Sunday, August 5, 2012

Debunking US Politicians' China Infrastructure Love... Again

US politicians, particularly Democrats, have been enamored with China's massive infrastructure spending for years now.  I've already taken a few swipes at this misguided affection, but it seems that it - and the underlying assumption that massive new spending on US infrastructure will boost jobs and jumpstart the flagging economy - will again play a prominent role in the 2012 elections.  For example, Massachussetts Senate candidate and Democratic National Convention headliner Elizabeth Warren released a new TV ad during the 2012 Olympics opening ceremonies, in which she questioned why the US government wasn't spending more on infrastructure when so many citizens are out of work and our "competitors" like China are spending like crazy on their roads, bridges, trains and cities.  Warren certainly isn't alone: President Obama has long been a fan of comparing US and Chinese infrastructure spending, and has been on the campaign trail trumpeting the notion that infrastructure spending is an obvious and uncontroversial jobs plan.

What Warren, President Obama and their big spending friends seem not to understand, however, is the simple and obvious fact that comparing US infrastructure spending to Chinese spending is a really, really dumb idea.  First, given the differences in the countries' governments, budgets and stages of development, their rhetorical ploy is a classic case of comparing apples to oranges, as made clear in this lucid critique by Reason's Ira Stoll:

The first problem is mathematical. U.S. gross domestic product is about $15 trillion a year. Increasing infrastructure “investment” to the 9% Chinese level that Warren cites would mean an additional $1 trillion a year in government spending. That’s an immense spending increase. To put it in context, the entire federal government spent about $3.6 trillion in 2011, on revenues of about $2.3 trillion.

Where would this money come from? Not tax increases, right? Warren has already reportedly promised nearly a trillion dollar tax increase, spread over ten years, by raising the estate tax, imposing the Buffett Rule, and letting the Bush tax cuts expire for those earning $250,000 a year or more. But that money, she has said, would go toward deficit reduction. If Warren really wants to spend $1 trillion a year more on infrastructure, she’d need to eliminate all national defense spending ($705 billion) or all Social Security spending ($730 billion) and then find another more than quarter trillion dollars. Or else she’d have to go on the biggest borrowing or taxing binge in American history.

Math, though, is hardly the only problem with emulating China’s approach to infrastructure spending. History is another. America and China are at different junctures in our development. America built a lot of bridges, tunnels, and highways in the 1950s and 1960s when China was stuck under Communism. A lot of China’s spending now isn’t going to outpace America but to catch up with things that we’ve had here for decades, like potable water and a population that is mostly non-rural.

Finally, not all of China’s infrastructure spending is worth emulating. The Chinese Communist treatment of those who stand in the way of their projects makes Robert Moses, the mastermind of so many of New York’s neighborhood-destroying highways, look like Mother Teresa. For example, the group International Rivers reports that 1.2 million people were displaced to construct the Three Gorges Dam. That $40 billion project also reportedly had devastating effects on the Chinese river dolphin, river sturgeon, and paddlefish.

China is able to spend so much on infrastructure because it’s an unfree country. It lacks the rule of law that lets American community groups wage legal and political battles against big government projects. Warren may protest that when she’s talking about “infrastructure” she mainly means maintaining existing roads and bridges, not building brand new projects that flatten urban neighborhoods or destroy scenic rivers. But that’s not what’s happening in China.
Stoll's criticisms are all valid, but he only hints at what, in my opinion, is the broader and more systemic problem with using China as some sort of model for a US infrastructure/jobs plan: the well-documented list of failures associated with the Chinese government's attempts to direct, via central planning, huge amounts of money to ambitious infrastructure projects in order to support domestic employment.  Such failures include not only the nasty dislocation issues that Stoll mentions, but also rampant fiscal mismanagement, capital misallocation, outright fraud and corruption, and, because of serious, often ignored safety problems, even death.

There is perhaps no better example of many of these facts than China's "ghost cities" - multitudes of literally-empty apartments and shopping malls built in the middle of nowhere in order to boost Chinese employment and GDP. (Seriously, if you haven't taken five minutes to watch the breathtaking video provided at the link above, do it now.)  But many recent stories about Chinese infrastructure projects make clear that these ghost cities have a lot of company:
  • According to one of the Chinese government's top central planners, China's transportation construction initiative is all about "excessively big, redundant construction and unfair competition."  In the linked interview, he details how these projects have resulted in giant, unused "roads to nowhere" and a dangerous rail system that has not been reformed due to massive bureaucratic pushback.  As I concluded at the time: "government mismanagement of China's supposedly-awesome infrastructure spending has resulted in many wasteful - and often dangerous - bridges, highways and railways. And despite serious problems surrounding China's vaunted rail program, the government is quietly dumping even more money into the current, broken system in order to maintain arbitrary GDP and employment benchmarks."
  • China's overinvestment in shipping transport, combined with an unexpected slowdown in the Chinese economy, has resulted in a huge Chinese "ghost fleet" of cargo ships roaming the high seas looking for business.  (Insert pirate noise here.)
  • China's enormous spending on construction projects for the Olympics - lauded at the time by myriad fans of both architecture and central planning - may have produced fantastic venues for the 2008 games, but many of those arenas now sit empty and decaying (even in bustling Beijing).  And the Chinese government is struggling to pay the tab for these once-beautiful-now-creepy "ghost facilities."  Paying off the "Bird's Nest" alone will cost almost $500 million and take 30 years.  Oof. 
And today we see a lengthy new expose of China's big subway project, finding that it, like its infrastructure brethren, is riddled with waste, debt, mismanagement, danger and corruption (emphasis mine):
"Construction will cost at least 1 trillion yuan in total," said Chen Xunru, a member of the Chinese People's Political Consultative Conference, who conducted research into subway construction and delivered a speech on his findings to the CPPCC's annual meeting in March.

Experts are concerned that the construction could strain the resources of some city governments and plunge them heavily into debt.

They are also worried that the cities may not have taken account of the possible long-term costs of operating and maintaining the network. Moreover, there are concerns that the large-scale move toward construction has resulted in a shortage of trained professionals, which in turn could lead to reduced safety levels...

[T]he belief that a subway system is a symbol of a modern metropolis means smaller cities are also keen to build. "They see subways as their chance to polish their civic image and look like a modern city," he said.

Amid the raging competition between many similar-scale cities, some lost their ability to think rationally. "Some cities are mapping subway networks that will cost their entire combined income for five years," he said.

The NDRC imposed minimum requirements to prevent financially weak cities from building subways: A city must have an urban population more than 3 million, annual GDP must exceed 100 billion yuan, the local government budget must be at least 10 billion yuan, and the one-way traffic flow must reach 38,000 at peak time.

But, caught in the grip of subway fever, some cities have acted inappropriately.

In 2008, the State Council eased its grip on subway construction in the hope that infrastructure construction would further boost the economy. Zhang Yan, secretary general of the China Association of Civil Engineers, said that some cities manipulated the figures to meet the minimum requirement and obtain the green light: "Except for those in the first-tier, most other applicant cities submitted exaggerated figures for local one-way traffic flow."

Adding to the problems, enthusiastic cities tend to overlook the huge construction costs and overestimate the potential operating income. The heavy financial burden on local governments has crushed some underprepared cities...

Even Shanghai, with a population of 23 million and GDP of 1.9 trillion yuan in 2011, has been dragged into debt.... Ying Minghong, board airman of Shanghai Shentong Metro Group Co, said that only Line 1 is profitable. The income from ticket sales and advertising covers its daily operating costs, but is not enough to pay for maintenance or the interest on its loans. The city's other lines are in debt....

"I doubt there are more than five people in our company and the local government who know how much money the Shanghai metro loses every year. The problem is that it's not a simple mathematical question of adding the government's yearly subsidy and subtracting the metro's annual operating costs," said Yang....

According to a Xinhua News Agency analyst, who spoke on condition of anonymity, the total liabilities of the Shanghai metro exceed 100 billion yuan. However, the situation is far from unique....

It's estimated that in 2015, when the [Beijing] network reaches 581 km, the system will have an operating loss of 4.3 billion yuan, despite the huge traffic volume, Wu said. If depreciation and accounting costs are included, the loss will hit at least 17 billion yuan....

Many cities now spend money on subway equipment that consumes energy and pushes up construction costs, but doesn't improve safety, according to Wang Mengshu, of the Chinese Academy of Engineering....

One reason behind the spiraling cost is that builders blindly seek size and luxury in most cities, said Wang. "When the first subway line was built in Beijing, the platforms were smaller than 8,000 square meters. Now, none of the new platforms is smaller than 12,000 square meters," said Wang....

One of the drawbacks of the complex systems is that they use too much energy, with the power to drive the engines accounting for just 30 percent of total energy consumption.

The unnecessary facilities also pose potential hazards to subway operations. "Once a small problem occurs, the whole line is halted," added Wang.

This is partly because decisions about subway construction in many cities are not made by professionals. "Since the construction of subways in most cities is guided by the government, officials often have the final say in design and construction, instead of the experts," said Wang.

The November 2008 collapse of a subway construction site in Hangzhou, Zhejiang province, that killed 21 workers is a good example of the situation, he said. The local government blamed violations of construction regulations and technical failures. "But I think the accident exposed the serious consequences that can result from excessive interference by government officials in subway construction," said Wang, who inspected the accident scene.

"It normally takes three years to build a subway station of that size, but the construction period for that line was reduced by one-half by the city government," he said, adding that local government saw the completion of the subway line as an achievement of its tenure and thus attempted to reduce the construction period.

The CPPCC's Chen believed that the construction boom has resulted in a shortage of professionals: "Construction teams in many cities were scrambled to meet a deadline and untrained workers were hired. Safety cannot be guaranteed."
The idea that Republicans, conservatives and even most libertarians oppose state spending on infrastructure is a nonsensical strawman argument.  What these groups (myself included) oppose is massive deficit spending on centrally-planned infrastructure projects in an attempt to boost domestic employment.  This is what Ms. Warren and President Obama are proposing, and while their comparison to Chinese infrastructure spending is inapt for several reasons, their focus on China's experiences is helpful in one respect: it demonstrates the folly of thowing billions of taxpayer dollars at shiny new infrastructure projects to "grow jobs" in America.  Indeed, China actually provides the ultimate cautionary tale for people attracted to Warren's and Obama's plans to support US jobs via huge increases in federal government spending on US roads, bridges and trains.

Warren's and Obama's China infrastructre rhetoric is not just comparing apples to oranges; it's comparing apples to rotten oranges.  And fiscal conservatives are smart to avoid taking a bite.

UPDATE: Colin at ToGetRichIsGlorious adds via Twitter: "And look at Beijing's sewers!"

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