Sunday, July 31, 2011

The sewers I swim in

Boston sewer image from Liquid Assets
I've seen lots of arguments about why reducing the deficit right now would bring crisis to the economy. Most of them are very textbook Keynesian arguments arguing that at times of excess capacity, reducing deficit spending would just add headwinds to an already struggling economy. The other argument is that the US should take advantage of exceptionally low borrowing rates to invest in rapidly aging infrastructure and put Americans back to work using a sort of New Deal 2.0 scheme.

The first argument is a bird's eye solution to a ground-level problem. Yes, government spending would goose GDP, but is that spending creating wealth? Where is that "stimulus" going? Our goal, after all, is not to maximize GDP, but to maximize wealth. GDP is just a poor objective measure for a deeply subjective phenomenon and gaming our own framework won't help anyone, regardless of what numbers the BLS, BEA and FRB release over the upcoming months. And let's not forget that Washington has a very poor track record as an allocator of capital. I'm simply not comfortable leaving these decision up to the people that decided to try to reflate the bubble by pulling-forward demand, subsidizing toy arrows and foreign liquor and build useless airports. Just sayin'.

But does this mean we should address the crisis with full-throttle austerity? Not quite. As it was eloquently pointed out last Summer on interfluidity, austerity is stupid and deficits are dangerous. We can't make generalizations about debt, deficits or balanced budgets. Deficits and debt are neither good nor bad on their own. Leveraging up for wealth-creating projects is good, borrowing to throw money away shoveling sand from one pile to the other not so much. Washington is focusing on abstract goals like "putting real Americans to work." And one can't blame them because that's what people want, jobs. But "jobs" isn't something you can simply create from thin air, you can't just throw money at this problem and expect to fix it. "Jobs bills" and "improving America" are nebulous ideas, subject to interpretation without any objective way to measure success or failure, which is probably what Washington wants.

"Well, fine, but what do you suggest then?" you may be asking yourself. I just want to say one word to you. Just one word. Sewage. We've spent the better part of the last 10,000 years trying to secure sources of clean water and get rid of waste. Humanity has developed modern plumbing and sanitary sewers. We survived the Great Stink of 1858. We've battled epidemics of water-borne disease, droughts and floods.  I feel comfortable in making the broad statement that clean water is good and shitty water is bad. Therefore, one could expect that making something good out of something bad would be a positive thing, an improvement, a wealth-creating action. If you disagree, feel free to stop reading now.

All of which brings me back to our original topic, the deficit. We have swaths of unemployed persons and slack capacity in all aspects of construction, record-low financing rates, and an economy that uses fresh potable water faster than it replenishes it (including aquifer sources). Wouldn't it be great if we could put excess capacity to work creating an infrastructure that helps us achieve sustainability and conserve one of our most vital resources while financing it all at record-low rates? Well, we can, and it's called sewage treatment. It's the effective, efficient and inexpensive process of cleaning water.

The Deer Island Treatment Plant on the Boston Harbor provides primary and secondary treatment for the waste and storm water of the greater Boston area. It serves 43 communities, 2.5 million people and hundreds of thousands of businesses and it cost $3.8 billion to build. The entire MWRA had $176M of sewer-related operating expenses in FY2010 (pg 50). That works out to $70.40 per-person per-year. That figure includes not only the plant, but the entire sewer system as well as treatment of storm water and one of the most advanced plants in the country. DITP not only discharges water that is cleaner that the water it is being discharged into, but it efficiently decomposes organic waste using anaerobic digestion, reducing the volume of the sludge by 90% and using the resulting methane gas to help heat/power the plant. The dried, pelleted result of the digestion process is sold as Bay State Fertilizer (the heat naturally created by the digestion and drying process kills the harmful pathogens). So, for $70.40 per-person, per year, the MWRA cleans, on average, 360 million gallons of waste-water per-day and turns the organic water contained in it into energy and high-quality fertilizer, saving the city millions of dollars in sludge transportation and disposal fees, all while keeping the harbor clean. And while the $3.8 billion cost of construction may sound like a lot, consider that the plant had an initial 30-year expected life, meaning buying the plant on credit and amortizing it over 30 years (using the current 30y tsy rate of 4.12% as a proxy) would cost a only $7.36 per-person, per month. To put it all in perspective, including both amortization costs and operating costs, the cost per-thousand gallons of water treatment comes out to $1.48, or about the price of a medium-sized water bottle in a convenience store.

That's deficit spending I can get behind.

UPDATE-1: fixed an arithmetic oops and added reference to plant cost.
UPDATE-2: It was pointed out to me that the actual number of users serviced is 2.5 million, not 2 million. All numbers adjusted to reflect this. Link to source added as well.