Thread by @SeanCasten

Some Monday morning thoughts on infrastructure, free markets and the appropriate role for the federal government. Thread:

1/ Inspired partially by some of the chatter amongst the more libertarian ends of my twitter feed suggesting that if free markets won't build infrastructure, the government shouldn't either. That fundamentally misunderstands infrastructure and capital markets.

2/ For the purposes of this thread (and Biden's infrastructure plan) let's define infrastructure as capital intensive stuff that makes commodities that people need. Telephone, rail, internet, electricity, highways and high volume mfg. Among others.

3/ Infrastructure then is the thing that free markets really don't build. Raising and deploying capital that depends on low-margin commodity returns is really, really hard. We've only built those things with gov't-granted or business-created monopolies.

4/ We built railroads and electrified the country by granting monopolies to those who built out the infrastructure. In other infra sectors, the innate barriers to entry have attracted businesses that then cornered the market to force customers to pay higher margins

5/ Neither of those outcomes would pass Adam Smith's definition of a free market. Meanwhile, we haven't built lots of things with the free market that met that definition of infrastructure but didn't have either of those non-market conditions. (Universal healthcare, for example)

6/ That doesn't mean markets are bad, or that government intervention is good. It just means that infrastructure investments, by their nature are only made in an economy that has a health mix and partnership of public and private capital.

7/ (At least if they are universally available. Before we created regulated utility monopolies, cities were getting electrified. But there was no business case to electrify less densely populated rural America until government got involved.)

8/ Put another way, infrastructure investments are always a mix of capitalist and socialist ideas. We want the competitive discipline of free markets, but we don't want access limited solely to ability to pay. It's OK to have both thoughts in your head at once!

9/ Personally, I love the way that electricity markets rationalized dispatch of low cost assets since the 1992 EPACT... but I still don't want a senior citizen's refrigerator holding their insulin to shut off because supply & demand drove price up to levels she couldn't afford.

10/ So how should we think about infrastructure investment? I'd posit two rules. (a) be holistic and (b) be vigilant to abuses.

11/ Be holistic, by defining the goal without consideration for who provides the capital, then make sure that public and private capital adds up to the necessary total. Don't only do that which one of those buckets can justify.

12/ Again, using national electrification as an example: regulators noticed literacy rates spiked when people had access to electricity because they stayed up after the sun went down reading. One of many universal goods. So we set a goal for national electrification...

13/ Private capital dealt with urban centers, but with wildly different standards and voltages. Public capital built out the REA, BPA, TVA and provided the rate regulation and standardization to connect the whole system together.

14/ But we also have to be vigilant. Because in any business that has a mix of capitalist incentives and socialist price caps, you will find great profits - and great abuse - where those two systems abut and profit-seeking businesses can arbitrage the gap.

15/ The California power crisis 20 years ago is an example. Wholesale rates were set by markets but retail rates to consumers were capped. Profit-seeking, ethically limited businesses (see: Enron) figured out how to game that market. Regulators should have seen that coming...

16/ So as we go forward with infrastructure today, from a green electric sector (and the transmission to connect it to loads), coast to coast broadband and so much more, let's follow those same rules.

17/ Define the holistic goal, from zero-carbon electricity to universal broadband. Expect that public and private capital are both going to participate. And make sure regulatory compliance is on the watch for abuse.

18/ And yes, the benefits and theory of a "mixed economy" have been outlined more accurately and in greater detail decades ago. But it's worth reminding ourselves how important it is. It is, after all, one of the things that made us great. /fin