What an infrastructure bonanza could mean for America’s economy

on Jun24
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JOE BIDEN’S plan to lavish spending on infrastructure is a crucial part of his bid for a transformative presidency. Much of the first tranche of around $2.7trn, now entering the meatgrinder of congressional politics, will be spent on greening the American economy and tackling inequalities. About a quarter will be directed towards overhauling transport, water and other basic infrastructure—a vast sum, by recent standards. Bridges to nowhere and white elephants are not the stuff of which proud legacies are made, and history’s view of the bill will depend on its specifics, which are still to be determined. Yet economic research suggests that, in the right circumstances, basic infrastructure spending has significant, positive effects in the long run.

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A clear understanding of infrastructure’s contribution to growth has been a long time coming. In 1944 Leland Jenks, an economic historian, extolled America’s railways as a transformative force, noting that “the conviction that the railroad would run anywhere at a profit put fresh spurs to American ingenuity and opened closed paddocks of potential enterprise.” Yet Robert Fogel, a Nobel-prizewinning economist, argued in 1964 that the “social savings” generated by railways—the contribution to economic growth relative to alternatives, like canals—was in fact rather modest: worth perhaps at most 3% of annual output in 1890.

Economists’ attempts to grapple with the effects of infrastructure spending intensified around 1990. David Aschauer, then of the Federal Reserve Bank of Chicago, argued that the size of the public capital stock contributed substantially to productivity and that the end of America’s post-war infrastructure-spending spree was an important cause of the slowdown in productivity growth in the 1970s. Assessing this claim was not easy. Untangling causation presented problems, for instance: does infrastructure investment cause fast growth, do fast-growing economies demand lots of investment, or are both things caused by some other factor?

Subsequent research suggested that infrastructure spending does indeed lift growth in output and productivity. John Fernald of the Federal Reserve Bank of San Francisco tackled the causation issue by studying whether new spending on roads subsequently raised productivity in industries that use roads intensively, relative to others that do not. His analysis determined that post-war road-building was both a good investment and a boon to growth; it contributed about one percentage point more to productivity growth across the economy before 1973 than it did thereafter. More recent work by Valerie Ramey of the University of California, San Diego, arrives at a similar conclusion. She estimates that a 1% increase in the stock of public capital is associated with a rise in output of 0.33%: a figure slightly below but very close to past estimates, including Aschauer’s.

What impact then would an infrastructure bonanza have, if it makes it through Congress? As both Mr Fernald and Ms Ramey note, the value of new investment depends upon the state of the infrastructure already in place. The second high-speed transport link between two cities is unlikely to have the same positive economic impact as the first. How much America stands to benefit from new spending will depend in part on its needs.

A burst of investment does seem overdue. While spending on most sorts of infrastructure, adjusted for inflation, has continued to climb in recent decades, net investment—taking account of depreciation of an ageing capital stock—has not. Growth in the real net stock of transport capital per person, which rose above 2% in the 1960s, subsequently dropped below 1%; in the aftermath of the financial crisis it sank to nearly zero. Spending on most other sorts of infrastructure has followed similar trends (with the exception of digital capital). Mr Biden’s proposal also allocates large sums to measures intended to reduce and protect against climate change, like electric-vehicle infrastructure and retrofitting homes and buildings, which could raise output in the future by reducing the economic cost of climate change.

Money alone will not solve all problems, though: infrastructure spending does not, for instance, reduce congestion. Studies consistently show that new transport capacity does not reduce gridlock over the long run, because free-flowing traffic attracts new users until roads and railways fill up once more. Breaking up jams, economists reckon, requires charging users for access to transport capacity, through tolls or other fees. Such a policy could both raise money and improve the efficiency with which transport is used, but it has proved politically difficult to implement.

Roadway Joe

Yet new transport investments could subtly reshape America’s economic geography. Past spending has had profound effects on the location of activity. America’s interstate highways drove the country’s socially transformative suburbanisation, for example. Work by Nathaniel Baum-Snow of the University of Toronto concludes that but for the construction of the interstate highway system, the populations of American cities would have grown by 8% between 1950 and 1990; instead they shrank by 17%. A reassessment of Fogel’s estimates of the impact of railways by Richard Hornbeck of the University of Chicago and Martin Rotemberg of New York University, which considers their wider impact on the economy, suggests that without the railways America’s GDP in 1890 would have been around a quarter smaller. The massive shift in population they brought about altered not only the American economy but the very idea of what America was and could be.

A new era of large-scale infrastructure investment would necessarily be less revolutionary than the railways and roads of the past. Yet it might nonetheless prove surprisingly transformative in its direct economic impact, its knock-on effects on private industry—and in the psychological spur it provides to a country that could do with a bit of reinvigoration and renewal.

This article appeared in the Finance & economics section of the print edition under the headline “Building a boom”

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