Crumbling Infrastructure? Broken Schools? Unleash the Power of the Free Markets

In Saturday's Wall Street Journal, there were two Op-ed pieces on the same page, seemingly unrelated. One carried a profile of Newark, New Jersey's dynamic young Mayor, Cory Booker, while the other was a commentary about the decaying infrastructure of the US and some suggestions for fixing it from a senior editor at the Manhattan Institute. After reading these two stories, however, I found that there were several key themes binding them together:

• Each was discussing a very critical, yet very political problem facing our society;
• Each was calling for powerful new ideas for fixing these seemingly intractable problems;
• Each has to overcome a legacy of populist rhetoric in order have a chance at success;
• Each acknowledged that without dramatic action, what are currently bad situations will only get worse; and
• Each proposed solution is centered around privatization and/or letting the free markets dictate capital allocation.

Education and transportation? In reality, they are attached at the hip. In the US, both areas have historically been addressed through centralized government policies backed by federal and state tax dollars. Needless to say, one need only look at the condition of our highways relative to those in Western Europe to understand the pitiful state of our infrastructure, or to look at where the US ranks among developed nations with respect to academic achievement. In plain english - we suck. Now Mr. Booker of Newark and Mr. Malanga of the Manhattan Institute understand this, and they also understand the compelling argument for letting the free markets determine the values of things like roads, bridges, and schools.

Consider this extract from Christian Sahner's interview with Mr. Booker in the WSJ:

Part of Mr. Booker's solution to this dilemma is education reform centered on school choice. "It's the last frontier we have to cross in order to become the most thriving city in America," he states confidently. "Parents in Newark are more demanding than ever, and they deserve a plethora of options of excellence to choose from that meet the needs of their kids." Mr. Booker is a longtime advocate of school choice: In 1999 he helped found E3, a prominent education-reform group in New Jersey that pushes for charter schools and vouchers for inner-city communities.

Newark's public schools enroll around 42,000 students. With frequent instances of in-school violence, decrepit facilities and low morale, the system is in need of serious overhaul. Just 37% of the city's high-school seniors passed the state proficiency exam in 2005, a statistic that is even more embarrassing considering that city schools spend around $20,000 per pupil -- far above the $13,000 state average (itself the second-highest in the country).

Before Mr. Booker can pursue any sweeping reforms, though, he must wrest control of the district from the state, which took over in 1995. "My goal is to turn the clock back to the '70s and vest control in the mayor to appoint school board members that can drive an agenda for reform," Mr. Booker says with hope. "Elected school boards often hit the lowest common denominator . . . they are not the way to get courageous, driven change."

Mr. Booker emphasizes that until local control returns -- which, thanks to recent moves by the state, could be within "16 to 18 months" -- his powers are limited. But that hasn't stopped him from cultivating donors to start thinking about charter schools for the future. Last month, he flew to Seattle to meet with representatives of the Gates Foundation. "We had very strong conversations," he reports. "I told them, 'If we can grow KIPP schools and overachieving charter schools [in Newark], it will be much easier to show that [school choice] can work, because you'll see results a lot quicker than in a place like New York, which has around a million school-aged children.'"

Mr. Booker is looking for change, dramatic change, and for the tools to help him make it happen. Private funding. The ability to bring in progressive, fresh thinking, action-oriented members of the school board to support his challenging initiatives. Is there any argument for not giving Mr. Booker - and the free markets - a chance to solve this generations-long problem? Newark has among the highest per pupil spending of any school district in the country, yet with performance that words are inadequate to describe; how about starting with offensive? As a taxpayer, I expect my dollars to go farther, much farther than they appear to be going in Newark. Charter schools. Parent choice. These will quickly separate the wheat from the chaff, shining a bright light on those schools that the free market deems worthy versus those than simply don't cut it. Anyway, I hope Mr. Booker succeeds. And maybe I'll just think of a way to try and help him out.

Mr. Malanga, though writing on a distinctly different topic, captures the essence of the battle Mr. Booker is waging against an inadequate academic product expect with respect to our inadequate infrastructure product:

Nearly a fifth of America's roads are now considered in poor shape and about one-in-four bridges is rated "structurally deficient." The U.S. Department of Transportation estimates that the cost to fix these problems is a staggering $460 billion. The tab grows far larger when you add in the hundreds of billions to build the new transportation infrastructure that's needed to handle the country's growth.

Part of the problem is that big increases in state and local spending for politically popular programs, especially Medicaid and education, as well costly public employee pensions and benefits, have crowded out infrastructure -- even as some traditional sources of financing for roads and bridges, such as the proceeds from gas taxes, haven't kept pace with demand.

It's unlikely that public funds alone will supply what's needed. Rising gasoline prices have made it politically unpalatable to increase fuel taxes, while some state and local budgets are already groaning under the weight of decades of borrowing, making massive new debt offerings more and more difficult. More federal transportation money? The problem is that 98% of our bridges and 97% of our roads are owned and operated by state and local governments -- and that these governments have often used past increases in federal transportation aid simply to replace their own infrastructure spending.

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Using traditional means of valuing a public asset -- which is to calculate how much in municipal financing could be raised by floating bonds backed by the road's tolls -- Indiana pegged the road's value at $1.8 billion. Instead, the nearly $4 billion that Indiana got has replenished the state's transportation fund and allowed the state to embark on an aggressive program of new building and maintenance.

Mr. Daniels is not the only public official to tap the market. Chicago Mayor Richard Daley garnered $1.8 billion auctioning the city's Skyway to the same partners who purchased Indiana's Toll Road. He's now trying to sell Midway Airport, which could fetch up to $3 billion. As in the Indiana deal, Chicago discovered that its roadway, whose worth the city's advisers had pegged at $900 million, was far more valuable to private investors. The vast disparity in valuation highlights essential differences between the private and public sectors.

For starters, private financiers in these deals -- mostly managers of international pension funds with enormous sums to invest -- often have a greater taste for risk than the typical conservative investor in municipal bonds. The winning consortium in the Chicago Skyway auction estimated that traffic would grow annually by about 3%. The city's own study used a more conservative 1% growth rate. The small difference, stretched out over decades, resulted in a vastly greater valuation.

Moreover, the Skyway sale transfers risk from the taxpayer to the private owner. If the road's traffic doesn't grow as anticipated, investors must accept a lower rate of return. Thus incentivized, the Skyway's new owners quickly installed an electronic toll-collection system and assigned additional collectors during rush hour to reduce wait times and expand use of the road.

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Nevertheless, opponents of privatizations and private-public partnerships argue that private operators can only make money "at the expense of" taxpayers, and that the new owners will skimp on maintenance and repair work in order to squeeze profits out of these operations. These objections typically ignore the significant restrictions and operating requirements written into the contracts -- here in the U.S. and around the world -- which allow governments to cancel the deals, take back the roads and bridges and keep the cash if operators don't live up to the terms.

Taxpayers are protected by an even more powerful mechanism, namely consumer choice. The majority of toll roads, to take one example, are built as high-speed alternatives to already existing routes. If the roads become too expensive or unpleasant to drive, their owners risk losing business that they are counting on to make their investments successful.

Do you see what's going on here? The argument for a market-based solution to US infrastructure problems is compelling, but there are embedded biases and political interests that stand in the way of the logical and best solution from being employed. Fortunately  (or unfortunately), the situation is becoming so dire that certain states are taking matters into their own hands and using privatization as a vehicle for raising much-needed funds and getting better privately-funded infrastructure in the process. I expect that this trend will continue as the benefits of using the free markets as a vehicle for solving our infrastructure woes are simply too compelling, even in the face of political rhetoric to the contrary.

Education, infrastructure, whatever. Let the free markets do their jobs. They consistently yield the best results and the highest quality. The question is when our legislators begin to internalize this reality and apply more market-oriented perspectives into their policy-making. Hopefully it is right around the corner. For all of our sakes.