Cool. What? 10 point what? Billions? No thanks. (Photo credit: Wikipedia)

I assume we’ve staved off fiscal apocalypse because Yahoo Research economist David Rothschild’s greatest concern is governors reacting to the perverse political incentive not to spend money they don’t have. Let’s jump right to his main takeaway from New Jersey governor Chris Christie passing on a massively expensive new infrastructure project:

There’s only one clear solution: If voters show themselves capable of punishing politicians for maximizing short-term benefits at the cost of avoiding beneficial long term investments.

Is that what got NJ into a $10.5 billion budget hole? Selfish politicians refusing to commit to long term spending that kicks in after they’ve left office? Seems counterintuitive, but Dr. Rothschild does have a PhD from the Wharton School of Business; perhaps he was just fed bad information. From a NY Times article he references:

The report by the Government Accountability Office, to be released this week, found that while Mr. Christie said that state transportation officials had revised cost estimates for the tunnel to at least $11 billion and potentially more than $14 billion, the range of estimates had in fact remained unchanged in the two years before he announced in 2010 that he was shutting down the project. And state transportation officials, the report says, had said the cost would be no more than $10 billion.

The Times must be reading a report from a GAO different from this one:

Over time, the cost estimates for the project increased from an initial estimate of $7.4 billion in 2006. In 2008 and 2010, FTA performed risk assessments and revised the cost estimate. FTA and NJT agreed upon a baseline cost estimate of $8.7 billion in 2009. After considering comments from NJT, which projected lower costs than FTA, FTA revised its estimate and issued a cost estimate of $9.8 billion to $12.4 billion in October 2010.

Sure sounds like those costs were being revised… up up UP!!! The same month he found out that initial estimators didn’t have a clue what the project would cost (estimates had gone up over 50% in a few years), Christie made the responsible decision to can the project. For this the governor must be “punished”?

Let’s get back to Dr. Rothschild’s analysis:

Traffic on the current rail links, two 100 year old tunnels, is at full capacity and demand will only increase over time. Lawmakers and analysts dispute the cost of building a new tunnel, but it’s generally estimated to be in the neighborhood of $10 billion. It will take decades to recoup the investment. This type of massive-scale infrastructure is beyond the scope of any corporation, but not for the simple reason of scale. Consortiums of private institutions can raise massive amounts of money. But can you imagine anyone in the private sector investing in a project that may not earn money for several generations?

The congestion is nigh unbearable, “demand will only increase over time”, yet none of these desperate commuters will pay a premium for a faster, modernized ride? If the project will really take “several generations” for the costs to be recouped, then it is simply not an “urgent need” as Rothschild would have us believe.

More important is that the project would have many positive “externalities,” or societal benefits that no owner can capture and charge for. If 100 people need to get from New Jersey to New York City every day, society benefits from them sitting in a single train, rather than 100 automobiles: less pollution and less congestion. But the owner of the train or the tunnel it goes through cannot charge one person for the value of slightly cleaner air. Only a government can internalize the value of clean air for all.

$12.4 billion for “slightly cleaner air”? Pass. This sounds like a classic boondoggle, with potential to be the next Big Dig. Good on Governor Christie for recognizing that when you’re already $10.5 billion in the hole, taking on new risky “investments” might not be the best idea. Thankfully, his latest approval ratings show the NJ electorate shares the common sense that seems to be beyond the reach of a PhD in Economics.