U.S. Infrastructure Spending: No Time to Get Cheap

Infrastructure outlays not only improve the public well-being but also boost returns for the private sector, says columnist Chris Farrell

By Chris Farrell

It's hard to imagine at the moment, with America's fractious and politically vicious midterm elections drawing near, but the outline of Round Three in the federal government's efforts to stimulate the economy is becoming clearer.

Round One came in late 2008 with the Bush Administration's bank bailout and the Federal Reserve's easing of monetary policy. The defining initiative of Round Two was the Obama Administration's nearly $800 billion fiscal stimulus package signed into law on Feb. 17, 2009 (along with more Fed easing).
Round Three is largely based on—who else—the Fed taking steps to bring down long-term interest rates even more by buying up U.S. Treasury securities, the so-called quantitative easing. The fiscal lever this time around? A boost in infrastructure spending.
The latter initiative is vulnerable, of course. The Obama Administration on Oct. 11 proposed a $50 billion up-front investment in highways, roads, and the air transport system. That's on top of the $68 billion infrastructure spending that was part of the 2009 fiscal stimulus bill, money earmarked for highways, rail, transit, broadband, school modernization, water treatment, and airport improvement. The Administration has also proposed an "infrastructure bank" to cut down on duplicate projects and to attract private capital as co-investors in various initiatives.

Worries About Fiscal Policy

Large capital projects on infrastructure traditionally appeal across party lines since so many constituents benefit from the investment. But that traditional political calculation may not hold in an era when the Tea Party movement is repelled by the federal government's red ink and even a silent majority of more mainstream political participants seems to share a common worry about the soundness of fiscal policy.The backlash against government spending carries over to the state level.For instance, New Jersey Governor Chris Christie cited the cash-strapped state's finances when, on Oct.7, he cancelled its participation in an $8.7 billion-plus train tunnel project under the Hudson River.
But the embrace of fiscal conservatism, while understandable, risks ignoring what should be a top priority for the nation's long-term economic health. For one thing, the Aug. 1, 2007, tragic collapse of the I-35 bridge in Minneapolis vividly signaled the nation's deteriorating infrastructure. The investment need is there. For another, it's the kind of government spending that not only yields public quality-of-life benefits; it also raises private rates of return.
And with the government's cost of investment capital extremely low—taken a look at Treasury yields recently?—and heading even lower, the hurdle rate for a positive rate of return on government expenditures won't be hard to reach.
"Spending now on infrastructure stimulates the economy in a way that will help provide for long-term higher economic growth that will increase future tax revenue and bring down the debt-to-GDP ratio," says David Aschauer, economist at Bates College. He's the author of an influential set of research papers from the late 1980s and early 1990s on the effect of infrastructure spending on national productivity. "It's real supply-side economics." (One of Ashauer's better-known articles, "Why Is Infrastructure Important?" is available on the Boston Fed's website.The late Edward Gramlich, economist and former Federal Reserve Board governor, wrote a critical review of the infrastructure/productivity literature of the time in "Infrastructure Investment: A Review Essay," which can be found on the World Bank's site.)

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