payments and investments to be those things that actually serve the population for the future. This is not to say that all money spent on education and health care isn’t an investment; it IS when those individuals gain significant and useful skills that they can utilize for the economy. But overall, the building of even a highway or power plant is now beyond the pale even with government spending far higher than the historical norm; transfer payments have been re-defined as investment. Just look at those rusting “L” tracks to prove it.
Cross posted at LITGM
5 thoughts on “Infrastructure and the meaning of “Investment””
Seems to me that Bill Clinton is to blame for so often misusing “investment” that most of the public stopped noticing the dishonesty and began to accept the word as a synonym for “government spending.”
It is tragic that the West seems unable to build anything, except for stacks of ‘environmental impact’ studies. On the other hand Chinese real estate bubble seems about to burst as well, with some of their newly build cities standing empty.
On the topic of those rusted El steps, I once e-mailed Randall O’Toole about Metra — the commuter trains bringing people to the Loop from distance suburbs.
Randall O’Toole is the Boogie Man or Ton-ton Macoute or what have you to the right thinking people who believe in public transportation and in trains and such things.
His main knock on commuter rail or heavy rail (CTA Rapid Transit) or light rail is that compared to cars and highways, these systems are not pulling their weight. By making some assumptions about lane capacity, he reasons that most of these commuter lines are carrying less than a highway traffic lane in each direction on a daily basis.
Metra has “300,000 daily riders.” Most of the traffic is commuting from homes in the ‘burbs to jobs in the Chicago downtown. If there are 300,000 daily riders, they have to ride once to come to work and ride again to go home, so there are 150,000 round trips. Let’s assume that rush hour is spread over a two-hour period. Let’s assume that a traffic lane carries 2000 cars/hour before a traffic jam happens. I reasoned, based on these assumptions, that Metra is replacing almost 40 freeway lanes in each direction (yeah, yeah, the Kennedy has those reversible lanes, not replicated elsewhere in Chicago or on the planet) — about 4 freeway lanes in each direction for each of the, what is it, 10 Metra lines?
I e-mailed him that his lane-equivalence of transit systems does not take into account the rush hour, and even with flexible hours or people just sneaking in to work late, a two-hour rush hour is a reasonable assumption, and I ran by him my estimate of what Metra is doing — supporting 150,000 jobs in the Downtown.
Now Mr. O’Toole is not easily swayed from his opinions much as the people who value trains or transit hold on to their beliefs, but he was so polite as to e-mail me back a response. He suggested that if Metra was responsible for supporting 150,000 jobs by getting to work, over some time period he mentioned (like the past 10 years or so), the outlying areas had added 600,000 jobs. It is not to say these people have a picnic commuting on the Toll Roads or on whatever major surface streets, but his point was that Metra is not where the action is in terms of where people are getting jobs and need to commute to those jobs.
To paraphrase Jimmy Stuart’s famous speech in “It’s a Wonderful Life”, you’re jobs are not here (gesturing at the rusted El steps), they’re . . . over there (gesturing at the Toll Road suburbs). It’s a shame that the CTA is going to ruin, but there are many more people commuting to work (largely by car) far outside the city limits than the CTA ever supported back when it was in a good state of repair.
I prefer the dusty dictionary definition of investment: buying income. Investments are measured by their return. That is, what the investor receives above return of principal. If you don’t expect to see the principal again, it is not an investment, it is an expense.
Buying good feelings is just spending on entertainment.
I’m not familiar with Chicago, but transit systems in other cities were built as investments where the operator expected a return on and return of principal. If an entity rebuilds the El knowing that fares will not cover costs, it’s not an investment. It is only shifting transport costs to subsidize areas served by the system.
It’s not just the steel vs. flesh, it is what is intended and expected.
Minneapolis has at least one reversible lane, coming in to the city in the a.m. and going out to the burbs in the p.m.
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