The Next Tool in the Tool Chest

Historically, the U.S. economy has grown about 3% a year. But since 2008, there has been a marked downshift to the 1%-2% range. How best to get the patient up and out of bed? Growing the nation’s workforce would spur economic growth but the prospects here appear limited due to our low birth rates and levels of immigration. Making each worker more productive is the other option but, unfortunately, the track record here too is not encouraging. Since 2006, growth in real output per worker averaged 0.9%, well below the 2.1% rate logged over the 1996-2005 period.

In the face of these limitations, policy makers have relied on monetary policy tools such as low interest rates and massive Quantitative Easing (bond buying) programs to stimulate growth. While this approach helped us recover from the Great Recession, there is growing agreement today that these tools are having a diminishing, and possibly even negative, impact on the economy. As a result, economists are now increasingly looking to fiscal policy measures such as boosting infrastructure spending as a remedy.

This response makes a lot of sense. As the chart to the right shows, the nation’s infrastructure is aging. Many of our bridges and roads were built 40-50 years ago and as the recent crisis in Flint, Michigan illustrates, many municipal water systems around the country are in drastic need of repair. A recent study by the American Society of Civil Engineers gave the U.S. overall infrastructure a D+ grade and claims that we need to invest a total of $3.6 trillion by 2020 to bring it up to acceptable levels.

The U.S. is not the only country suffering from under investment. Over the last several decades, infrastructure spending as a share of GDP has been trending lower in much of the developed world (see below). The developing world, which has historically spent more, shows no sign of letting up. A study by Oxford Economics and consultancy PwC forecasts global infrastructure spending of nearly $78 trillion between 2014 and 2025 with 60% of that coming from the Asia-Pacific region.

Despite the obvious need, securing funding for infrastructure projects here in the U.S. will not be easy. Constrained budgets, growing political grid-lock and regulatory burdens have stymied many proposed projects. Perhaps the greatest problem is that in the absence of a crisis, allocating scarce dollars to simply maintaining infrastructure carries little political appeal. But there is some reason for hope. The current low level of oil prices is allowing many states to increase the gas tax as a way of funding new highway projects. Tapping into private funding too through joint venture arrangements may provide additional capital going forward. 

The research on infrastructure investments is mixed. For every study on the economic benefits of such spending, there is one highlighting the waste and misallocation of capital that can result. Most economists agree, however, that infrastructure projects focused on meeting specific, well-identified needs and that pass a rigorous cost-benefit analysis can yield sustained economic benefits. Whether such projects can survive the necessary state and federal approvals remains to be seen.