Domino's fixing potholes is an ominous sign

Published on Wednesday, 20 June 2018 19:02
Written by Noah Smith

I recently noticed a string of interesting news stories, all with the same theme. Domino’s Pizza is donating money to 20 U.S. cities, to be used for fixing potholes and cracked roads. Salesforce has donated $1.5 million to reduce homelessness in San Francisco, and its CEO, Marc Benioff, has spoken of grander schemes to end homelessness in the city entirely. And Facebook is talking about renovating a defunct bridge that runs across the San Francisco Bay near its offices.

All of these initiatives, in and of themselves, are good things. It’s good for potholes to be fixed, homeless people to be housed, and traffic congestion to be relieved. But the fact that it’s private companies taking these steps is an ominous sign for the nation. It suggests a breakdown in the government’s ability or willingness to carry out one of its core functions - the efficient provision of public goods.

When economists use the term “public goods,” they mean something very specific. A public good is something that one person can use without making it less available to another person - in other words, a good that doesn’t get “used up,” in the way that goods like food or cars do. (The classical definition also requires that a public good be something you can’t easily prevent people from using, like sunlight, or national defense, but this part of the definition isn’t always useful.)

In reality, there are few perfectly public goods in the textbook sense. But lots of things have some public aspect to them, because they create positive spillovers that benefit people who don’t pay for them.

Roads and bridges benefit not just the people who drive on them, but also other people who benefit from the economic activity enabled by transportation networks. Housing homeless people certainly is a moral obligation of society, for their safety and dignity. Incidentally it also results in a cleaner, safer city.

In most advanced societies, public goods - infrastructure, sanitation, national defense and others - are mostly provided by the government. There’s a very deep result in economic theory that explains why this is the case. Public goods have an inherent free-rider problem: For anyone who can, the impulse is to let someone else foot the bill, and simply consume the public good for free. Businesses, nonprofits and wealthy individuals might provide some amount of public goods - for their own benefit and others’ - but not the full amount that society needs.

Economists have theorized about just how much public good the private sector would provide in the absence of government. One classic paper by Theodore Bergstrom, Lawrence Blume and Hal Varian explores the question of how inequality affects the equation.

They find that under some simple assumptions, a more unequal division of wealth results in more provision of public goods by the private sector: In other words, when a few people get really rich, they start acting like a government.

So companies like Domino’s, Salesforce and Facebook might be venturing into public good provision because of rising inequality in the U.S. economy. While the moves might seem like marketing gags, they also provide value to the companies in question - Domino’s drivers will use the roads, Facebook employees will commute over the bridge, and Salesforce employees will live and work in a more ethical community. It might be that these companies are reaching such a level of size and wealth that it no longer makes sense for them to wait for governments to fix these problems. While it’s good of them to do this, inequality itself is an ominous trend for society.

Also, private provision of public goods might signal another, even scarier trend - government dysfunction. Bergstrom et al. find that government provision of public goods partially crowds out private provision. In other words, when governments are doing closer to the right amount of infrastructure, sanitation, etc., private parties are doing less, and vice versa.

In the U.S., government investment has been trending down, as a percentage of total economic output, for decades. Another factor is cost. Infrastructure in the U.S. is very expensive relative to other countries, which may deter governments from being willing to undertake infrastructure projects at all.

So while it’s nice for companies like Domino’s, Salesforce and Facebook to spend money on public goods, it’s also a harbinger of some unpleasant trends.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

Posted in New Britain Herald, Editorials on Wednesday, 20 June 2018 19:02. Updated: Wednesday, 20 June 2018 19:04.