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.

4 comments:

  1. Great article. And I love it when "updates" actually further reinforce the writers point.

    I remember when the Deer Island plant was being built one would look out from the busy streets of Boston proper out to this "distant" island project and scratch their head. In those nascent stages I think its relevance and practicality to many seemed metaphorically as distant. But now the plant stands as one of the few successful marriages between public/private or Business/environmental interests.

    It is not lost on me that my only memory from the high school western civ class I had was that one of mighty ancient Rome's biggest contributions to world development was (besides vomitoriums) it's viaducts and sewers. If, for better or worse, the rise and fall of Rome foretells America's arc like so many pundits would say, then it seems our destiny is indeed in the sewers. Maybe, as social conservatives point out, Rome was evil and rotted morally from within. Maybe it was wonderful because it welcomed "all roads." Besides Russel Crowe who really knows. But whether it was heaven or hell to live in, at least it smelled better than other places. So yeah, whether or not America is going up or on it's way down, we owe it to ourselves to at least attempt projects like this. And, who knows, maybe someday the world will look with envy at the U.S. and it's thriving economy and once again we can strut the globe like our sh*t don't stink.

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  2. Job creation: The intention is correct, method of implementation wrong. When so many mouths are to be fed, projects implemented created no jobs. Machines are used, reducing labor reqirements. The profit generated is enjoyed by one or two only. We forget "that there are a lot of hungry mouth feed". Unless the projects implemented employ large population, there will be only unemployment & poverty.
    Wealth created - How was created? : Housing bubble. Value of the house was inflated from one hand to other, providing loans to persons having no means to repay for the sole purpose to get commissions and inflated profit. Rubbing chille to the wound is the creation of the worst instruments leading to the present economic turmoil. Where is / are the project implemented here?
    In the name of profit alone, the jobs are shifted from one country to other. They do not want to pay minimum wages here, thereby creating unemployment. But we blame other countries, when the fault lies with us. Whatever profits are obtained they are parked outside for tax avoidence and helping only a few who controls it. At least they should have invested it in this country creating jobs.
    Entitlement programs are blamed for every evil here. How it is implemented and the frivolus law suits, malpractices and other impediments are if removed, entitlement programs will shine.
    Instead of strengthening our frontiers we have invaded other countries on false pretext, wasting trillions of dollars. In the history, no invading country prospered. But our politicians want to send troops to other countries even today. Unless otherwise we realise this folley and make no further entanglements, our country will lose a lot of our precious finance.

    A good country, envied by others was ruined by whom ? By us/politicians/profietiers. Salvation is with in us.

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Do the right thing.