Texas stands out as a magnet for people from other states and countries. According to the Federal Reserve Bank of Dallas, net in-migration reached nearly 350,000 in 2022. Waves of newcomers, both people and companies, have been arriving in Texas for some time now, and Texans are mostly glad to have them.
It’s all good—except for the all part. More people and companies moving to Texas contribute to soaring housing prices in the DFW area, Austin, and other places. So many newcomers also put added strain on infrastructure.
In a capitalist economy, the invisible hand of the market does a good job of responding to the demand for most goods and services. Markets offer an abundance of choice and provide some infrastructure, too; for example, telecommunications and internet connectivity. A big chunk of infrastructure, however, comes via the visible hand of governments through a bureaucratic process that largely bypasses markets in making decisions on quantity, prices, and quality.
In economic terms, our infrastructure tends to follow the model of Soviet-style central planning, even here in free market-loving Texas. It’s not ideological; it’s practical—an answer to meeting consumer needs that market forces struggle to supply in sufficient quantity.
So, government steps in. But the public sector has its own baggage. The inherent shortcomings of central planning can’t be denied, and infrastructure looms as a continuing challenge to fast growth in Texas and its metropolitan areas.
Infrastructure Goes Public
The government becomes a significant player in infrastructure because of what economists call “internalizing the gains from investment.” Infrastructure delivers value to an economy in difficult ways for markets to capture and accurately price.
The economy-wide benefits of the always-busy Dallas-Fort Worth International Airport far exceed what a private company could hope to gain for making such a huge investment. Additionally, political machinations shape decisions about infrastructure projects’ location, design, cost, capacity, and consumer prices. Monopoly predominates because it would be costly and impractical, for example, to operate several water utilities serving the same communities.
These flaws muddle incentives, making it less likely that the central planning system will make wise decisions on the infrastructure needed to support economic growth.
Planners don’t have to fixate on raising capital, keeping costs in check, or earning profits. Infrastructure financing comes mainly from taxpayers, providing little incentive to match costs to benefits and avoid pressures that inflate costs.
States and cities shield local citizens from the full burden by tapping into federal subsidies, particularly for transportation. Few mass transit systems make economic sense, but Washington’s largesse made the DART rail possible.
In addition to taxes, user fees help pay for infrastructure. These prices are set by fiat without regard to supply and demand or profits and losses and subsidies are commonplace.
Planners don’t have to worry about competition. Infrastructure monopolies won’t lose their customers no matter what, leaving little incentive for improving quality or innovation.
Our portrayal of infrastructure as an exercise in central planning may sound harsh, but shortcomings don’t arise from bad intentions. They come from bad incentives in the public sector.
Getting the Infrastructure Right
Infrastructure is rarely top of mind, but Texans have been going about their business amid signs of its vulnerabilities. Road congestion keeps getting worse, and airports are packed. Summer heat brings warnings of potential overloading of the electricity supply—periods of low rainfall prompt calls to cut water consumption.
Winter Storm Uri in February 2021 was a reminder not to take infrastructure for granted. When the storm caused the power grid to fail, it caused $195 billion in damages and 246 deaths.
The Texas model of economic freedom is the foundation of Texas’ decades of fast growth. When governments get bigger, economic freedom takes a hit, and growth usually slows. If done wisely and well, however, public spending on infrastructure makes the private sector more effective and efficient, supporting growth.
The private sector can’t prosper without infrastructure, and companies will look to governments to provide it. The question is whether businesses and their workers will continue to find what they need in Texas’ free market economy or go someplace else that offers a high degree of economic freedom and better infrastructure.
The central planning system responsible for infrastructure will have much to say about what happens. If it gets infrastructure right, companies and people will keep coming to Texas. If the planners don’t provide adequate infrastructure, breakdowns will erode in-migration and its benefits. Gains in output and employment suggest Texas’ markets are working just fine. Government can do its share by doing its job of supplying infrastructure.
W. Michael Cox is professor of economics in the Bridwell Institute for Economic Freedom at Southern Methodist University’s Cox School of Business. Richard Alm is writer-in-residence at the Bridwell Institute.
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