Earlier this month, the US Senate passed the Infrastructure Investment and Jobs Bill (HR 3684) in an overwhelming bipartisan vote. This bill begins a multi-year, $ 1 trillion effort to improve roads, bridges, water and sewer systems, broadband, the electrical grid, and other mostly traditional infrastructure projects.
This is the type of legislation that has both principled opposition and support. In other words, this is a normal law. One way to think through this law is to consider the amount of that spending and what infrastructure spending will and will not do for the economy.
This bill spends around $ 1 trillion on infrastructure over several years. The total value of public infrastructure in the US is approximately $ 30 trillion. Our annual federal budget is about $ 4.5 trillion per year, and state and local tax levies add another $ 1.8 trillion per year. Spread over seven years, this corresponds to an investment of around 0.4 percent of the total capital stock and 2.2 percent of state and municipal tax revenues.
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In that context, let’s compare this bill to a homeowner who makes $ 50,000 a year and owns a $ 150,000 home. The infrastructure bill is roughly $ 600 to $ 1,100 for house maintenance, repairs, and remodeling. I’m not a fan of budget comparisons of public spending, but this at least offers a scale of spending. However, this comparison ignores some state and local contributions and ignores the fact that public infrastructure has a much longer lifespan than private infrastructure.
Many people consider infrastructure issues as a job creator. While it is true that this spending tends to create jobs in construction and manufacturing, the inevitable taxpayer money that goes into it kills jobs in other sectors. Even if these expenses are financed through loans, the real benefit lies elsewhere. It is also true that there will be a large shift in jobs from one industry to another, and possibly from one year to another. It is by no means certain that there will be net employment growth. The real benefits of infrastructure spending don’t lie in the short-term construction jobs.
The efficiency of public infrastructure is an essential part of economic growth. Private companies do not see a direct return on investment for public roads, bridges, sewers or water systems, but overall productivity can be affected. And productivity – how much a worker produces each year – is the key to economic growth. Here are the potential benefits of infrastructure spending.
The decision to invest more in public infrastructure is really a decision about the relative productivity benefits of public and private spending. Every new tax dollar spent on public infrastructure reduces investment in private infrastructure. So spending on this infrastructure bill necessarily draws money away from private investors who would otherwise spend it on urban housing, research and development, more productive capital, or private facilities.
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 cost of borrowing suggests that businesses are getting low returns on investing in new plant and equipment. Today’s interest rates on new plant and equipment are at historic lows. There isn’t enough demand for investment money to drive interest rates high, suggesting that the productivity benefits of private investment are historically low.
In contrast, the low interest rates make government borrowing unusually cheap. The 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. That means we can borrow for long-term infrastructure improvements in a rare window of time, but only if that spending improves the productivity of the economy.
If done well, the real benefits of these expenses would be improved productivity associated with updating infrastructure. Some advantages are obvious. Roads and many railways are heavily congested, resulting in wasted fuel, damage to delivered goods and loss of time for workers. There are many hundreds of economic studies that quantify these types of losses.
A common example for comparison is the US air traffic control system. Today’s system is so antiquated that it costs the average passenger more than half an hour of additional waiting time per flight. This waste alone costs billions of dollars a year, but repairing the system can cost a billion dollars. So when you compare the $ 1 billion that airlines spent privately trying to improve their onboard WiFi with $ 1 billion that was spent upgrading the air traffic control system, the benefits of public infrastructure spending become pretty obvious.
To be fair, this example is only helpful in understanding the problem. The air traffic control problem is obvious and airlines could spend their own money to improve air traffic control. I would support the privatization of air traffic control, but that does not seem politically feasible. In the meantime, upgrading the system is a good investment.
There are many other investments that have obvious benefits. Many of our nations’ water and sanitation systems are in dire need of investment. The Flint debacle, Michigan’s water system, could repeat itself in dozen, if not hundreds, of cities across the country. A surprising percentage of urban water pipes in US cities are nearing a full century of service. The cost of replacing them is high but, considering the impact, potentially much lower than if they were to fail.
Some of the investments will accelerate the move away from coal as an energy source. That transition would have been impossible 10 years ago, but a growing proportion of Americans understand that we are going beyond coal as an energy source. It is significant that both West Virginia senators voted for the infrastructure bill.
It is too much to say that America’s infrastructure is crumbling, as the annual report of the American Society of Civil Engineers suggests. Of course, they may not be completely disinterested observers. However, there are many examples of real problems that the spending in this Infrastructure Act will at least partially address.
There is fundamental opposition to this bill. A trillion dollars is a lot of money and our national debt must be a cause for concern, even if it is not an immediate concern. A better bill would be implemented more slowly, with a better cost-benefit analysis of the projects. Still, it’s refreshing to see so widespread support for legislation on an issue that American politicians 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.