The fear of markets, and the disciplines they enforce.

It's hard to believe that the New York Stock Exchange once looked like this.  The stock market was less regulated then, but never a place for a timid person to risk his/her money.

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One of the things I've said for years is that I believe in open, fair, and transparent markets. In an ideal world, these markets would be self regulating. However, powerful players love to distort markets via the use of rules, and via a lack of transparency.  In the case of the stock market, most disputes are settled via arbitration - which is often rigged in favor of the large firm by the nature of familiarity.  Precedents from one settlement are not applicable in the next case, so the large firms have an edge which is almost impossible overcome.

However, the lack of transparency affects more markets, and has an even greater effect. For example, the current practice of "Non-Standard" sizing makes it much harder for a person to "compare apples to apples" when determining the price of goods. In the case of a carton of Orange Juice, the standard 64 oz. size was shrunk by all players to 59.5 oz. - making it much harder for people to determine what the real price was.  Also, the shrunken size went less far, so the customer had to buy more containers to sate their needs for Orange Juice.  Something similar happened in the size of Tuna cans - a few years ago, the standard size was 6 oz. - now it's 5 oz.!  No one asked the consumer (in these terms) whether we wanted to pay the same money for smaller size packages, or more money for the same size packages.  If they did, the marketplace would have chastised the sellers of these goods - something they avoided by obfuscating their price hikes with package size changes.

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Right now, people are starting to see a crisis with student loans.  This is another example of marketplace interference creating disastrous effects.  A little over 150 years ago, it was "easy" for a person to attend some of the nation's most prestigious universities.  All they had to do was learn the "basics" - which included Latin, and other skills no longer needed in the real world - and then pay the bills for school - which weren't that expensive.  However, after World War 2, the GI Bill made it easier for students to afford college - and a college education was seen as the ticket to middle class success.  Years later, our nation's policies changed to provide poor people with grants to go to college, trying to create a more diverse student base in these schools. And then came the age of college loans - which I see as a total disaster.  Instead of increasing the supply of college seats (which would have reduced prices and increased availability), policy simply increased demand for college seats by making student loans cheap, easy to get, and with no demand that a student comes out with a salable skill.  The only effect here was to raise the price for seats in a good school.

What happened to the students?  Many got saddled by debt, studying in majors that would not prepare them for jobs in the outside world.  When a student owes money on a student loan, it is almost impossible for it to be discharged in bankruptcy.  As a result, the interest on the debt makes the student loan virtually impossible to pay off.  

But what would happen if we eliminated the Federal guarantee of payment?  What if these loans could be discharged in bankruptcy?  Well, many of the private lenders would cease lending money, marginal students would stop going to college, and colleges might be forced to lower their prices for study.  The powers that be don't want that.  The banks making a lot of these student loans would cease making loans - and making guaranteed profits.

I posed a question to a couple of people and got the same negative response - therefore I know I'm on to something....  What if (1) there were no guarantees of student loan repayment by any level of government, and (2) a student loan lender could insist that a student loan borrower major in a field likely to result in a job?  Both people said that this would be wrong - the student has a right to study what he/she wants to study.  But at whose expense?  The student is usually way too immature to make many decisions which will impact the rest of his/her life. Part of college's function in society should be more than that of a trade school - it should teach a person how to think, and how to look at life with a long term perspective.  One of these people said that if he were to take out a bank loan for a car, that the bank has no right to tell him what car to buy.  Yet, one could counter - that if a car manufacturer's finance arm offers you the loan on the car, it should have the right to tie you into buying one of their cars.

In short, the lack of a efficient market (with rules for proper debt discharging) for funding higher education has caused a crisis in higher education that also affects non-students. If a former student is saddled with too much student debt, that same person may not be able to afford getting married and having children. And if this person has children, he/she may not be able to pay enough in school taxes to educate the children - a long term risk for society.

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Not all problems in society can be resolved by market forces.  Other methods must be used to limit consumption of resources.  Great Britain spends about 35% of what America does on health care, and has a roughly equivalent standard of national health.  Canada spends about 50% of what America spends.  And other developed nations are in the same league. What is different?  They all recognize that health care doesn't work with a marketplace model. So, instead, they ration care in ways that Americans would consider unacceptable. Britain uses results based medicine, and when in doubt, chooses the cheapest alternative. There is a waiting line for almost everything except acute emergency care - and even then, there are rules and regulations that apply - as if one were part of a giant HMO.

I do not advocate the British or Canadian models, because they err in ways Americans would not accept.  But the German and French models have a lot to offer - if only we would examine them more closely.

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Americans like the idea of free express roads that take them from town to town, and city to city.  There is one big problem - the price - FREE.  This has encouraged the growth of the trucking industry over that of the railroads who pay for the upkeep of their track.  One might say that truckers pay gas taxes that should maintain the roads. But in many states, especially in the South, these gas taxes have not been raised in years, nor have they been indexed to inflation.  As a result, we're seeing part of our transportation infrastructure neglected by lack of proper funding, and now at great risk - as many structures are at the end of their life spans.

What happens when people have to pay to use a road?  People actually think - do they need to make this trip?  And this is an important question, as it reflects a market helping to shape a behavior. There is a discipline that takes place in a well functioning market.  The trick is to design a market well, regulate that market well (but minimally), and make sure that only the right things are governed by that market.... This, as I see it, is the big challenge of the 21st century.

Our Transportation Infrastructure

The above image (from 2007) shows some of the decay in one of America's most iconic bridges. Given the "over building" of this bridge over 100 years ago, I am not afraid to drive across the East River using the Brooklyn Bridge. However, this is the tip of the iceberg when problems with our transportation infrastructure are involved....

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When the snow started to melt recently, many potholes began to grow in the region's roads. From Somers, NY to Carmel, NY on a recent trip, I was afraid to drive at posted speed limits, in part because the roads were in such a state of poor repair. And this, I consider to be a minor problem, compared to other problems across the country. In 2013, CBS News reported "Thousands of bridges around the U.S. may be one freak accident or mistake away from collapse, even if the spans are deemed structurally sound." In addition to the bridges which are poorly maintained, there are others which are vulnerable to accidents, and even more that are beyond their expected life span.  

Bridges alone, are not the whole problem. In the NYC region, for example, we have a network of parkways leading North and East from the city, many of which have dangerous entrances and exits - none of which would ever been built today. Add to this problem that these roads are not all "limited access" and have intersections (some with control lights, others without), and one can see danger lurking.  (Recently, a woman got stuck on the railroad tracks paralleling the Bronx River/Taconic Parkway in Valhalla, possibly as a result of the traffic control at the intersection, and the resulting railroad accident resulted in 5 deaths.) Sadly, there is only so much one can do to retrofit these roads to make them safer. As a result, we continue to live with greater risk from obsolete road design that can not be fixed.

Much of this infrastructure was built without being sure that an adequate income stream would be there to maintain these roads and bridges. The Federal Gas tax has not been increased in years - even though inflation and new technology keep pushing up the price of keeping these roads and bridges in shape. The same goes for many state taxes on gas - no one wants to increase taxes, and even indexing taxes to account for inflation would be a non starter in today's polarized politics. As a result, maintenance tends to get deferred, except where adequate tolls are charged. And then, much of this revenue gets allocated to other purposes.

In New York City, the price of a single ride on a bus or on the subway is going to be raised to $2.75. Although the MTA bridges and tunnels are being maintained with this money, much of it is being siphoned off to subsidize New York's mass transit systems. (Similar money siphoning is also being done at the PA for the PATH system and other pet projects.) And yet, the NYC subway is not in a state of good repair. If one looks at stations such as Chambers Street on the 7th avenue line, one will see (last I was there) one wall that hasn't been cleaned in many years, with tiles falling away from the wall. What else is going on behind the scenes that we don't know about?

I have not ignored the air traffic infrastructure. Three of our nation's most important airports are in locations that wouldn't make sense if one had 20/20 future vision: La Guardia, (Reagan) National, and San Francisco International. There is only so much one can do with these airports, as the flight paths go over some very sensitive real estate, and all have short and tricky landing approaches combined with short runways. Add to this, many airports have poor access via mass transit, and one has a Gordian Knot that makes travel extremely inconvenient....

When much of this infrastructure was built, people assumed that America would never stop growing, and that we would continue to be a nation of unlimited wealth. No one thought of establishing maintenance trust funds for all of this infrastructure - they expected to use current account cash flow - operating expenses, instead of planning for maintenance as capital expenses. (I hope I have my accounting principles correct, for purposes of this discussion.) One can not rescue a system by deferring maintenance - one only kicks a problem further downstream until some poor jerk can't avoid the blame for paying the full bill with interest.

Some cities have gotten creative - Youngstown, OH and Detroit, MI have taken the extreme step of eliminating the infrastructure in areas of town meant to be "decommissioned". This means, that entire city blocks will be razed, and vacant land left - so that the costs related to sparsely lived in areas can be eliminated. Roads will be left to decay, as they will not be maintained. Over time, new developments can pay the cost of rebuilding the infrastructure - but with those developments come the very people who will be paying the taxes to maintain it.

Cities, states, and nations need to maintain an adequate transportation infrastructure. They can no longer scrimp on mass transit, as people are moving back to the core cities without their cars. The Interstate highways need to be maintained, lest people nation wide are prepared to suffer delays in receiving goods attributed to road and bridge failure. The private railroads need to make money from investing in their own infrastructure, as we can not afford for many of the goods we depend on to be delayed. In short, because we are no longer a network of local economies, but one large, pulsing national economy, we need a reliable transportation infrastructure for all of America.