Why you can’t rely on the railways: Institutional constrains to fiscal stimulus

The timing of infrastructure spending should be strongly countercyclical so government can employ people without crowding out private sector activity and provide jobs when they are scarce. But, as Chris shows, government investment is in fact rarely strongly countercyclical. Simon Wren-Lewis is understandably annoyed that David Cameron is true to form in this respect. There will be no economic growth this year, borrowing is cheap and yet there will be no new infrastructure spending.

The coalition has announced £9bn of rail infrastructure spending, which is great – gentlemen, get your rivet guns ready! – apart from the fact the spending won’t hit until 2014 (and most of it has already been announced). This is because Network Rail’s investment in the rail industry takes place over five years plans control periods. We are in the middle of control period 4, which runs from 2009 to 2014, and we have just had the announcement for work to take place in control period 5, from 2014 to 2019.

It isn’t a physical problem which has pushed investment to 2014 it one of organisation. The are many shovel ready projects in the rail industry. Newark could use a flyover to ease congestion, electrifying the Barking to Gospel Oak line would open a freight corridor linking east and north London, the Welsh valleys which are to be electrified have needed more investment for decades.

So while there are rivet gun ready projects, we have to concede that investing in rail does takes a lot of planning. Since privatisation that planning has taken a very particular form. Every five year the DfT announce what infrastructure they expect Network Rail to deliver and the Office for Rail Regulation decide whether or not that is realistic given the industry’s business constraints. There is tooing and froing as they negotiate and they eventually settle on the work to be done.

It would be possible to bring forward infrastructure spending but you would have to pass new legislation to do so. The Office of Rail Regulation would need to look the other way while you stuff money and project managers down Network Rail’s throat. Gordon Brown called himself a restless reformer, rail has felt the worst of a political culture that makes a virtue of constant turmoil.

After more than two decades of regular reorganisations and continuous micromangement, there is no industry more in need of certainty over funding, infrastructure and organisation than rail.  The final round of organisation reform, infrastructure spending, spending priorities and fare structure may finally leave us with something approaching a decent railway by the end of the decade.

Fiscal policy is just one aspect of what a Government does. Countercyclical investment projects can and should be prepared, they could and should have been included in a separate schedule of possible work for this control period, but they were not. The lesson here is that where institutions have been established after hard bargained the feasibility of idiosyncratic countercyclical spending is reduced.

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PS This bargaining determined capacity for idiosyncratic countercyclical spending explains the lack of countercyclical investment before Thatcher discussed by Chris. Before the 1980s institutions were much more rigid; labour unions demanded more predictable working patterns and there was less entry and exit of firms and facilities with the greater prevalence of state owned industries. This is rather a counter intuitive result given the trumpeting of China’s countercyclical prowess.

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2 thoughts on “Why you can’t rely on the railways: Institutional constrains to fiscal stimulus

  1. I see absolutely no reason to concentrate counter-cyclical spending on infrastructure, or indeed anything else (if that’s what the above article is suggesting). That is, counter-cyclical spending should be dispersed as widely as possible throughout public AND private sectors.

    Reason is that if such spending is concentrated in particular areas or sectors of the economy, that sector will quickly run in to shortages of labour with relevant skills and shortages of relevant capital equipment.

    1. The purpose of this post was to suggest that the degree to which spending decisions are determined by bargaining instead of enquiry will determine how easy employing counter cyclical spending is.

      For example, today the health service would be a rather easy place for counter cyclical spending as people agree spending more money on health would be nice, but this wouldn’t have been true 60 years ago when we had to cram doctors mouths with gold to get them to back the NHS. The spending was contentious because of the structures of power in the industry at the time.

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