Archive Hosted by the AFL-CIO

Value-added Public Service

July 05, 2011 By Lee Egerstrom, Economic Development Fellow

State services being shutdown is shattering one widely held myth that government doesn’t generate wealth. That being the case, let’s turn chaos into another teaching moment and look at a concept that is generally ignored or not understood in America and here in Minnesota.

This other concept is actually a strategy called “value-added public service.” Economists and port officials at the Port of Rotterdam used that term 25 years ago as they sought to increase the economic importance of Europe’s largest port.

The strategy was to add value to cargo entering or leaving the port at least three times before it went on to other destinations, the port’s chief economist explained to me while on a sabbatical in Rotterdam. Adding value took different forms from partial processing of bulk cargo, manufacturing at port sites, and especially from logistics, legal and financial services for shipments farther up or down the supply chain.

These higher economic value business functions were carried out by the Dutch and multinational firms doing business in Rotterdam. But they were assisted by the services and infrastructure provided by the public port authority.

The concept of value-added public service is evident at our own ports of Duluth and Superior, notes Ron Johnson, trade development director for the Duluth Seaway Port Authority.

Duluth doesn’t use the term. But the dozens of specialty trade and service companies operating out of the Twin Ports, and the multiplier effect of these economic activities for Duluth and the region carry out what was Rotterdam’s expressed strategy.

The most recent economic analysis of the Duluth port is now eight years old, Johnson said. A new study to update data is underway. At the same time, the port does point to an understated annual economic impact of $210 million from port activities, more than 2,000 jobs dependent on the port, more than $2 billion in cargo shipped annually through the port, and the average of 1,150 visits by domestic and foreign vessels each year. (For more on Minnesota ports see our December 2010 report, Moving Minnesota to Market by Water.)

Still, there are libertarians among us who insist government doesn’t generate wealth and thus were content seeing the government shutdown.

Minnesota news media have done a thorough job, however, of showing links between local and state economies and basic state services. By extension, these reports do show that government and public services do generate wealth.

This happens when public services assist businesses in growing by lowering what economists call transaction costs, and by stimulating economic activity through helping the most unfortunate among us consume goods and services.

All of these ties have to be ignored by people content with shutting down government services. Again using Duluth as an example, the port’s directory of businesses shows 28 different categories of trade-related companies working at the port, and nearly all categories involve multiple competitive firms.

The most complicated area of value-added public service is in lowering transaction costs that hinges on efficiency in markets and fulfillment of contracts. Nobel laureate Douglass North at Washington University in St. Louis has supplied the world with research proving the importance of these services, but such work is conveniently ignored by both the far right and the far left and by the businesses that are the primary beneficiaries of these services.

Meanwhile, the most hard-hearted among us like to dismiss public service as simply meeting basic human needs for other people’s problems. This ignores the economic benefits to retailers and local service providers that come from meeting basic needs, which the federal food stamp program has demonstrated over the years. And it ignores the harder to see impact of not meeting basic human needs for health and welfare that comes back to haunt the general public with higher costs for goods and services.

Class frictions may be part of the reasoning behind neglect and inadequate public services. But this inflicts a terrible price on all citizens over time. The indifference to this from St. Paul policymakers mirrors that in Washington and is promoted by the same narrow special interests.

Meanwhile, any Minnesotan using the current state crisis to weigh economic benefits of public services might like another lesson from the Netherlands. The Dutch are hosts to a huge number of American and Minnesota multinational firms, and especially our technology companies.

Logistical services are a Dutch strength and not just for water borne commerce. Education and language skills of the Dutch workforce are others and help companies reach markets throughout the world. The typical equivalent of a high school graduate in Holland is literate in at least three languages and university graduates have added an extra language or two.

The former Rotterdam economist cited above once joked that harmonizing public policies, or removing unfair interventions in the economy to comply with membership in the European Union, did not require the Dutch to downgrade education to a European average.

That is in stark contrast to what is happening to education with the budget battles in Minnesota. What should be clear is that government can generate wealth. Right now, state lawmakers are more intent on squandering it.

Thanks for participating! Commenting on this conversation is now closed.