by Robert Litan
First, the total volume of Bitcoins, by design, is limited, allowed to increase at a progressively slower rate until the total reaches 21 million units.20 This contrasts with fiat monies whose supply is governed by human beings running central banks.
Second, Bitcoin users pay little or no fees, in contrast with transaction fees associated with credit cards, which can be as high as 3 percent of the total value of a purchase. Some vendors accepting Bitcoin pass the savings on to consumers in the form of a discount (analogous to some retailers giving discounts for cash payments instead of payment by credit card). In addition, Bitcoin claims it is more useful than conventional currencies for micropayments on the web.
One misconception about Bitcoin is that users leave no trail and thus are anonymous. For this reason, the currency initially was (and almost certainly still is) used in black markets for goods, drugs, and perhaps terrorism. In 2013, the Federal Bureau of Investigation shut down one of the largest black market websites, Silk Road, an action from which users of Bitcoin drew some comfort. The Bitcoin website (www.bitcoin.org) makes clear that if one wants true anonymity, then use cash, but this of course is impossible on the Internet. Nonetheless, the site indicates that various mechanisms associated with Bitcoin provide users some privacy and more are in the works.
Other than how it is treated for tax purposes, the other key question about Bitcoin or any other virtual currency is security. Bitcoin’s official website claims it has an unprecedented level of cryptographic protections. Users have their own Bitcoin wallets from which they can either send or receive Bitcoins, with each transaction being authenticated by digital signatures and publicly available through open source software. Bitcoin balances are maintained in a protected, highly distributed network of computers.
Despite all this, however, in early 2014, hackers forced at least two Bitcoin exchanges to temporarily shut down, one of them permanently, as noted earlier. Only time will tell whether all the protections built into Bitcoin and presumably others to be added over time will be sufficient to resurrect confidence in Bitcoin while warding off an army of hackers, who also will have greater incentives to break Bitcoin’s code if the currency becomes more popular and its price increases.
Various economists have downplayed Bitcoin for other reasons: that new entrants may be attracted into competition with it, or current holders of Bitcoins may begin selling them off, triggering more sales and thus a collapse in its price.21 Bitcoin advocates respond that the currency should at least hold its value since its supply is limited. The steady accumulation of websites and real companies accepting Bitcoin for payment may even call into question the critique that the currency won’t be used widely until its value stabilizes.
Ironically, if Bitcoin survives, and the more accepted it becomes for transactions (which may require further technological advances), the less demand will exist for speculative purposes. If this sequence of events occurs, the causation may be reversed: more transactions, less speculation. One thing is reasonably clear, however: Some kind of light-touch regulation of those who offer and transfer the currency, which even the Bitcoin foundation welcomes,22 is likely to be integral to the success of Bitcoin or any virtual currency, since regulation would confer legitimacy and instill confidence among users, especially in the wake of the hacked exchanges.
Only time will tell, of course. That’s the way it is with innovations, especially potentially disruptive ones like Bitcoin. But even if, for any number of reasons, Bitcoin fails to become a meaningful alternative currency, experimentation in payments, including other virtual means of payment, will surely continue. Economic history is littered with first movers that failed (think Netscape among web browsers), while second and later movers achieved success (Microsoft with Internet Explorer and more recently, Google with Chrome). Yale’s Robert Shiller, a Bitcoin skeptic, nonetheless believes that an electronic currency tied to one or more price indices may be the way forward.23 If his notion, or some other virtual currency, makes it and Bitcoin does not, Bitcoin’s experience at least will have paved the way.
Congestion Pricing
The decaying state of much of America’s infrastructure—especially its bridges—is well known and much commented on. Also, like the weather, the congested state of automobile traffic, especially in America’s large urban areas, is a staple of everyday conversation and, more so than the weather, a source of constant irritation. The American Society of Civil Engineers reported in late 2013 that one in nine of America’s bridges were structurally deficient and over 40 percent of the country’s major urban highways were congested.24 Admittedly, the organization’s claims are self-interested, but I am reasonably confident that the average American would find these estimates not unreasonable, and perhaps even low.
The answer to infrastructure decay, like the depreciation of any building or piece of physical equipment, is repair and replacement. That requires money, which will be in short supply given austere budgets at all levels of government and the public’s resistance to higher taxes. Very difficult tradeoffs will thus have to be made if America’s broken infrastructure is to be fixed.
Congestion is a very different sort of problem, and one where many economists’ first answer is not necessarily for the government to spend more money. As my longtime Brookings colleague Anthony Downs (one of the country’s leading economists on the housing and real estate sectors) frequently said, “If you build more roads more cars will come to fill them” (which some refer to as Downs’ law). In the end, more roads will not necessarily solve the congestion problem.
Ironically, it was the same William Vickrey (profiled in Chapter 3) who first noted in the 1950s that congestion, whether on the highway, or relating to the use of any other limited resource, entails an externality: Each user imposes costs on others in the form of delay. The first best solution to this problem, Vickrey suggested, and many economists have later agreed, is to charge drivers or users of any scarce resource more during peak times, such as rush hours. The congestion charges will encourage employers to adopt different work schedules and consumers in other contexts to shift their uses to other less busy times. The highly regarded urban economist Edward Glaeser of Harvard imagines that Vickrey, who died of a heart attack while driving late at night, was driving at that hour to avoid congestion.25
Vickery’s heirs or relatives nonetheless can have the satisfaction that the congestion or peak-load pricing he suggested has since been widely adopted in the United States and other countries for telephone and electric utility use, and for urban transportation systems in a few countries. Its application to road pricing in the United States, so far, has been more controversial, for two reasons.
First, there are concerns that government agencies and/or litigants will have access to the time of day and location data encoded in the transponders mounted in vehicles necessary for congestion pricing to work. Indeed, the same concerns have been voiced about the widely discussed technological solution to road congestion, the driverless car, which I discuss in more detail shortly. Legislation could limit access to time of day and location data, but at the very least law enforcement agencies would want exemptions.
Second, congestion charges will take larger bites, on a percentage basis, out of the incomes of low- and middle-income workers, most of whom (at least for a while) will continue to work for employers that will not change their work schedules. In principle, low- and middle-income users could be compensated out of the additional revenues generated from congestion charges, either through general tax relief or more targeted, income-based rebates verified through the submission of annual state income tax returns. At this writing, no such systems have been adopted anywhere in the United States (although one rebate scheme was floated in the California legislature in early 2014).
Cities in other countries—notably, Singapore, London, and Stockholm—nonetheless have implemented some form of congestion pricing, mostly in inner city areas and largely based on driving location rather than time of day. In co
ntrast, in the United States, rationing has been used instead so far to control congestion, through special high-occupancy vehicle (HOV) lanes devoted during peak driving hours to cars with more than occupant.
HOV lanes are only a stopgap solution to traffic congestion, which is more than an irritant to drivers. Traffic congestion, especially the uncertainty of when it is likely to be worst, complicates the business of manufacturers who increasingly rely on just-in-time delivery for both their inputs and their finished goods. To mitigate this problem, companies at all levels of the value chain can hold more inventory, but financing it costs money and thus introduces additional costs that ultimately consumers pay for.
It is possible, and maybe inevitable, that driverless vehicles will be the technological fix that substantially reduces congestion without requiring the construction of new roads, though such a system will require new investments in software and hardware, and further advances in the technology itself, including modifications to existing roads. Even if the technological impediments to a driverless world are overcome, some legal hurdles, in addition to concerns about privacy, stand in the way. High on the list is how liability for the inevitable accidents will be assigned or apportioned among companies producing the software and hardware for driverless vehicles, or even among the drivers themselves in cases where they have a chance to override the automatic features but fail to take action. The earlier such rules are established, preferably through legislation rather than years of litigation, the sooner this technology is likely to be deployed.
In the meantime, population and the number of conventional vehicles continue to grow, adding to congestion, especially in already highly populated urban areas. What is to be done?
Building more publicly financed roads will be difficult, given the pressures on public finances from growing costs of entitlement programs for aging baby boomers (like me) at the federal level and rising health-care and prison costs at the state and local levels. One suggested way around this problem that has been under discussion in Congress (and was supported by the Obama administration) is for the federal government and/or the states to establish infrastructure banks, which governments would capitalize but that would be largely funded by government-guaranteed bonds. These banks, in effect, would be government-sponsored enterprises (GSEs), like Fannie Mae and Freddie Mac, which could fund not only the construction of roads but also capital investment in rail and public transportation. But the GSE status of an infrastructure bank also could be one of its main political problems. Since Fannie and Freddie had to be bailed out by the federal government (even though in the end the payments were fully repaid), federally guaranteed infrastructure banks would run the same risk. That may not prevent their creation, but the prospect of future bailouts, however distant, would significantly complicate the politics of creating the banks, even though the credit subsidy for guaranteeing their bonds and even possible future bailouts might cost the government much less than the cumulative amount of direct federal spending for new roads.
Congestion pricing, thus, may turn out to be the only realistic alternative solution in the medium run for at least slowing the increase of, or ideally reducing, traffic congestion. But because of its drawbacks in a public context, we may see it penetrate most rapidly in private settings—that is, for privately financed toll roads where operators are not subject to the same degree of public scrutiny and concerns that so far have frustrated the implementation of the idea for public roads.
Yet even privatized road construction and operation has hurdles. For one thing, a number of privatized toll roads in the United States have run into financial difficulties, primarily because the projected amounts of traffic, and thus toll revenue required to pay off the bonds that financed the roads, have not lived up to expectations.26 In addition, where reasonably substitutable public roads are not available, regulation may be required to prevent monopoly pricing by road owners. At the same time, however, the prospect of rate regulation limits the upside gains to these owners of private roads, which could discourage private investment in these projects.
Each of these problems is not insurmountable. The uncertainty in revenue projections caused by uncertain traffic flows, which are sensitive to both toll prices and local economic conditions, can be addressed by using more equity to finance future toll roads than has been true in the past. A higher mix of equity financing will require higher tolls than otherwise, since equity is more expensive than debt, but this should not be a barrier to getting the deals done. To keep tolls down, it may be necessary for governments to chip in some of the capital costs, perhaps 10 to 15 percent, but these efforts will be constrained by the limited availability of government funding.
Adverse public policies, whether in the form of lengthy construction permitting processes or excessively tight price controls, can inhibit or totally prevent more private roads. But these problems can be overcome. State and local governments committed to providing additional roads can move approval processes along if government officials know public funds will not be required for their construction and operation. As for monopoly power requiring some form of rate regulation, this is much more likely to exist for bottleneck structures like bridges than it is for roads, where there is typically more than one way for drivers to reach their destinations. Furthermore, the financial pressure and attractiveness of selling existing roads and other public assets may limit the desire of governments to put too heavy a hand on the regulatory scale.27
Indeed, some clever experimentation with privatization is going on in various states at this writing. Aware that investors have little appetite for funding greenfield road construction projects where predicting future traffic volumes is especially hazardous, Georgia and Texas allow private firms to own and build additional lanes next to existing roads that are already congested and thus where investors can have greater confidence in future tolled-traffic forecasts. Puerto Rico, a U.S. territory plagued with financial problems, privatized two existing roads in 2013. Each of these experiments is aided by technologies, such as E-Z Passes that drivers can purchase, or video monitoring that can send regular bills to drivers who don’t have passes.
My guess is that other states facing financial pressures, especially those with large unfunded pension funds, will look to privatized roads, either existing or new ones close to current ones, as a way of killing two birds with one stone: harnessing the financial power of private investors and owners to build and operate roads while taking some of the funds or the bonds issued to finance the projects and using them to shore up the state and local government pension funds.28
In the end, one of the nation’s leading transportation economists, Clifford Winston, is probably right when he concludes that governments will have to inch their way toward privatized roads (and other traditionally public infrastructure) and congestion charges through a process of experimentation before embracing these ideas wholesale.29 But at least the ideas are out there and have been widely recommended by many economists, who someday may see their visions for wider use of congestion pricing actually realized.
Which businesses will flourish from more extensive use of congestion charges? I suspect many more than most people imagine now, since the notion of charging for peak use has broad potential application in a wide range of retail and wholesale markets. Congestion pricing not only will enhance revenues and profits of the firms that adopt it, but also change consumer and business behavior.
With respect to congestion charges for transportation in particular, the firms that will benefit most will be the private firms that own roads and related facilities. Investment bankers will take their cut of the equity and debt used to finance such ventures. At the consumer end, applications software will be written to enable users to minimize the charges they have to pay. Residential patterns and work hours will change. I can’t outline all of the implications, but one thing I know: Life would be different, and with an economist’s faith, I believe, on balance, better.
The Bottom Line
There are many great ideas out there waiting to be exploited. Some ideas are tried out too early and fail. Others are copied, but in some cases, the first or second movers are difficult, if not impossible, to dislodge. Timing is thus not everything in business—execution and effort are also critical—but timing often really matters.
There is an old saying that good economists should never forecast a number and a date at the same time. I’ve implicitly followed that adage here, outlining ideas on the shelf relating to prediction markets, financial innovation, and congestion pricing that have been introduced into the marketplace to a limited degree, but are waiting for much more extensive commercialization possibilities, many beyond those imagined here. Such is the power and usefulness of economists and their ideas.
Notes
1. For more complete information about this market, see http://tippie.uiowa.edu/iem/.
2. The New Yorker columnist James Surowiecki invented and popularized the term in his now classic The Wisdom of Crowds (New York: Anchor, 2005).
3. See http://ubplj.org/index.php/jpm/index. For a wider application of prediction markets to public policy decisions, see Robin Hanson, “Decision Markets,” in Entrepreneurial Economics: Bright Ideas from the Dismal Science, ed. Alexander Tabarrok (New York: Oxford University Press, 2002), 79–85.
4. See www.cnn.com/2003/ALLPOLITICS/07/29/terror.market/.
5. Andrew Rice, “The Fall of Intrade and the Business of Betting on Real Life,” Buzzfeed, February 20, 2014, 13, www.buzzfeed.com/andrewrice/the-fall-of-intrade-and-the-business-of-betting-on-real-life.
