Ever since reading Brooks-Liscow on the growth in American road construction costs since the 1960s, I’ve been interested in the surplus extraction theory of costs. The authors call their main theory citizen voice, in which local groups can use litigation to extract the social surplus generated by infrastructure construction. I’d like to go more deeply into what this theory is and what it implies.
What is surplus?
Normally, a competitive market has no surplus. The owner of a restaurant, the developer of a building in an unconstrained area like suburban Texas, the seller of cloth masks on Etsy, the freelance web developer – none of them is making a killing. People enter the market until profits are driven down to levels low enough to essentially be the owner-manager’s wage. Companies can only make a large profit if they operate at enormous scale, which takes a long time to develop – the profit margins on a single Walmart or Carrefour or Lidl are small, but the profit margins on 10,000 stores add up to a couple billion dollars a year.
Infrastructure is not a competitive market, for a number of different reasons:
- The construction of transportation infrastructure has strong positive externalities, through enabling agglomeration. In a country with cars, the construction of public transportation also helps mitigate the negative externalities of cars.
- Infrastructure is not meaningfully competitive. The largest city in the world, Tokyo, has around two competing rail operators per suburban region. In Tokyo, it’s a natural duopoly; in just about every smaller city, it’s a natural monopoly.
- The barriers to entry are so steep that some kind of price regulation is obligatory. The result is extensive consumer surplus for riders who are not poor.
- Government involvement means that regulations that make it easier or harder to build infrastructure have large impact, which can create or destroy social surplus.
The upshot is that at non-New York costs, infrastructure construction in New York generates enormous social surplus. I could break this down by component, but for brevity I won’t, and just cite what looks like the upper limit of what the publics in the United States and Europe are willing to pay for urban and regional rail: around $50,000 per projected weekday trip. Lines teetering on the edge of cancellation, like M18 in Paris, Second Avenue Subway Phase 2 in New York, and Crossrail 2 in London, all cluster around this figure.
If we take $50,000/rider as the lowest possible benefit-cost ratio that gets a project built, around 1.2-1.3 in countries that conduct such analyses, then Second Avenue Subway Phase 2, currently projected around $60,000/rider, is 1. But at the median global cost, which exists in France and Germany, it would cost $700 million, or $7,000/rider, for a benefit-cost ratio of 8.5. At costs that exist in Southern Europe, Scandinavia, Switzerland, and Korea, make it $400 million, or $4,000/rider, for a benefit-cost ratio of 15. That’s a big net profit for New York City Transit (or, it would be if its operating costs were not abnormally high too), and a huge net social surplus for New York. Every group that wants a piece of that surplus then has an incentive to make noise and raise costs.
How can surplus be extracted?
People who wish to seize public resources have a variety of methods with which to do so. Some are net transfers of surplus from society to one special interest, but most are net destruction of value in the sense that the loss of social surplus exceeds the gain to the special interest, usually by a large margin.
The technique for surplus extraction is usually the threat of a lawsuit, but in some cases it can be direct political lobbying. The actual lawsuit is almost never important – in the US and Germany, at least, the state usually wins these suits, and the impact of litigation is to delay and to deny political capital.
However, surplus can also vanish into the ether through poor planning. Consultants who are not under pressure to save money may well propose oversize infrastructure just because that’s what they are used to, or to avoid sharing right-of-way across railroads; this has led to unusual cost premiums in the United States for everything that touches mainline rail, whereas the subway and light rail premiums are, outside New York, bad but less onerous.
The demands made by special interests that extract surplus vary. They include any of the following:
- Gratuitous tunneling instead of above-ground construction. This is usually a demand made of high-speed rail, but there are some gratuitous tunnels in suburban rail as well, for example Crossrail 2. The surplus here is that NIMBYs do not like to see trains from their houses; the emotional value of their views is naturally a fraction of that of the cost of tunneling.
- Compromise alignments that either increase costs or reduce benefits. This is usually about avoiding specific places; Brooks-Liscow give an example of a Detroit highway swerving around a Jewish community center. But sometimes it can be the opposite – in fact, early US freeway builders expected that communities would lobby for highways near them, not far from them. Los Angeles County’s advocacy for a high-speed rail detour through Palmdale is one such example.
- Extortion of community benefits to activists, for example demands for larger stations to act as neighborhood centers. A large degree of the cost explosion of the Green Line Extension in Boston came from the policy of accommodating local demands, leading to oversize stations. But such overbuilding can also occur absent extortion – the surplus can vanish into poor practices, representing incompetence rather than malice, as in the oversize viaducts of California High-Speed Rail.
- Contracts to favored companies. This led to cost explosion in Italy in the 1970s and 80s, especially in Rome but also Milan; unlike the other items on this list, this is generally illegal, and costs in Italy came down after crackdowns on corruption in the 1990s. However, legal versions exist – sometimes the government is just used to doing business with a company with a poor track record, for example the “the devil we know” attitude in California toward Tutor Perini. The surplus in the latter case vanishes not quite into someone’s pockets but more into the state’s unwillingness to oversee contractors more tightly.
- Labor demands. If the demands are purely about wages then the surplus is distributed without being destroyed. However, these demands are in all cases I know of also about other things. For example, the sandhogs in New York opposed the use of more efficient tunnel boring instead of more dangerous but more labor-intensive dynamite. Protectionism also leads to inferior equipment in addition to higher costs.
Who can extract surplus?
Surplus extraction works through informal mechanisms. The purpose of the nuisance lawsuit is not to win, but to extract a settlement. The threat is delay and loss of political favor for the project rather than outright cancellation. The NIMBY lawsuit in Silicon Valley against California High-Speed Rail was right on the technical merit – the Pacheco Pass route, which would pass through the richest suburbs was technically inferior to the Altamont Pass route, which wouldn’t – still lost; Pacheco was favored due to another kind of surplus extraction, namely Rod Diridon’s desire for shorter Los Angeles-San Jose trip times.
Because surplus extraction works through politics and not clear rules, it benefits those with the most political power. In this way, the rise in NIMBYism in the 1960s and 70s, for example the freeway revolts, contrasts with the contemporary free speech movement, which used formal lawsuits with the intent of winning to expand the boundaries of free speech in America.
The free speech movement celebrated protections for communist Berkeley professors and for pornographers; people with normative professions and normative political views were already protected. In contrast, NIMBYism was most powerful in already rich areas, like Jane Jacobs’ Greenwich Village, or Boston’s South End. Baltimore’s racially integrated freeway revolt was exceptional. New York built freeways through working-class neighborhoods easily, and only encountered political obstacles in the Village, which was by the 1950s gentrified (Jacobs was a journalist with some college education, married to an architect, and her father was a doctor), a new development that hadn’t happened in urban history before and thus the city elites had missed it. Moreover, Jacobs’ remedy of creating and empowering community boards has ensured that only powerful people and powerful communities could change city decisions.
Even more recent attempts to create equity have failed. Slowing down the state and empowering community is always bad for equity, because the community is where inegalitarian traditions live. Black leaders now can derail transit plans just as white leaders can; non-leaders have no voice in neighborhood politics, and it’s those non-leaders who work outside the neighborhood who rely on public transit.
Surplus extraction remains the domain of people with political and cultural cachet. One can fight redevelopment in San Francisco on behalf of a mural to Cesar Chavez; fighting it on behalf of pornographers is harder. Similarly, the unions that have been the best at extracting surplus are traditional ones, doing jobs that existed 100 years ago, at productivity levels that remain stuck in that era, mainly the trades.
Conclusion: saying no
Surplus extraction theory does not say it is impossible to reduce costs. Italy’s sharp fall in costs in the 1990s and Turkey’s gentle fall in the 2010s both suggest that cost reduction is possible. What it does say is that the role of the state is to safeguard surplus and keep it socialized, against demands from many special interests, which should be disempowered through legal changes making lawsuits harder and reducing the ability of consultants and unions to drive up costs.
In that sense, the role of the planner is to say no – and moreover, to say no to charismatic groups representing much-romanticized people. No, dear mother with children, we will not build you a noise wall just because you think 140 km/h electric trains will reduce your quality of life. No, dear tradesman much-profiled as a non-college white voter, we will not hire you for $110/hour when there exist people who will do your job better than you can at $35/hour. No, dear third-generation business owner, we will not listen to what you think about traffic as we replace parking spots with bus lanes. No, dear anti-gentrification activist, we will not pay you as an equity consultant, we will just build the subway in the city. No, dear white flight homeowner, we will not build you a tunnel just to avoid taking a few houses through eminent domain. No, dear deindustrialized city leader, we will not require companies to set up factories in your city at high cost when we can get cheaper imports. It’s never going to be no, dear criminal, or no, dear Nazi, because criminals and Nazis are not used to making such requests and having people listen.
It’s optimistic in a sense, because much cost control comes just from knowing that it’s possible and having the nerve to say no to people who are used to hearing yes. The engineering factors that lead to low costs are important, but first of all, it’s necessary to believe that they are feasible, over local objections.