The Road to Ruin; J. Semmens

John Semmens THE ROAD TO RUIN IN our private lives it seems that crises are relatively rare events brought on by extreme circum stances and unforeseen situations. In the realm of public policy, how ever, crises seem to be the norm rather than the exception. We have international crises, domestic crises, monetary crises, fiscal crises, energy crises, crises of confidence, ad nau seam. The government apparently has the capacity to turn the most prosaic and mundane circumstances into crises. The "crisis" of the '80s will be the need to rebuild America and make her great again. Dire consequences are predicted if we fail to meet this challenge. A subsidiary "crisis" to the more general need to rebuild Mr. Semmens is an economist for the Arizona De partment of Transportation. America is a "public sector in ruins." Within the public sector, few things are as threatened with ruination as our highway system. In state after state, the cry has gone out that our roads are crumbling, that without drastic action (a doubling or tripling of taxes) we won't be able to get from here to there. Our economy will col lapse and savagery ensue.

Why has the highway finance is sue reached a crisis stage? Exami nation of the nature of the highway product and how the government has sought to provide it will reveal a classic example of public sector fail ure. The tragedy is that the failure was foreseeable and predicted by many critics of government waste and mismanagement. We will be able to make more sense of the issues in highway financing if 723 724 THE FREEMAN December we realize that highways are invest ments. The decision to build a high way will have consequences very similar in nature to the decision to build any other capital facility. To insist, as some do, that since high ways are publicly owned they are exempt from normal investment de cision criteria will be destructive to the general welfare. Regardless of whether a facility is owned and operated as a public or private undertaking, the economic law of scarcity still applies. This law of scarcity is a common-sense recog nition of the finite nature of our ex istence. In the final analysis, there is only a limited amount of time available to us to devote to efforts aimed at serving a multitude of needs. Time consumed in acquiring or manufacturing the resources to serve a portion of our needs is not available to spend in efforts to serve other needs.

Recognition of this finite limit is important if we are to rationally manage our time and effort. Of ne cessity, anyone need or problem cannot be considered in isolation from all other needs or problems. This might appear to make for an unwieldy mess, since it is unlikely that anyone person or group of per sons could conceivably consider all needs or problems simultaneously. Fortunately, society has evolved the market institutions that serve to calculate the best uses of scarce resources for the constantly changing needs and problems of a diverse world. The Functionof Prices The price system of the market place yields us a "best estimate" of the current and future values of var ious resources in meeting human needs. This price system applies both to the commodities that might be employed in implementing our plans to meet our needs and to the capital required to purchase the commodi ties. By comparing the prices we must pay with the revenues we an ticipate from our planned invest ments, we can determine whether what we intend to do is financially feasible. Inasmuch as the price sys tem is a reflection of a continuous stream of voluntary choices, reli ance upon its verdicts will also produce investments which are so cially desirable.

Unfortunately, utilization of the market and its price system has not been well developed in the public sector. Past decisions in public high way construction were made on the basis of other factors. The result has been the creation of a roadway in frastructure which is becoming in creasingly out of balance with the means to finance it. We cannot just build all that highway officials say we must build without massive in creases in the amount of resources consumed by this activity. Our needs 1981 THE ROAD TO RUIN 725 for roadways must compete with a multiplicity of needs for every sort of good or service. To devote re sources to highway construction will mean, of necessity, that these re sources cannot be devoted to other uses. In order to employ resources for the maximum benefit, it is nec essary to determine how highways compare with other investments in terms of the benefits produced.

The cost of errors in the expendi ture of resources on highway facili ties is considerable. Once time, ef fort, and money have been converted into a roadway, they are irretriev able. Decisions on highway con struction are cast in concrete. This irretrievability factor raises the risk of highway investment. Roads which do not return as much in value as they cost to build and maintain cause total economic output to decline. The long-term effects of lower eco nomic output are reduced welfare throughout society. There would be fewer employment opportunities, more poverty (as well as the social ills associated with poverty), fewer resources available to meet other human needs in the areas of health, housing, education, and the like, in cluding other transportation needs. Measuringthe Value of PublicInvestment It is not enough to assert that roads are "essential" to a community's well being. A lot of things are "essential"

to this well-being. How are we to al locate scarce resources between competing "essential" goods or ser vices? Given that wants are vir tually unlimited, it is obvious that there won't be enough resources to satisfy all demands. Consequently, society will be forced to choose which wants go unfulfilled. In a market economy, society's in vestments are made based upon the perceived return to be earned. That is, if the decision-maker believes that his gains from an investment deci sion will exceed the costs incurred in pursuing that decision, he will implement the investment. If he is right, he will enjoy profits which can be used for future investment or consumption. If he is wrong, he will suffer losses. If the losses are severe enough, the resources will be de pleted and no future decisions or in vestments will be possible. In the public sector, the connec tions between decisions and out comes are more indirect. Establish ing the costs and benefits for the purpose of estimating a future re turn on investment is more complex and difficult. The responsibility for the decision-making may be ob scure. The profits or losses are dif fuse and ambiguous. The short-term political impact of the decision will be more prominent in guiding public policy than the longer term invest ment returns. Nevertheless, these problems and complexities do not 726 THE FREEMAN December relieve society of the consequences of bad decisions made in the govern ment sector.

The simplest approach to evalu ating an investment is to match cash inflows to cash outflows. If more cash is coming in than going out, the ac tivity is sustainable. If the reverse is the case, namely more cash on the way out than on the way in, the ac tivity is unsustainable. Unsustain able activities may be rescued in one of two ways: reduce expenditures or increase revenues. Private businesses might resolve a cash flow problem by either cut ting out losing product lines, or in creasing prices, or both. The public sector could well take heed of this approach ..There are a few barriers that must be overcome, though, be fore a rational public policy can be adopted. First to go must be the no tion that access to the road system is some sort of inherent right to which persons or corporations are entitled. Roads are material goods that cost real resources to construct, operate, and maintain. Individuals or businesses have no right to de mand access to highway services without paying the costs of that ser vice.

A second barrier to be overcome is the idea that it is not possible to fairly assess highway users for the cost of the services they require. Granted, the public sector has little experience with pricing and marketing its products. This is not to say that it should not be done. A third barrier to be overcome is the notion that the value of road ser vices can or should be determined independently of the use and fees collected for that use. It has been stated that user fees do not capture all of the benefits enjoyed by road users. In this respect, roadways are no different than any other eco nomic good. Everything exchanged in a voluntary transaction produces benefits above and beyond the reve nues collected by the seller. UncapturedBenefits The problem of uncaptured bene fits is not unique to highways, or to the public sector for that matter. To argue that higher taxes for highway purposes are justified because of the non-revenue-producing benefits oc casioned does nothing to establish what priority, if any, highways are to have over any other use for re sources. The fact that highways are public facilities often conveys the erroneous idea that this in itself makes them especially productive in terms of non-revenue-producing benefits. There is no basis for as suming that public sector invest ments do, while private sector in vestments don't, produce these benefits. Yet, many analyses con ducted by government economists implicitly make this assumption.

Since there is such widespread 1981 THE ROAD TO RUIN 727 confusion surrounding this issue, an example may be most illustrative. A frequently cited example of a road's non-revenue-producing benefits is the reduced travel time for emer gency vehicles. Cutting an ambu lance's transit time by a few minutes may save a life. The value of this life is not reflected in the user fees col lected from whatever highway taxes may be paid by the beneficiary ofthe life-saving event. There can be little argument with the proposition that in instances like the aforementioned example, the benefits exceed the revenues pro duced. What isn't answered is how the benefits of better roadways com pare to the benefits produced by the other components of the life-saving event. Isn't the phone call which summoned the medical help worth more than the 10 cents it may have cost? Isn't the medical equipment that may be used-cardiopulmon ary resuscitation machines, surgical tools, and the like-worth more than the cost? Isn't the vehicle doing the transporting worth more than the cost? The list of other factors can be quite extensive. In the case of each component, it can be justly argued that the benefits to the person served exceeded the revenues captured by the manufacturers of the compo nents.

The difficult question is how do we compare the non-revenue-producing benefits of each component? If we ignore the non-revenue contributions of every component other than the highway system, we will distort the investment picture. Universal ap plication of a methodology which computed non-revenue-producing benefits for public sector invest ments only would result in a costly transfer of resources from their most productive uses to a series of largely arbitrarily selected public sector projects. This would reduce social welfare. The best road system in the world would be useless if vehicle manufacturers couldn't obtain re sources. Arizona:A Case StUdy Investigation of the Arizona State Highway System in terms of return on investment demonstrates the folly of ignoring the market in highway investment decisions. Over 60 per cent of the mileage on the State Sys tem does not generate enough reve nue to cover the cost of upkeep. That is, nearly 4000 miles of roadway op erate at a loss. These are roads un der state jurisdiction. The situation appears to be even worse for county and local roads.

The investment performance of various portions of the State High way System shows wide disparities in the. returns generated vs. the costs incurred. Some segments cover their costs many times over. On the other hand, many segments won't even generate enough revenues to cover 728 THE FREEMAN December a fraction of their anticipated costs. Even if taxes were doubled, over 45 per cent of the system's mileage would not generate enough revenue to cover the cost. If taxes were qua drupled, nearly 30 per cent of the State System would not cover the cost of upkeep. Finally, there are segments where the expenses are so high, or the revenues so low, that they can't even cover 10 per cent of the cost. Over 780 miles of the Ari zona State Highway System falls into this category. Roadways in this cat egory include the fantastically ex pensive urban freeways and por tions of rural highways that see little use.

The MarketIs the Answer The profit/loss profile of the high way system is a reflection of past de cisions in highway investments. The crazy quilt pattern of viable and non viable road segments serves as an indictment of the previous highway planning process. The schemes, the mechanisms that have been used in the name of the "public interest" or "general welfare" have been a com.,. plete flop. The resulting highway in frastructure serves transportation demand worse than a random sys tem of roadway funding would have done. Contemporary public debate has shunned the issue of government re sponsibility. The mismatch of high way expenditures and demand that has produced clogged urban streets and nearly vacant rural roads is portrayed as an accident, or a result of OPEC manipulations, or J apa nese auto manufacturers-any thing but what it is: the failure of government in the provision of ma terial goods and services.

It is easy to take the products of modern capitalism for granted. It would not be so easy to live without these products. If more and more re sources are diverted to the public sector, because the total return on investment (with non-revenue ben efits added) in the public sector ap pears better than the purely finan cial returns calculated for private sector firms, human welfare would be reduced. It is not really feasible for us to attempt to measure the non-reve nue-producing benefits of every pos sible use of resources. Fortunately, it is not necessary to do this. Com parability between alternative uses of scarce resources can be achieved by restricting analysis of benefits to the revenue-generating services for which users are willing and able to pay. This puts the onus on the public sector. to exert more effort in ascer taining appropriate pricing systems in order· to capture a larger portion of claimed benefits as cash inflow.

The fact that new pricing systems may be unprecedented or difficult to initiate is no argument against the legitimacy or the advisability of de1981 THE ROAD TO RUIN 729 vising them. The advantages of de veloping a more market-oriented pricing system and using it to fund sustainable highway investments are persuasive. The foremost advantage is that it would most fully employ the device of allowing consumer choice. Consumers would have the option of using-and paying for what they use. This would move from a politically determined decision making environment toward a more market determined environment. Looking in the Wrong Place Greater customer satisfaction could be anticipated. Cash flows would be more stable-responding to the de mand and use of the facilities, rather than to the political popularity of the road system. The continuous expression of market demand via user purchases of highway services would simplify the task of deciding what services to supply. Govern ment would be more assured that it is providing value for the fees it col lects. , IDEAS ON LIBERTY No number or concentration of experts on road construction or of wiz ards on finance can find the solution to the highway problem until the search is conducted in the area in which the solution lies. The evidence is clear that the wrong place to look for the solution to the highway problem is in the area of government. That practically all highways are owned by some particular form of government-federal, state, county, or municipal-is the problem and not the solution.

Government is not creative, although misguided and misunderstand ing citizens and elected servants have time and time again mistaken compulsion for creation. The proper role of the government should be to defend our nation from outside attack, as a soldier, and defend us from lawlessness from within, as a policeman. Both of these tasks are very important, but neither is creative in nature. The company striving to develop a new vaccine for the elimination of cancer surely would not assign the project to the plant security police. Nor should we assign the development of highways to political policemen. We have too often hooked up coercive power to a creative field, and the results have ended inevitably in fail ure. When the hand of government is inserted in a problem requiring initiative, it becomes a dead hand-and the failure can be predicted. JOHN C. SPARKS, "The Highway Dilemma"