Let cities borrow to build new infrastructure

The blurb introducing [amazon_link id=”1137519843″ target=”_blank” ]The Public Wealth of Nations[/amazon_link] by Dag Detter and Stefan Folster begins: “We have spent the last three decades engaged in a pointless and irrelevant debate about the relative merits of privatization or nationalization.” Yup. And that futile framing of the issues could intensify now that Labour Party members have elected Jeremy Corbyn, a cheerleader for old-style nationalization, as their leader. Which is a shame, because this book makes a persuasive argument that it is not the ownership of assets that determines how well they perform, but instead how they are managed.

[amazon_image id=”1137519843″ link=”true” target=”_blank” size=”medium” ]The Public Wealth of Nations: How Management of Public Assets Can Boost or Bust Economic Growth[/amazon_image]

Specifically, the authors argue for the creation of sovereign wealth funds or holding corporations, with independent, non-partisan governance structures, to manage public assets. As Dag Detter used to run the Swedish government’s holding company, he has some direct experience of how such structures might operate and there is plenty of practical advice in the book. It focuses on publicly-held commercial assets, and argues for the state holding them (as opposed to privatizating them) but with independent management protected from short-term politics, and delivering a reasonable commercial return to the government. The role of politicians is to act as advocates for the public interest.

A short final chapter turns to infrastructure, and argues for state entities investing in infrastructure projects, but it does still presume that these should all be expected to deliver a commercial rate of return. So the book omits altogether the public good case for non-commercially viable state activity, which seems an odd – and large – gap.

It’s hard to argue with the general thrust of the argument for professionalising the management of sovereign wealth funds or state corporations, and shielding them from political short-termism; but the privatization/nationalization debate is not merely about commercial efficiency but also about the purpose of the entities involved and how they serve the broader public interest. The authors write: “Public wealth should aim to yield financial returns similar to comparable assets in the private sector.” Well, sometimes, perhaps even often, but not always – especially when the reason they are in the public sector is that there are not comparable market assets. Nor does the book tackle any political economy questions about how to move toward such a different kind of governance structure for public assets.

Lots of economists would like to see more infrastructure investment, with the real interest rate the government would have to pay to borrow the money so low. (Few think paying for it by ‘printing money’ or so-called ‘people’s QE’ makes any sense; if not financed by borrowing, then raise taxes.) However, it seems unlikely to happen unless either the Conservative government has a change of heart, and separates out capital spending from its deficit targets; or the borrowing and investment decisions for some infrastructure investment are devolved to the newly empowered city regions.

I can’t see any problem at all with experimenting on a modest scale with municipal bonds, and surely Manchester would leap at the chance to pilot this to go ahead with the upgrade of the trans-Pennine rail route, and much more. Clearly national politics has become a circus, but perhaps city politics will be relatively unaffected by the national Punch and Judy show. Let’s hope so. But the new political context means transparency, accountability and professionalism in investing in and managing public assets will be all the more vital. For all its narrow market efficiency pespective, the point the book makes about the sound management and independent governance of any new or existing public investments is an important one.