Sunday, October 05, 2008

So, what is this thing called infrastructure?

A recent news item quoted snippets from the two candidates about the economy:

"I will rebuild the middle class and create millions of new jobs by investing in infrastructure and renewable energy," vowed Obama.

McCain pledged to "open markets around the globe for our products, cut taxes and expand domestic production of energy ... I will create jobs and get the economy on the right track."

I find Obama's use of the term infrastructure interesting, not because our infrastructure is not in need of investment, but because it is probably one of the more neglected and misunderstood elements of America.

On the other hand, McCain touts "market expansion" as the cure all. Expanding markets create jobs. You know, like the vast expansion of the mortgage market.

First, one should keep in mind that many significant elements of our infrastructure are not serious long term "GDP multipliers". Rebuilding sorely neglected bridges creates jobs for the construction project's duration. The bridge may be enduring, but the jobs are not. Thus, the cash infusion is finite, and any workers trained and employed in these projects will be looking for new employment at the project's completion. Yet, we need to bite the bullet and tend to this task. To me, the sound approach would be a long term infrastructure building and maintenance program that would establish, at the least, a stable labor pool, and an "industry" with a long term life expectancy. The difficulty is doing this in a tax averse, profit seeking society. We must have "growing markets", and if we are talking about tax funded infrastructure, the end result is higher taxes to "grow the market opportunities", especially if profit making firms have a vested interest in the "market". But many elements of infrastructure are societal needs, not simple capitalist markets.

So, we must avoid the pitfalls of never ending public works projects. Taxes must support necessary infrastructure. Infrastructure vital to the nation's well being. Otherwise, we become like the former Soviet Union, where vast fortunes were spent building unnecessary facilities solely to create jobs - year after year after year. Exquisite amphitheaters for band performances to entertain passing boats along the Volga River waterway, for example. When we cruised up the Volga in 1992, we saw numerous amphitheaters, facing the river, kept neat and clean, but never used. As our Russian friend said, "Build it. Engage a staff to keep it clean. Lots of jobs. Lots of Jobs. But nothing meaningful produced - not even music." Adding to the horrific burden that caused the government to collapse of its own weight.

And all infrastructure is not simply brick and mortar. Consider air transportation. Since the start of airline deregulation, the US has really had no serious air transportation policy. Safety regulations, operating regulations, airport building programs and the air traffic control system, yes. Those four areas are pretty much what represents the infrastructure of the US air transport system, and these are what are addressed in allocating the current resources and planning for the future air transportation needs of the country. Notice I didn't mention airlines. During the blood bath of "Fare Wars" in the early 1990's, Bob Crandall, then CEO of American Airlines, said that airlines were no longer anything other that the purveyors of a commodity - "cheap seats between point A and Point B". Anyone with enough borrowed money could enter "the market" with a couple of aircraft and offer cheap seats, whether or not these seats were necessary, and whether or not the business plan could ever realistically offer a profit. These low price airlines drove the rest of the industry to match their prices, as any cash flow is better than no cash flow.

Now, one might say the the flying public benefited, because they were able to save considerable money in airfares, and many more people got the opportunity to fly. On the other hand, look closely at what this "commodity" approach to airlines has created over the last 18 or so years. Employment in the industry is highly unstable. Real wage levels in the industry have fallen. Route structures are unpredictable. Every major airline (I'm including Southwest) in existence in 1990, except two, has either gone out of business or declared bankruptcy to stay in business. Billions in retirement plans as well as employee and investor saving have evaporated. All but one major airline now ships its "major maintenance" tasks to foreign sites, where quality oversight is questionable. But even if the quality is OK, highly skilled jobs are lost in the US, diminishing the domestic size of this talented labor pool in the long run. And, as we now see, all airlines are having to significantly reduce total capacity to survive, driving fares up and eliminating cities from the route network. And this contraction has hit the domestic market harder than international routes, resulting in fewer US jobs. In short, allowing "market forces" to make airlines commodity suppliers rather than an integral part of the air transportation infrastructure has had enormous long term societal cost.

If you want to jump up and shout, "What about Southwest?", I would respond that Southwest is a "niche" airline that has wisely identified and dominates its niche. It is not part of the US airline "system" in any respect other than using airports and air traffic control. You cannot book travel through Southwest outside its own system. Part of the savings in using Southwest is its use of outlying or secondary airports. If you want to travel from Amarillo, TX (as well as dozens of other cities that Southwest serves) to London, for example, you will have to change airports (at your time and expense) to connect to the transatlantic flight, carrying your baggage with you in the taxi, train or bus. And, if your SW flight is late or canceled, the airline to which you are connecting has no legal obligation to accommodate this problem. Unlike "regular" airlines, a Southwest ticket carries no cash value outside Southwest. I am not saying Southwest isn't great. I am just saying that upon close inspection, it is operating in a system of its own and provides a service separate and different from what we see as the "air transportation system". It does, however do its job well and at benefit to the flying public. But if all airlines were to adopt Southwest's model, there would be no "system" and travel would be truly chaotic.

Placing the airlines into the "infrastructure" of the air transportation system of the US would indeed stabilize the industry, and that could be done to a great measure by establishing a national air transportation policy. Here in Europe, the discounters are restricted to point to point niche markets by requiring them to generally use a secondary airport at one end of each route. Niche markets are recognized and encouraged. What Southwest does to lower costs, European regulators do to preserve infrastructure. And everybody benefits.

But the air transport system is not the only element of infrastructure that has fallen prey to free market forces. Anyone remember ENRON, or the financial "system"?

"Infrastructure" has such a noble ring. And, in the main, US infrastructure in many areas is deteriorating, often to make way for "free market" profits, as well as to gain political capital by lowering taxes. But in the end, failing to recognize, build and maintain essential infrastructure delivers a down stream bill which often far exceeds the tax savings and short term profits initially enjoyed.

Hopefully, Mr Obama knows a bit more about infrastructure than our national track record demonstrates. Should he be the successful candidate, and if he understands even the basics of national infrastructure, we may very well benefit.

Al

7 comments:

Charles Gittings said...

This is pretty good...

http://www.youtube.com/watch?v=7DIc8jdra0o

mike said...

Well said Al. What is your take on Alaskan Airlines??

BTW, you should also add schools and universities to infrastructure that needs rebuilding - and not just in the brick and mortar sense. Many of today's university graduates have tuition loans to pay of that are bigger than any mortgage that I ever had to pay off. They have been turned into serfs and peons by crippling debt. And our nation's high schools have given the short end of the education stick to the future.

Publius said...

Actually, Al, given the realities of the decay of public roadways, bridges, etc., etc., I think folks put to work on needed projects would be able to enjoy very stable employment without anyone ever having to come up with Soviet-type make-work projects. It's shameful that this nation has neglected its own needs, by instead opting for the siren-song of the Republican Laffer Curve.

Reaganomics didn't work for Reagan; it just doesn't work. We now need higher taxes, at least for some, a tough prescription in what are shaping up to be very bad economic times. However, it's very clear that there's been a gross imbalance in benefits from the Bush tax cuts and I think that needs to be addressed.

Maybe if fatcats start getting taxed heavily, they might fall out of love with foreign wars conducted for illusory gains. Virtually every rich dude out there is a Republican. Why not? He benefits greatly from the economic policies and can essentially ignore the messy little details, such as poor and middle class kids getting chopped up for the wars that have gone along with the economic policies.

Southwest Airlines? I love 'em. My airline of choice. What's not to like about an airline that runs on time, doesn't charge for baggage and actually gives you free drinks and snacks? With a great safety record and flight attendants who are decent human beings to boot. And they fly out of airports in major cities. I used 'em last month in and out of Jacksonville and Oakland, and will use them at Christmas-time in and out of Tampa and Oakland. On my last trip, a flight attendant told me Southwest had locked up avgas at about $2.13 a gallon through 2013. A good business plan, too.

BTW, infrastructure may end up having to be neglected, just because of the dire economic straits we're in. This baby is bad, real bad, the worst any of us has seen in our lifetimes. You ain't seen nothin' yet. Thank you, George Bush.

Aviator47 said...

Mike-

As a retired military aviator with several years in maintenance as well as operational command, I tend to agree with Bob Crandall's serious concern about outsourcing maintenance to save money, as it results in no one really "owning the airplane or the airplane's mission". Alaska is a decent airline, but has a recent history of less than stellar maintenance practices in an effort to contain costs. (Full disclosure - the wife is a retired airline senior manager)

What does "owning the aircraft" mean? A good anecdotal example comes to mind. Then BG Gary Luck was strolling my unit's flight line one day when he came upon a young soldier working on an aircraft. He engaged the soldier in a conversation. The soldier politely asked if the general would be kind enough to let him continue to work as they chatted, as the soldier had "a 1300 PZ time to meet". Luck said, "So you are the flight engineer on this bird?", a reasonable assumption based on the soldier's comment. "No, sir, I am an electrician in the unit direct support platoon", the soldier replied. "This bird has a 1300 mission, and I'm responsible for getting the generator replaced so it can report to the PZ on time." Luck complemented the soldier and let him work uninterrupted. He then stopped by to chat with me about what he saw as exceptionally close focus on the mission by this soldier. I assured him that all our maintenance folks were focused as this young man demonstrated. Our philosophy was that we all existed to accomplish the mission, and the mission was flying in support of the folks on the ground, not merely anyone's task at hand.

Yes, Mike, not all infrastructure is brick and mortar. I would accept that a society has an "intellectual infrastructure", and a proper education that prepared the citizenry for a productive role in society maintains that infrastructure. We are not all capable of being rocket scientists, but we should all be offered the education and held to the standards that will enable us to function to the best of our ability. That said, however, reducing standards to provide everyone with a diploma does neither the society nor the individual any favors.

Speaking of education and standards, what I find astounding is that in instituting mandatory testing for the award of a high school diploma, the test is administered two to two and one half years before the child completes high school. In short, one must be able to prove a tenth grade level of mastery to be considered to have completed twelve years of study. Something is wrong with that picture.

Publius-

No argument with your comments whatsoever. Yes, were we to pony up the taxes to repair and maintain just the ground transportation infrastructure, it would be a jobs creation of massive proportions for a period of time far greater than any other I can think of. But we are not a society of preventative maintenance, nor do we like to pay for anything that doesn't benefit one's self directly. We like to cross bridges when we come to them and all too often the bridge collapses under us due to neglect.

Yes, Southwest is a great operation and has served its niche well and profitably. But, an air transportation system requires more than a collection of totally independent operators like Southwest. The system has to be able to serve interline connections. It has to serve critical low/no profit routes as well as the profitable ones. Herb Kelleher was very frank in saying that Southwest was a niche operation, and during the industry hearings in the early 90s, clearly said that his firm could not be a model for the whole system.

I remember an event with Crandall that the wife took me to. The question of finding a way to compete with Southwest came up. Crandall pointed out that Southwest served a totally different overall market and provided a totally different form of travel as compared to the majors. They were not linked into the transportation infrastructure (baggage, interline ticketing, etc) that is part and parcel to the operation of the majors and a significant cost element. So someone asked why AA didn't create a wholly owned subsidiary like their regional carrier American Eagle. Well, Eagle is also a part of the "system" as it must be to serve as a "feeder" airline. Simply splitting off assets to be a Southwest "look alike, act alike" without making it a free standing, off system carrier would not work, and there really wasn't a market for another off system carrier like Southwest. At least not one large enough to risk the investment. Note that United ( as well as others) tried this with its discount cattier TED, and failed.

Southwest has not only achieved dominance in its niche, but it has also saturated it. Even Southwest has recently had to significantly reduce capacity this year, abandon some routes and quietly raise fares. One major problem with reducing air transportation to being a commodity is a quantum one. You can't just offer one, two or five seats from Point A to Point B. You have to offer a whole airplane load.

But, after all is said and done, we are fortunate that Southwest identified their niche and serves it in fine fashion. It's just that the total system cannot operate with their model.

Al

J. said...

I think Obama understands what transportation infrastructure is and what it requires, but you can't explain it adequately to Joe Public - given the health insurance, banking industry, war, etc etc all he can say is "hey those billions going to Iraq really could do a lot for bridges and roads in the US." Short and simple, got it.

Let's face it, the airlines got their sugar and they have a pretty well-established machine. The interstates and railroads in particular don't, and it's embarrassing to me how much European and Japanese rail has passed the US system by.

Aviator47 said...

J-

No question that Obama has an idea of what infrastructure is, even if he hasn't pinned down everything that is actually part of our national infrastructure or should be treated as such. The stumbling block is that we are so absorbed in "free markets", "smaller government", "low taxes" and so on that the nation as a whole, to include those who should know better, have lost sight of what our infrastructure elements are, and how vital it is to maintain them.

I used the air transportation industry as an example of the misunderstanding. Airlines are neither seen nor treated as vital infrastructure, yet airports and air traffic control are. So airports are built, improved, and expanded without thorough regard to whether or not airlines can afford to service them in the long run. During the days of regulation (and I am not necessarily calling for regulation), if a city had a valid need for air transportation, the airline(s) were assured fares (system wide)that made service to/from that city economically feasible. Now that airline seats are a commodity, cities are losing service as the market will not pay more for a Dallas - Boston segment to help cover the cost of a Fayetteville, AR - Dallas segment. "Free market" has forced airlines to treat every city pair as a stand alone competitive P/L issue.

In most European countries, for example, the health care system is part of the nation's infrastructure. Every citizen has access to health care, to include routine physicals, preventative care and minor aches and pains. "Free market choice" (private physicians and hospitals) is in addition to national health care, but it is part of a general "system". These systems may have their "warts", but they do not result in 15% of the population having only emergency room medical care. Hell, in our little village of less than 90 folks, a Nat Health GP has office hours every Wednesday to allow those without cars to been seen for routine care without having to take an hour's bus ride. At no cost.

Not only is the US fading as a military, political, economic and moral force in the world, but it's ability to support itself is fading as infrastructure decays.

Al

1138 said...

Wow I love words and everything... but I'm time limited so please forgive me for skimming about 2/3 of the post and maybe repating part of what you said.

The air travel/transport industry in this country is mismanaged and abused, the federal state highways system and bridges are a mess and the rail system is not just an embarrassment and disgrace, but a hazard.

A new national rail system for freight and high speed human transport to replace a large part of what the air industry has been abused into doing and the highways system has been doing would satisfy infrastructure needs and job growth.
Doing so could also reduce usage of petro fuels by a dramatic amount and improve America's balance sheet.