Why Infrastructure Investments Are a Money Pit

Bridges, hospitals, highways and schools force lasting, and expensive, choices.

Tyler Cowen pointed me to this comment on Singapore's health system a few weeks ago, which combines a forced savings model (Singaporeans save a mandatory 36 percent of their income) with public provision of low-cost services. It provides a pretty good safety net, at a very low cost, and conservatives looking for alternatives to the Obamacare model should probably start looking in Singapore.

How does Singapore combine good outcomes with low cost? Here's what Chris Conover says, in said comment:

MediShield is a mandatory BASIC insurance scheme meant to help patients pay for large bills at the Class B2/C levels. What are Class B2/C wards? Class B2 wards have 6 beds per room, Class C wards have 9.http://www.sgh.com.sg/Patient-Services/Charges-Payment/Pages/types-wards.aspx.. If stay in a Class A bed in a public hospital or in a private hospital, MediShield only pays the Class B2 rate, so you would have a rather sizable cost difference to make up out of pocket.

Check out some of these exclusions:

EXCLUSIONS UNDER THE MEDISHIELD SCHEME • Ambulance fee • Maternity charges (including Caesarean operations) or abortions • Dental work (except due to accidental injuries) • Infertility, sub-fertility, assisted conception or any contraceptive operation • Mental illness and personality disorders • Treatment of any illness, disability, injury or any condition arising from or due to the Acquired Immune Deficiency Syndrome (AIDS) virus • Treatment for drug addiction or alcoholism • Vaccination

What? No free contraceptives? No free preventive care? No outpatient MD services? No 10 categories of essential health care services? Obamacare this is not!

Even after Singapore revamps this package of mandated benefits, I'm pretty sure if Republicans had introduced an amendment proposing to substitute it for the one included in Obamacare, not a single Democrat would have voted in favor. Would you?

So here's the problem with looking toward Singapore for cost control: We couldn't do this even if we wanted to. Multi-bed wards pretty much disappeared from the U.S. after the 1970s. My father, who was a budget analyst in the New York hospital system, notes that this had two causes: first, commissions kept recommending private rooms over those noisy, unsanitary large wards. And second, any new beds you built could be paid for by filling them with Medicare patients at "usual and customary" fees. The result was a hospital-building boom, which is why virtually all hospitals are in new buildings, and why, outside of some emergency wards, you've probably never spent time in one of those long wards you see in black-and-white films. "American hospitals are rather like hotels," I was once told by a British colleague who was defending the honor of the rather more spartan National Health Service.

Cost controls that are relatively easy to implement in advance -- by, for example, not building shiny new hospitals filled with private rooms -- become impossible once you've made certain investments. This problem also afflicts higher education. Say we decided, as a society, to go back to the college costs of the 1970s. We'll fire all the extra administrators, and to hell with whatever it is they're doing to promote diversity, improve admissions or direct student life. If their missions are critical, we'll make faculty take them over and cut back on research. Cafeteria service will go back to the fare of my mother's day (lamb patties and lima beans twice a week -- she lost 20 pounds her freshman year, and she wasn't heavy to start with). Want to get in shape? Go run around the track, because we're closing the fancy gym.

We still wouldn't reach the cost levels of the 1950s, because the buildings are still there. The grounds have to be maintained. Everything has more lights, and the buildings aren't built to be warm in winter and cool in summer; they're built on the assumption that they'll be climate controlled. Frequently the windows can't even be opened, so it's going to get awfully stuffy in there unless you turn on the A/C. You can't shut down the fabulous new fitness center and go back to using the old gym, because the old gym was probably torn down. Unless you want to invest billions of dollars in reconfiguring the nation's campuses, they're going to be inherently harder to operate than the campuses of yesteryear.

And of course, there's also the problem of public opinion. Back when 8-bed wards were normal, people were pleased to be on one. But if you make people check out of their private room and go back to the 8-bed ward, they're going to be seriously upset. (And not without reason -- imagine having to watch television chosen by eight random people 16 hours a day. While recovering from open-heart surgery.) Similarly, students denied access to a gym, a top-flight chemistry lab, and so forth, are going to feel cheated. They'll fight you every cost-controlling step of the way.

This was one reason why I wasn't so excited about spending on infrastructure as a way to stimulate the economy. Infrastructure has maintenance costs. Over time, it entrenches itself in the community, and becomes hard to change, even if it turns out to have been a mistake. The Tappan Zee bridge, for example, was built in almost exactly the wrong place, because its location put it outside the control of the Port Authority. Even if we wanted to move it now, however, we can't, because whole communities, and lots of ancillary businesses and infrastructure, have sprung up around that bridge. So instead, as the bridge ages, we're exploring building another bridge in exactly the wrong place. Such investments should be made cautiously, not shoved out the door as quickly as possible in order to stimulate the economy.

Policy, in other words, has path dependence. Cost increases are almost always easier than cost decreases, and not just for political reasons. Consider this any time someone asks us to make a big expensive investment -- or promises that their magnificent new scheme can cut costs in some area where we've already invested a huge amount of cash.

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