Impoverished Valuations

Photo by Osman Rana on Unsplash

What’s the value of societal audacity?

On the “Securities” podcast this week, I posed an audacious question: “How much would you spend to transform the lives of every denizen of one of America’s great cities?” Or even a suburb or a small town? If you could improve the lives of every Angeleno for $100 billion, is that money worth spending? How do we even begin to consider such an expansive (and likely expensive) proposition?

Valuation is the lifeblood of capitalism, as it’s the precondition for free exchange. Improvements in our calculation of valuation can lead to exceptional economic growth, as once unthinkable transactions suddenly become feasible.

Simple bartering allows one to compare the relative value of two objects, but currency allowed us to abstract valuation for all objects simultaneously. As humanity started creating intangible assets, we needed better machinery for valuation to compensate. Many assets, like a share of stock without a dividend, have essentially no “real” value (you can’t sleep on it, you can’t eat it or so one hopes). In order to judge their valuation, we evaluate them relative to “comps” — comparing similar assets and assessing a sort of median price we believe other stock buyers believe the stock is worth in an endless braid of beliefs.

These decisions still involve trade, but it gets even harder when we invest broadly in society. How much should we collectively pay to install safety barriers that save multiple lives per year? That requires assessing the value of a statistical life, actuarial tables, and a dismal accounting of dollars spent to life years gained. Scaled up, we can do the same calculus with a new highway or train station: we can estimate future usage, increased fares and tax revenues, and try to quantitatively rationalize a decision.

Then there are megaprojects that are so large, they are impossible to fathom in the context of valuation. Consider the audacity of Georges-Eugène Haussmann, who transformed central Paris in the mid-to-late 1800s into the wondrous urban landscape we know today. It was a plan of exceptional vision (and of extraordinary destruction to the inhabitants caught up in it). Ultimately, it’s renowned as a masterpiece of urban design that is still studied with envy the world over.

How do we account for that transformation? We could calculate real estate values, the increased lifespans of Paris’s inhabitants (hard to causally identify given so many other coeval public health advances), the faster speed of movement across the city through grand new boulevards and the coming of the Paris Métro. But that doesn’t even begin to capture the aesthetic, architectural and cultural benefits of building up the extraordinary beauty and quality of France’s capital.

Economists never suggest the impossibility of valuing something, and indeed, one could imagine laboriously assigning a quantitive value to every feature and benefit I just suggested. Even as you begin to get a handle on those questions though, there’s a question about time. Central to economics is the time value of money, and so how do we account for the benefits of Haussmann’s accomplishment over the past 150 years and counting? Does all of that count, even as the original inhabitants who suffered and paid for these improvements have long since passed from the Earth?

I keep asking questions because we have slowly transitioned away from the strict valuations that make economics a coherent discipline into the realm of the philosophical. Valuation is quantified, but values are qualified. What we think counts, what we think matters, is ultimately what undergirds our underwriting. The awakening of an environmental consciousness starting in the 1960s led engineers to quantify environmental protection in most construction projects. We didn’t include it before, and now we spend a lot of time (often too much time) calculating and adding it into the sum total of a project’s benefits and costs.

The Central Artery freeway cut through the core of downtown Boston. Photo by Massachusetts Department of Environmental Protection.
The Central Artery freeway cut through the core of downtown Boston. Photo by Massachusetts Department of Environmental Protection.

All of this thinking brings us back to this week’s podcast episode, which focuses on Boston’s Big Dig megaproject. By reputation, the Big Dig has gone down as one of the greatest boondoggles in American infrastructure history. It’s goal was deviously simple: replace an unsightly six-lane highway known as the Central Artery that scarred central Boston and replace it with a series of well-designed tunnels that would move vehicular traffic below ground and out of sight (think of it as Elon Musk’s The Boring Company but actually working). Decades later and billions and billions of dollars over budget, it finally opened about 15 years ago. It wasn’t so much a celebration as a sign of relief for politicians who had long been sapped of capital and willpower by the forever project.

Podcast episode design by Chris Gates via DALL-E
Podcast episode design by Chris Gates via DALL-E

My guest Ian Coss recently recorded a nine-part retrospective series on the Big Dig for Boston’s NPR affiliate GBH News. A local, he had heard of the traumatic story of the Big Dig, its cost overruns, the insane construction delays and the herculean efforts by Boston’s leaders to bring the unmitigated disaster of a project to a final close. But what he discovered across more than 100 interviews and assiduous research was a very different narrative: the Big Dig — considered in its totality and context — was a massive success. In fact, it was such a success, we might consider doing such a megaproject again somewhere else, and soon.

On the expense side of the equation, many of the project’s cost overruns were not, in fact, overruns. According to Ian, the federal government’s modeling of construction costs failed to take into account inflation during the 1970s and early 1980s (hint: inflation wasn’t low then), which meant that the massive and lengthy Big Dig project would see its costs multiply just to account for already-known inflation. Such positioning no doubt helped with early traction to get the project underway from politicians and the public, but astonishing increases in cost estimates soured the perception of competent management.

It’s on the benefits side of the equation though that Ian makes his strongest argument. With the Big Dig now finished for more than a decade, we can see the extent of evolution in Boston’s urban landscape, and it’s astonishing. The Seaport district (where I once lived) has gone from a handful of converted loft apartment buildings to now dozens of skyscrapers holding residences, offices and hotels. Before the Big Dig, the Seaport was all but unreachable without crossing the highway that cut it off from the rest of downtown Boston.

The cut through central Boston that once held the Central Artery freeway has now been replaced with a greenbelt park that flows through dense neighborhoods like North End, which now have much more fluid access to the rest of the city. Transportation options like Amtrak’s Acela stop South Station are now easily accessible from the financial district. Perhaps most importantly, traffic in the tunnels is significantly reduced compared to the congestion that the Central Artery offered commuters for years (although ask any so-called MAsshole driver and they will certainly scream at you otherwise).

The Big Dig cost upwards of $15 billion, although no one really knows how to calculate the true cost of the project. In reflection and over time, that value increasingly seems like a bargain for rejuvenating one of America’s founding cities and opening up whole new neighborhoods for residents and office workers.

So how do we measure audacity? Ambitious projects are always going to induce sticker shock; after all, there’s rarely a discount bin for boldness. Announce the true cost of one of these projects, and even if accurate, the immediate revulsion will occlude even the slightest spark of imagination of what is possible. Maybe we’re so inured to failure that we just want these big ideas shot down lest they gain momentum and start to terrorize us.

I think Ian’s key point though is important to remember: sometimes, it really takes the megaproject to make it all work. The waterworks and water wars of California eventually transformed the state into the most productive agricultural region of the United States while also producing that city of quartz, Los Angeles. Pierre L'Enfant’s design for Washington DC brought a grandeur to a young nation’s capital that was sorely lacking amidst the swamps of the Potomac. Energy projects from the Hoover Dam to the expansion of fracking and massive solar installations have brought abundant energy that has powered modernity for all of us. The occasional megaproject — well-designed, well-planned and well-executed — has the ability to transform our lives for the better.

🔊 Listen to “The most wasteful infrastructure megaproject that wasn’t

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