Private Sector Can Help Kansas City Manage Its Public Infrastructure, Likely for Less

Posted on by David Stokes

The $2.5 billion settlement to improve the Kansas City sewer system has put the city well past the question of whether something needs to be done with its infrastructure assets. Right now, private companies are willing to pay for the right to manage the city’s property, and long-term savings result when the private sector operates public services more efficiently. Partnering with the private sector — either in the form of up-front payments for asset management, or cost savings from greater operational efficiencies — could help Kansas City meet its financial obligations, both now and in the future.

In 1984, Oklahoma City contracted out the management of its wastewater treatment facilities to a private utility company, Veolia Water. At the time of the contract, Oklahoma City spent $14 million per year on its system. Seventeen years later, in 2001, Veolia operated an improved system for only $11 million per year. These numbers have not been adjusted for inflation, making the savings even more impressive. Veolia still operates the Oklahoma City wastewater system today, after further contract renewals.

I provide this example not to encourage you to buy stock in Veolia or move to Oklahoma City, but to showcase the potential effectiveness of partnering with the private sector in public infrastructure operations, management, and delivery. A city council committee has approved a resolution for Kansas City officials to study the possibilities offered to residents and taxpayers from private sector competition for public infrastructure programs. The full council is scheduled to consider the proposal soon.

This resolution is limited in its reach. The proposal simply calls for the city to study the expected effects of contracting out the management of certain assets. There is no plan or intention to sell off and fully privatize city assets. Instead, the study could consider a range of options, such as private companies that pay the city for the right to operate city parking garages, or a private engineering firm contracting to operate water or wastewater facilities. One local example of the benefits of these ideas involves recent successful changes to the Kansas City animal shelter, although that particular effort moved further toward full privatization than this proposal does.

Successful examples of the private provision of public services can be found throughout Missouri. They include instances of outsourcing, contracting, and private ownership. Private companies successfully operate the nation’s only private, commercial airport in Branson; manage the pharmacy services of Saint Louis County’s Department of Health; provide electricity, gas, and water throughout Missouri; and manage trash collection in communities throughout the state. Around the country, private companies efficiently operate public highways, libraries, jails, and much more.

Not every example would be appropriate for Kansas City, but a study could help determine where private partnerships would benefit the city. Mayor Mark Funkhouser deserves credit for bringing these issues to the forefront, and the people of Kansas City will benefit if they get the serious study they deserve.

David Stokes is a policy analyst for the Show-Me Institute, a Missouri-based think tank.

 

Free Trade Does Not Cost Too Much

Posted on by David Stokes

Mike Guzy, who currently writes for the St. Louis Beacon and formerly wrote for the Post-Dispatch, is a very talented writer. A column he wrote probably 10 years ago for the Post defending the use of the death penalty remains one of the best treatments of that topic I’ve ever read. But today in the Beacon, he gets his economics wrong. How wrong? Let’s just say it took only a few seconds of research to find two economists who are frequently at odds with each other both disagreeing with his point.

What is his point? That cheap imports are causing unemployment in our current recession, and the proper solution is to raise tariffs on imported goods. From his article:

The only conceivable way to revitalize the American middle class — the little engine of consumption that pulls the global economy — is to impose labor tariffs on imported goods, making their cost comparable to those manufactured here.

Let us now quote famous men and women writing about the Smoot-Hawley Tariff, which did almost exactly what Guzy calls for, and is near-universally derided as one of the worst pieces of legislation ever passed by Congress. Here is Great Depression historian and economist Amity Shlaes:

This lack of concern resembles many Americans’ disregard for the effects of the Smoot-Hawley Tariff Act, signed into law by Hoover in June 1930. Republicans told themselves that the tariff couldn’t hurt much since trade was a small part of the U.S. economy at that point.

But that view overlooked the signal that markets were sending. Long ago Jude Wanniski noticed that the progress of the Smoot-Hawley legislation tracked declines in the stock market. More recently Scott Sumner, a professor of economics at Bentley University in Waltham, Massachusetts, has argued that the tariff reduced investment all over the world, and therefore produced deflation.

Shlaes’ great book, The Forgotten Man, goes into much more detail about the harm of the tariff.

And now we turn to Paul Krugman for his views on the Smoot-Hawley Tariff:

Just to be clear, I don’t think the Smoot-Hawley tariff was a good thing — it was a really bad thing. Nasty protectionism! Bad Smoot-Hawley! Bad! Bad! Bad!

Krugman is clear that although he doesn’t think protectionism and the tariff caused the Great Depression, it was nonetheless a terrible idea.

When legislation makes the goods that we import, and voluntarily choose to purchase, more expensive, it limits our choices and our freedoms, and increases our costs of living. It also immediately harms the enormous number of Americans who depend on trade, shipping, and related industries for their employment, and results in retaliation by other trading partners that would limit our exports. Instituting higher tariffs for protectionist purposes is always a net loss for our economy.

Why Does Kansas City Need More Power to Take Private Property?

Posted on by Audrey Spalding

The Kansas City Star recently wrote that the city should step up its efforts to deal with more than 12,000 vacant properties in the city. Vacant properties discourage people from moving into neighborhoods, can become dangerous because of brick theft, and can attract criminals.

To combat vacancy, Kansas City passed a law more than a year ago that allows the city to take property that is designated as vacant and a nuisance (meaning it might have overgrown weeds, cars that are damaged or disabled, or, in worse cases, criminal activity) to be taken from the property owner and given to a receiver. The receiver can rehab or bulldoze the property and eventually sell it to a new — and, hopefully, better — owner.

But this law just isn’t the way to fight vacancy. Both Kansas City and Saint Louis can, and do, recover property from owners who have utterly abandoned it. If property owners don’t pay their property taxes for several years, local government can take the property and put it up for sale so that, hopefully, it will be put to more productive use. I am wary of Kansas City using this new power to transfer properties to “better” owners, because it allows the city to seize property that, although vacant, has an owner who is not delinquent on his or her property taxes. If the current owner continues to pay property taxes, he or she is claiming the property explicitly.

Properties in productive use go vacant all the time — a property under construction is not occupied, nor is a property that has been put up for sale. Can you blame people for holding onto a property for a little longer before putting it up for sale in the currently anemic market? Perhaps a better question is, should Kansas City take property from people who are holding out for a better price, or don’t want to sell for some other reason?

The city also has ways to deal with properties that are deemed a “nuisance.” After notifying the property owner, the city can inspect and reinspect the property until the nuisance (say, rotting plant matter) is fixed. If not, the city can even fix the nuisance itself and/or issue a fine.

So, Kansas City has ways to deal both with truly vacant properties and nuisance properties. Why exactly is this receivership law necessary? From here, it looks like the receivership law is an attempt to speed up the process at best (while also deteriorating property rights), and a manipulable ordinance at worst.

Importance of Quality in Primary Education

Posted on by Abhi Sivasailam

If you’re like me, you too have spent the past few months eagerly awaiting the release of a certain academic article. Well, I’m pleased to report that the wait is over. Here it is: “How Does Your Kindergarten Classroom Affect Your Earnings? Evidence From Project STAR.” The paper is written by several “superstar” economists whose research supports the conclusion that investments in improving the quality of early education can provide lasting benefits. The paper is also noteworthy for tracking the effects of early educational interventions onto market outcomes, and not just subsequent educational outcomes.

Here’s the abstract:

In Project STAR, 11,571 students in Tennessee and their teachers were randomly assigned to different classrooms within their schools from kindergarten to third grade. This paper evaluates the long-term impacts of STAR using administrative records. We obtain five results. First, kindergarten test scores are highly correlated with outcomes such as earnings at age 27, college attendance, home ownership, and retirement savings. Second, students in small classes are significantly more likely to attend college, attend a higher-ranked college, and perform better on a variety of other outcomes. Class size does not have a significant effect on earnings at age 27, but this effect is imprecisely estimated. Third, students who had a more experienced teacher in kindergarten have higher earnings. Fourth, an analysis of variance reveals significant kindergarten class effects on earnings. Higher kindergarten class quality – as measured by classmates’ end-of-class test scores – increases earnings, college attendance rates, and other outcomes. Finally, the effects of kindergarten class quality fade out on test scores in later grades but gains in non-cognitive measures persist. We conclude that early childhood education has substantial long-term impacts, potentially through non-cognitive channels. Our analysis suggests that improving the quality of schools in disadvantaged areas may reduce poverty and raise earnings and tax revenue in the long run.

For those who don’t want to read the whole paper, the research is also available as a PDF of Power Point slides.

Come Meet Some (Alleged) Criminals!

Posted on by Dave Roland

On Monday, the Show-Me Institute will host another Show-Me Forum in Columbia, at which I will present a talk called “Economic Liberty and Occupational Licensing: If You Aren’t Outraged, You Haven’t Been Paying Enough Attention.” I’ll talk about the ways in which occupational licensing laws are being used and abused both in Missouri and nationwide. As a special bonus, we will have on hand five or six Missouri entrepreneurs that the state believes are criminals, simply because they failed to get the government’s permission before providing useful services to informed, willing consumers.

For anyone who can’t make it to the Show-Me Forum, consider tuning in to Mike Ferguson’s radio show on Monday afternoon between 4:20 and 4:40, when Mr. Ferguson will interview me and Mrs. Brooke Gray, an equine dentist who has found herself in the crosshairs of the Missouri Veterinary Medical Board.

You’ve Been on a Fast Train, and It’s Going Off the Rail

Posted on by John Payne

Transportation expert (and sometimes Show-Me Institute author) Randal O’Toole wrote an editorial for USA Today about the folly of huge government subsidies for high-speed rail. O’Toole’s basic point is that we get very little transportation benefits from high-speed rail in comparison to its massive costs:

At an inflation-adjusted cost of about $450 billion paid out of highway user fees, the Interstate Highway System, to which high-speed rail is sometimes compared, provides more than 4,000 miles of passenger travel for every American, miles that Americans were not traveling before the system was built. By comparison, a $600 billion expenditure on high-speed rail will provide, at best, around 300 miles of travel per person.
[…]
Amtrak brags that its high-speed Acela between Boston and Washington covers its operating costs, though not its capital costs. It does so, however, only by collecting fares of about 75 cents per passenger mile. By comparison, airline fares average only 13 cents a passenger mile, and intercity buses (which, Amtrak doesn’t want you to know, carry about three times as many passengers between Boston and Washington as the Acela) are even less expensive.

According to the Bureau of Economic Analysis, Americans spent about $950 billion on driving in 2008. This allowed us to travel, says the Federal Highway Administration, more than 2.7 trillion vehicle miles, for an average cost of about 35 cents per vehicle mile. Since the California High-Speed Rail Authority estimates cars in intercity travel carry an average of 2.4 people, the average cost is less than 15 cents a passenger mile.

O’Toole also points out that urban elites are the ones most likely to benefit from high-speed rail travel, because they are more likely to live in the downtown areas where train stations are typically located. The construction of high-speed rail has little to do with the costs and benefits of different modes of travel, and almost everything to do with aesthetic preferences. Unfortunately, aesthetics usually trump economics in the political world.

Back in February, I explained why Saint Louis should not expand the MetroLink light-rail system.

(Blog entry title reference here.)

Kansas City to Take a Hard Look at How It Provides Services

Posted on by David Stokes

According to the Reason Foundation, New York Governor Mario Cuomo said about privatization, “It is not a government’s obligation to provide services, but to see that they are provided.” That statement perfectly sums up the inspiring choice by Kansas City leadership to study and consider the potential to make greater use of the private sector in Kansas City’s infrastructure management and delivery.

I want to be very clear from the beginning that Kansas City is NOT considering full-scale privatization of its infrastructure, as I recommended the city of St. Louis do with its water division. Kansas City leaders will study the potential for contracting with private partners to manage facilities, including wastewater treatment, parking, and more. Today’s Kansas City Star has a very good story about yesterday’s committee meeting (which I attended). Mayor Mark Funkhouser and the members of the committee deserve a great deal of credit for their willingness to consider these possibilities for the taxpayers and residents of Kansas City.

This type of operations and management (O&M) outsourcing can have great benefits for the city and its people. Oklahoma City has had great success after outsourcing its wastewater treatment plants in 1984. Anyone who thinks that this type of original thinking always fails or hurts taxpayers simply needs to look at the success in Oklahoma City for the other view. Like anything, these types of efforts can be executed either well or poorly. Although privatization failures exist, Oklahoma City represents only one example of success out of many. I look forward to sharing them with you as this discussion moves forward.

Debate Tonight!

Posted on by John Payne

The Show-Me Institute is sponsoring a debate between me, Research Assistant John Payne, and Policy Analyst David Stokes on the subject “Are Conservatives and Libertarians Natural Allies?” The debate will be held at 6:00 p.m. today at Dressel’s, located at 419 N. Euclid in Saint Louis’ Central West End.

Since the end of World War II, libertarians have typically been considered a part of the right, in a “fusionist” alliance with traditional conservatives. However, a number of libertarians have questioned the usefulness of this longstanding relationship in light of the dramatic growth in the size of government and restrictive social policies instituted by self-described conservatives in government.

Both Stokes and I want to see dramatic reductions in the size of government and the roles it plays, but we disagree on the strategy for achieving those goals. Stokes will argue in the affirmative that libertarians’ best hope is to ally with conservatives — the only other group he sees as trying to limit the size of government. I will take the negative, contending that, despite their rhetoric, the conservative commitment to limited government is only skin-deep.

Outside of our employment at the Show-Me Institute, I serve as the Missouri state chair of Young Americans for Liberty, and Stokes is the Republican committeeman for Clayton Township in Saint Louis County.

Join us tonight (Thursday, Sept. 30) at Dressel’s in the Central West End for food, drinks, and discussion. (Cash dining and bar.)

Tax Credits: A Poor Strategy for Economic Development in Missouri

Posted on by Christine Harbin

Not surprisingly, every person who has testified before the Missouri Tax Credit Commission during its regional meetings has spoken in favor of tax credit programs — primarily because those people, who work in industries subsidized by state tax credits, directly benefit from the programs.

Tax credit programs defeat the purposes that supporters usually cite in their favor: encouraging employment and helping Missouri compete. In short, tax credits are a form of wealth redistribution — we all bear the cost, but only special interests and favored industries benefit.

Tax credit programs are not as effective as advertised. The state auditor recently found that fiscal notes underestimated the total cost of the programs by $1.1 billion over a five-year period. Tax credit programs have failed to deliver on their promises in other states, too. The Mackinac Center for Public Policy in Michigan released a study in which it compared job estimates made by Michigan’s economic development agency accompanying tax credit awards to the actual outcomes of those programs. Mackinac found that only 7.9 percent of projects were completed on time and produced the number of jobs promised. Missouri cannot afford this failure rate.

A particular program may provide some social benefits, but the state has to weigh this against its cost. Dollar signs are missing too frequently from these discussions. Whenever the state of Missouri awards a tax credit, that credit comes at the expense of other activities. A dollar spent on tax credits is a dollar that the state must cut from another program. The state should consider whether the social benefits of, say, increased wine production, film production, or vacant land assemblage are worth cutting the budget of another state program.

In addition, another recent audit by the state auditor found that the Department of Economic Development (DED) had a 43-percent error rate just when recording estimated jobs and investment figures from businesses receiving enterprise zone tax credits. In one instance, the DED inflated a business’ investment estimate by 333 percent.
Given this amount of misinformation, how can the state possibly have a chance at encouraging the right businesses and industries? The government has no special ability to predict which businesses and industries will succeed, yet tax credits are an attempt to identify and subsidize future successes.

Tax credits often don’t create economic activity, but instead merely shift it to another location. When states compete over companies by offering increasingly generous incentive packages, taxpayers lose because they have to foot the bill. As a recent example, while Ford lobbied for $150 million in tax incentives from Missouri, Ford also courted Kentucky, Michigan, Ohio, and Illinois for financial assistance, communicating the message that it would locate within the borders of the highest bidder. This is a very expensive game, and taxpayers everywhere would be better off if their state governments stopped playing.

Even if other nations, states, or localities offer tax incentives to lure businesses, Missouri would be better off if we don’t do the same — because we benefit from the lower prices that those subsidies create, without it costing Missouri’s taxpayers a dime. It would be better for everyone if all states stopped providing these subsidies, but Missouri will still experience better economic growth if it unilaterally removes itself from the tax incentive bidding wars.

Missourians would benefit if the state government took a hands-off approach to economic development instead of providing subsidies to private companies. Missouri’s tax credit programs have not fulfilled their stated purposes, and spending more on them will not likely result in better outcomes. Missouri’s tax dollars would be much better spent in the hands of individual Missourians than on enticements for companies like IBM and Ford.

If Missouri’s state government officials are serious about promoting economic development, they will stop attempting to pick and choose the economic activities that occur within its borders. Centrally planned economies have never worked, and that strategy won’t work for Missouri, either.

Christine Harbin is a research analyst for the Show-Me Institute, a Missouri-based think tank.

 

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