Once globally competitive, protectionism has annihilated the productivity of America’s most important sectors
There’s an old joke in development economics that goes something like this. A World Bank inspector and a local ministry official inspect three bridges as part of a country-wide review.
After years of planning, the first bridge they visit shows some signs of construction activity, but it’s way behind schedule. The inspector asks what’s taking so long and the official responds, “It’s a completely corrupt-free process run by the best engineers in the world.” Meanwhile, the second bridge they visit is fully finished and operating, but the official notes that “it took a bit of greasing the wheels to get it finished — maybe 30% of the cost.” “Corruption?” the inspector inquires. “One could say,” the official responds.
Then the two head to the third and final bridge. The inspector looks out over a glorious valley of flora and fauna, unperturbed by mankind. “Where’s the bridge,” the inspector asks, to which the official whispers, “100% corruption.”
Wealth generation and how it is distributed is a core question for any society. Rapid growth happens when wealth is flowing freely and most participants perceive a positive-sum game. Better to make a bit of money from many projects than try to exploit one project and scupper the future. However, when people perceive a zero-sum or worse, a negative-sum game, then the tide turns. Every player seeks their own personal profit at the expense of everyone else, often shrinking future returns to acquire profits today. Call it the Bridge Number Three problem.
America is not a place where the lessons of development economics are often applied. After all, no country more rapidly invents on the frontiers of science (the mRNA vaccine, for instance, saved the world from Covid-19). Why then can’t we use ancient technologies like elevators and trains?
That was the theme of two eye-popping articles this week. The New York Times published an essay by Stephen Smith on why elevator prices in America are deliriously more expensive than pretty much anywhere else in the world.
A basic four-stop elevator costs about $158,000 in New York City, compared with about $36,000 in Switzerland. A six-stop model will set you back more than three times as much in Pennsylvania as in Belgium. Maintenance, repairs and inspections all cost more in America, too.
Why? One is massive overcapacity:
The first thing to notice about our elevators is that, like many things in America, they are huge. New elevators outside the U.S. are typically sized to accommodate a person in a large wheelchair plus somebody standing behind it. American elevators have ballooned to about twice that size, driven by a drip-drip-drip of regulations, each motivated by a slightly different concern — first accessibility, then accommodation for ambulance stretchers, then even bigger stretchers.
The other answer is the negotiations between the parties involved, in classic Riskgaming fashion:
Architects have dreamed of modular construction for decades, in which entire rooms are built in factories and then shipped on flatbed trucks to sites, for lower costs and greater precision. But we can’t even put elevators together in factories in America, because the elevator union’s contract forbids even basic forms of preassembly and prefabrication that have become standard in elevators in the rest of the world. The union and manufacturers bicker over which holes can be drilled in a factory and which must be drilled (or redrilled) on site. Manufacturers even let elevator and escalator mechanics take some components apart and put them back together on site to preserve work for union members, since it’s easier than making separate, less-assembled versions just for the United States.
Unsurprisingly, “Nobody is marveling at American elevators anymore. With around one million of them, the United States is tied for total installed devices with Italy and Spain. (Spain has one-seventh our population, 6 percent of our gross domestic product and fewer than half as many apartments.)”
In other words, Bridge Number Three.
We can’t make machines go up, but can we make them go forward? The answer there, unfortunately, is also no. Amtrak and NJ Transit have had a summer meltdown of service, with trains frozen for entire days due to the collapse of their rail infrastructure (as I write, NJ Transit has entire lines shut down into NYC, stranding anyone who is still attempting to commute to a physical office). Nolan Hicks at Curbed writes up why the crisis is suddenly peaking: it’s all about infinite deferred maintenance on the train system’s electrical catenary wires that can’t be deferred any longer.
The $450 million grant — part of the economic stimulus package backed by then-President Barack Obama — was supposed to pay for replacing a 23-mile stretch of the Northeast Corridor between Trenton and New Brunswick. But the program was a mismanaged disaster that resulted in two probes by Amtrak’s inspector general, including one that determined that an unnamed Amtrak executive engaged in “improper hiring, indications of favoritism, conflicts of interest, and gross mismanagement of resources.” Amtrak cut back the tensioned catenary program from the 23 miles to 14 miles, and a subsequent report in 2017 by the IG showed that only seven miles’ worth was actually built.
Bridge Number Three strikes again.
To do some back-of-the-envelope math: the Northeast Corridor corridor is 457 miles long. Amtrak used $450 million to replace roughly 7 miles of electrical wires. That would imply a roughly $29.5 billion price tag for replacing wires across the whole line. And given that this program was launched in 2011, we’d have to assume with inflation that the final cost today would be closer to $50 billion or more — just for new electrical wires. Meanwhile — for the same price tag — Paris is building 68 new Metro stations and 120 new miles of subways as part of its transformative Grand Paris Express expansion.
This genre of investigation (“Why can’t we build it?”) is deeply enervating — and so maybe more reporting here would help. Certainly, that was the consensus on Twitter. Connor O’Brien at the Economic Innovation Group wrote that “We need more 120 page reports on why American elevators are so outrageously expensive. More tomes on why cities don’t do land reclamation anymore. More wonky manifestos on public procurement. Get into the guts of that thing that costs too damn much and explain it.”
If you believe that, then do I have a bridge to sell you — and it’s set in a glorious, unperturbed valley filled with flora and fauna.
One of the key lessons of Riskgaming is that it’s not nearly enough to inform people about complex and technical issues, since the underlying negotiations between different parties are ultimately what constructs the final outcome. Why can some parties extract their rents, and others either don’t, won’t or can’t?
In America’s reindustrialization dilemma dispatch from Detroit two weeks ago, I emphasized the deliberate nature of America’s destruction of its industrial might. We specifically and actively undermined our own factories, failing to provide the full-throated support required for these industries to be successful against cutthroat global competition. Most industries were lost — but not all.
The corollary is that we do still build things in mollycoddled industries that are extremely well-insulated from global competition — the survivors of 1980s deindustrialization. The “elevator lobby” is a real constituency and extremely well-organized, a set of labor unions and company leaders who actively work at the local level to thwart automation and imports through byzantine building codes and worksite rules. Each city requires its own unique handcrafted elevators, ensuring that jobs and salaries are protected from automation and foreign competition.
The same is true for rail. Many countries now run high-speed rail services, including Morocco and recently Indonesia thanks to a Chinese Belt and Road investment. Yet, America can’t even keep the power running on its anemic network, because $450 million just gets slurped up by a labor protection racket. One wonders what last week’s $6.8 billion grant for the cross-Hudson rail tunnels from the federal government will ultimately deliver. Bridge Number Three? Two? One?
These mollycoddled industries enact a secret and regressive tax on all Americans. Stephen in his NYT piece emphasizes the high cost of housing due to the aggregate extortionate costs of construction and components like elevators. We all lose when basic public services like rail don’t work, ensuring that American cities remain mired in traffic that could be solved.
Unfortunately, it’s not just manufacturing and infrastructure where such mollycoddling takes place. Occupational licensing protects tens of millions of workers from competition by preventing new entrants into their lines of work. Such licenses encompass everything from florists and acupuncturists to barbers depending on the state. American health care is the most expensive in the world thanks to a ravenous and uncompetitive labor market for doctors and nurses coupled with a profit maximizing nexus of institutions that face no incentives to increase productivity.
And then there’s the defense industry, where five primes so completely suck the federal government dry while providing depleted weapons stocks in return that it still shocks when a startup like Anduril can deliver a product in weeks instead of years, and at pennies on the dollar compared to legacy players. In a Wall Street Journal article reporting on new Silicon Valley Defense Group data, “When SpaceX awards are excluded, the remaining 99 startups [most well-funded by vcs] in the report share just over $4 billion in government revenue.” This year’s defense appropriations bill passed by the House totals $833 billion. It’s Bridge Number Threes as far as the eye can see.
Protectionism was the most common political program attendees advocated for in Detroit two weeks ago at Reindustrialize. The idea is to give American companies breathing room to improve — letting them walk before fighting for their lives against international champions.
What America needs though is actually the opposite: to transform its moribund, mollycoddled incumbents into globally competitive businesses by forcing them to confront their rivals head on with urgency. When Americans use protectionism, our history shows we kill industries, not protect them.
One of our major themes at Lux over the past year has been the idea of maintenance, something Josh Wolfe wrote about in our Q4 quarterly letter late last year and again in Q1 of this year. “With computer vision and better sensors, maintenance can be proactive and preventative, and not reactive and ruinous,” he wrote. “Labor-saving innovations can help maintenance teams prioritize the right repairs at the right time, cutting costs while crucially increasing readiness and availability.”
It’s true — technology has a critical role in improving the efficiency and productivity of our economy and ensuring that all of our physical capital — homes, buildings, trains, airports, military installations and more — are maintained. Yet, it’s clear that there are constituencies violently opposed to any improvement in these systems whatsoever. That inefficiency is their ill-gotten profit, their Bridge Number Three to nowhere. America desperately needs to rebuild a culture of expansion and growth, or watch as more wealth drains into the hands of the coddled at the expense of everyone. That’s a development economics lesson that even the richest country in the world can take to heart.
Podcast: Can we be optimistic about America’s future?
So what do we do if we want to make America more growth-oriented? There’s a lot of different strategies coming from the left and right, but that divider is no longer useful, or so argues James Pethokoukis. He’s a senior fellow at the American Enterprise Institute and the author of the recent book, The Conservative Futurist. In it, he defines the new political battle lines as not between left and right, but rather between Up Wing and Down Wing — those who seek growth versus those who demand regression and stagnation.
James and I chatted about his model, America’s approach to economic progress, and so much more in the latest edition of the Riskgaming podcast. It’s an optimistic tale, although so much more needs to be done.
🔊 Listen to “Can we be optimistic about America’s future?”
Second, we have our scientist-in-residence Sam Arbesman on again with another installment of The Orthogonal Bet, this time with Alice Albrecht, the CEO of Recollect. The two of them talk about artificial intelligence, cognitive science, and how Recollect is building new “tools for thought” that can transform the way humans think, research and produce original work.
🔊 Listen to “The Orthogonal Bet: What AI Can Learn from Human Cognition”
Lux Recommends
- Benjamín Labatut’s The MANIAC was one of Lux’s favorite recent books, and now the famed Chilean novelist has penned an excellent exegesis on artificial intelligence in "The Gods of Logic” for Harper’s. “[Geoff Hinton] seems to be afraid of what we might see when the embers of the Altar of Fire die down at the end of the sacrifice and the sharp coldness of the beings we have conjured up starts to seep into our bones. Are we really headed for obsolescence? Will humanity perish, not because of the way we treat all that surrounds us, nor due to some massive unthinking rock hurled at us by gravity, but as a consequence of our own irrational need to know all that can be known?” And since you’re there, also check out “Metal Machine Music” by Laurent Dubreuil on creativity and AI.
- Tess Van Stekelenburg recommends Ruxandra Teslo’s meditation on “Why haven't biologists cured cancer?” “One complication for genomically targeted therapies is that, even if you create a therapy targeted to certain mutation, the tumour has usually already gained the ability to quickly evolve and evade your therapy through the acquisition of other mutations.”
- Sam loved Marcin Wichary’s recent lecture at Config 2024 on “In defense of an old pixel.” It’s a meditation on pixels, fonts, design and so much more.
- Ross Andersen has an excellent look in The Atlantic on “A Wild Plan to Avert Catastrophic Sea-Level Rise” “Many polar science projects are held together by duct tape and the grit of people like [Martin Truffer], who spend long months in the field away from their families. But ice preservation on Antarctica wouldn’t be an ordinary science project. If a consortium of governments became convinced that Thwaites could be saved, and that trillions of dollars of flooding damage could be avoided, they might treat the project more like a military mobilization or mass vaccine deployment. By those standards, the many billions of dollars you might need—especially if the glacier had to be drilled and pumped continually, across many years—really isn’t that much money.”
- Finally, Matthew Longo on “The DMZ at 70.” “At first blush, these two experiences at the DMZ are hard to reconcile: in the tourist crush outside Seoul, the message is one of antagonism; out east, it is of unity. But on another level, the duality makes perfect sense. The DMZ has two countervailing mandates: to convince people that the dividing line is natural and necessary, while at the same time leaving open the possibility that it may one day be erased.”
That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.
