How to think about the bill on infrastructure



Earlier this month, the Infrastructure Investment and Jobs Act (HR 3684) was passed by the US Senate in an overwhelming bipartisan vote. This legislation launches a multi-year, trillion-dollar effort to improve roads, bridges, water and sewer systems, broadband, the electricity grid and other mostly traditional infrastructure projects.

This is the type of legislation for which there is both principled opposition and support. In other words, it is a normal distribution. One way to think about this law is to consider the magnitude of this spending and what infrastructure spending does and does not do for the economy.

This law spends about a trillion dollars over several years on infrastructure. The total value of public infrastructure in the United States is approximately $ 30 trillion. Our annual federal budget is approximately $ 4.5 trillion per year, and state and local tax collections add an additional $ 1.8 trillion per year. Spread over seven years, this is an investment equal to approximately 0.4% of total share capital and 2.2% of state and local government tax revenues.

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Putting that in context, let’s compare this bill to a homeowner who earns $ 50,000 a year and owns a $ 150,000 house. The infrastructure bill is roughly equal to between $ 600 and $ 1,100 for home maintenance, repair and renovation. I’m not a fan of public household spending comparisons, but it at least gives a scale of spending. However, this comparison misses some state and local contributions, and ignores the fact that public infrastructure has a much longer lifespan than private infrastructure.

Many people see infrastructure spending as creating jobs. While it is true that these expenses tend to create jobs in construction and manufacturing, the inevitable taxpayer dollars used to pay for them destroy jobs in other sectors. Even if these expenses are financed by the loan, the real benefit lies elsewhere. It is also true that there will be strong reallocations of jobs from one industry to another, and perhaps from year to year. It is by no means certain that there will be any net job growth. The real benefits of infrastructure spending do not come from short-term construction jobs.

The efficiency of public infrastructure is a key element of economic growth. Private companies do not see a direct return on investment for public roads, bridges, sewers or water systems, but there can be an overall impact on productivity. And productivity – how much a worker produces each year – is key to economic growth. This is where the potential benefits of infrastructure spending occur.

The decision to invest more in public infrastructure is actually a decision on the relative productivity benefits of public spending over private spending. Every new tax dollar spent on public infrastructure reduces investment in private infrastructure. So spending on this infrastructure bill necessarily takes money away from private investors who would otherwise spend it on urban housing, research and development, more productive capital, or private amenities.

Evaluating these compromises has rarely been easier than it is today. Financial markets tell us a lot about the perceived value of private infrastructure. Low borrowing costs suggest that companies see little return on investment in new factories and equipment. Current interest rates for new plants and equipment are at historically low levels. There is not enough demand for investment dollars to drive up interest rates, suggesting that the productivity benefits of private investment are historically low.

In contrast, low interest rates make government borrowing exceptionally cheap. The rate of return on public infrastructure is devilishly difficult to measure, but at today’s rates it doesn’t have to be high to justify additional spending. This means that we are in a rare window to borrow for long-term infrastructure improvements, but only if such spending improves the productivity of the economy.

So, if done right, the real benefits of these expenses would be the improved productivity associated with updating the infrastructure. Some advantages are obvious. Roads and many railroads are very congested, resulting in wasted fuel, damaged goods being shipped, and lost workers’ time. There are several hundred economic studies quantifying these types of losses.

A common example used for comparison is the US air traffic control system. Today’s system is so outdated that it costs the average passenger more than half an hour of extra wait for each flight. This waste alone costs billions of dollars a year, but fixing the system may be a billion dollar expense. So, comparing the profits of a billion dollars spent privately by airlines to perhaps improve their in-flight WIFI versus a billion dollars spent to improve the air traffic control system, returns the advantage fairly obvious public infrastructure spending.

To be fair, this example is only helpful to understand the problem. The problem of air traffic control is obvious and airlines could spend their own money to improve air traffic control. I would support the privatization of air traffic control, but it seems politically unworkable. In the meantime, modernizing the system is a good investment.

There are many other investments that have clear benefits. Many of our nations’ water and sewer systems are in urgent need of investment. The Flint, Michigan water supply system debacle could repeat itself in dozens, if not hundreds, of cities across the country. A surprising number of water mains in American cities are approaching a full century of service. The cost of replacing them is high, but potentially much less than letting them fail when considering the effects.

Some of the investments will accelerate the move away from coal as an energy source. This transition would have been impossible just 10 years ago, but a growing share of Americans understand that we are moving beyond coal as an energy source. It is telling that both West Virginia senators voted for the infrastructure bill.

It is too much to say that the American infrastructure is collapsing, as the annual report of the American Society of Civil Engineers suggests. Of course, they may not be totally disinterested observers. However, there are many examples of real problems that the spending in this infrastructure bill will at least partially address.

There is a principled opposition to this bill. A trillion dollars is a lot of money, and our national debt must be a concern, even if it is not an imminent worry. A better bill would be implemented more slowly, with a better cost-benefit analysis of the projects. Nonetheless, it’s refreshing to see legislation so widely supported on an issue that U.S. policymakers have ignored for too long.

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics at Ball State University’s Miller College of Business.


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