There ain’t no such thing as free infrastructure: Part 1, why
Way back in my benighted youth, when I occasionally played very-late-night poker against future captains of industry, our game of choice (
You pay to look; lessons come extra
One player in particular had a mantra, if the bet was checked around to him. “No free cards!” he’d practically shout, pushing in a bet, and while the shout was annoying, I eventually concluded that in our crowd it was sound strategy; every card costs money.
These things are related
The same principle underlies Robert A. Heinlein’s most famous quote, ‘there ain’t no such thing as a free lunch,‘ which forms the centerpiece of his improbable lunar-libertarian-revolutionary saga The Moon is a Harsh Mistress. As analyzed by Edwin G. Dolan:
The fundamental principle on which this strategy is built may be expressed in a simple slogan—There Ain’t No Such Thing As A Free Lunch, the “TANSTAAFL principle,” for short. The TANSTAAFL principle is closely related to the fundamental theorem of ecological economics: that everything depends on everything else. Everything worthwhile has a cost. Whenever you think you are getting something for nothing, look again—someone, somewhere, somehow is paying for it. Behind every free lunch there is a hidden cost to be accounted for.
For all sorts of reasons, elected officials – who often behave as if they were our collective subconscious, promising us things we cannot afford – do not wish to believe this, which makes them vulnerable to anybody who offers lunch that sounds, if not free, at least paid for by Sam Rayburn’s “fellow behind the tree.” So they fall victim to things that seem too good to be true, as entertainingly chronicled in Slate by Tim Wu of Columbia Law School:
It’s hard to dislike the idea of free municipal wireless Internet access. Imagine your town as an oversized Internet cafe, with invisible packets floating everywhere as free as the air we breathe.
Are those little Wi-Fi balloons free as air?
As Heinlein cites at length in Moon, air is free only on Earth – and if you want clean air, why then you’re paying your ratable share of emissions control and everything else.
That fanciful vision inspired many cities to announce the creation of free wireless networks in recent years. This summer, reality hit — one city after another has either canceled deployments or offered a product that’s hardly up to the hype. In
When it seems too good to be true, it usually is … but when Wi-Fi first came along, some folks thought it would be free.
Cities have labored under the illusion that, somehow, everything could be built easily and for free by private parties. That illusion has run straight into the ancient economics of infrastructure and natural monopoly.
The basic idea of offering Internet access as a public service is sound. The problem is that cities haven’t thought of the Internet as a form of public infrastructure that — like subway lines, sewers, or roads — must be paid for.
Here beginneth the housing implications – because it provides us a bridge into the relationship between housing and municipal infrastructure.
The house and home is a private good.
Built with the sweat of my brow
My home, my plot of land. All of its essential benefits are private goods. My cost of improvement, my appreciation, my security of tenure.
But the modern home is not complete without access (meaning roads) and utilities – meaning power, and water/ sanitation (which we in the developed world call ‘water and sewer’; either way it’s W&S) – in a word, infrastructure.
A lot of it is underground, and pulsing with fluids … which we’ll come back to.
In the developed and formalized world, these are the province of municipalities – indeed, the whole term ‘municipal finance’ refers to all these variations of infrastructure. As with many public goods, the ultimate source of repayment is very seldom user fees (which include things like bridge or road tolls); rather, it’s a pledge of municipal revenues (that is, taxes). The credit markets have concluded that they are willing to finance big immovable infrastructure only if the government stands behind it.
Once you lay the pipe, it’s hard to move it
This is telling, for it says that public-good infrastructure cannot pay for itself out of user fees.
[This wasn't always the case. Back in the Depression, Robert Moses figured out how to finance some infrastructure, like the
You see a bridge, I see a power base
In networked situations, we further divide infrastructure into large-scale and localized, each of which needs the other (just as the heart needs the capillaries, and vice versa):
For the last 20 years or so, the thorniest economic issue in the telecommunications world has been the “last mile.” Physically, the last mile consists of the wires that run from your home or business to the local phone or cable company.
The cable/ internet analogy is very strong to W&S. Big infrastructure gets water from the aquifer to the neighborhood, or sewage from the street main back to the treatment plant. Getting from the street to the home lot is W&S’s ‘last mile’:
It’s pricey and uses old technology, but almost everything depends on it and a few giant companies—like AT&T and Comcast—control it. The last mile is a bottleneck: The price and speed of the whole Internet depends on it. When people talk about the
Covering that last mile is agonizing
In the late 1990s and early 2000s, dozens of companies were launched that had new ideas for busting through the last mile and getting the Internet into homes. I remember going to industry trade shows where grown men demonstrated robots designed to crawl through city sewers and deliver a fiber-optic cable to your toilet.
Watch out for upwardly questing cables
Here’s another principle of infrastructure: once a network is built, it often winds up carrying another substance or signal than to build another network, because it’s so much cheaper. The cost to dig trenches and bury mains or to string poles is much higher than that of running another line of pipes. So we see light rail laid down interstate median strips, or fiber-optics running alongside co-ax cables.
(That firm, CityNet, received $375 million in funding and actually wired the sewers of
All the future that’s fit to print?
Oh, really? While both the FCC and paid industry analysts have continually predicted an “explosion” in broadband over power lines, its current market share is approximately 0.008 percent.
That’s 0.00008 of all homes, 8 in every 100,000.
Each of these ventures proved a dismal failure. With the exception of satellite service in rural areas, no competitor to DSL and cable has gotten far in the
The Law of Economic Gravity implies that the minimum market-clearing price for an ongoing product or service can be expressed by a simple equation:
Capital cost ties together (x) the hard cost of building the system or infrastructure, times (y) the weighted average cost of capital. Since capital recovery occurs over an interval, when that interval is completed, capital recovery cost drops dramatically.
Don’t laugh, it’s paid for
The phone and cable companies have already recovered the initial billions they’ve spent over decades, making it possible to set prices at levels that cannot be matched.
Here is the user-fee conundrum in a different form: an installed infrastructure drives down the market price of a networked product because the cost to recover capital investment can be low indeed. That’s good for consumers, and for society generally. Yet that inherent pricing advantage, and the market-standards-network monopoly effects, but tend to create a natural advantage to incumbency.
The competitors brought weak products that were not substantially different. Against that kind of competition, the newcomers never stood a chance.
So much for the market solution—how about government?
By their nature, these capital networks lower the marginal cost of adding another person – which is why, when we consider how cities scale, we find the (inflation-adjusted) incremental cost of bringing on the next subdivision is less than the one before it. Yet even with that decreasing incremental cost, the new service is not free, and in public-good amenities, user fees generally don’t cover marginal costs.
“Every time I make ends meet, somebody moves the ends”
The dear public wants its water at a bargain price (the bill should be less than the cost) – just as it wants the same for its power cost, its sewerage, and its roads. Government, forced by the Law of Economic Gravity to make things work, packages up the unrecovered costs in that oldest of boxes, the tax – state or local as the case may be. (By the way, this is why mayors are always yammering on about their need for city taxes. The city is serving the infrastructure to many people who live outside its borders, and it cannot recover those extra costs simply by the marginal toll or parking fee.)
When the public-good is topical (like broadband) and the infrastructure costs invisible (like those flimsy cables), there’s a temptation to imagine they can be got free, as we resume the Slate article by Tim Wu of Columbia Law School:
The failures of other ventures made municipal Wi-Fi seem an ideal alternative. After all, cities provide their citizens with water and garbage pickup—why not the Internet, too?
Actually – as I’m sure Professor Wu knows, he was just oversimplifying – not all cities do this, and not all cities ever have.
When in doubt, burn it
[Continued tomorrow in Part 2.]
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