Massive Infrastructure Spending is a Win-Win-Win-Win-Win
Former Democratic Pennsylvania governor Ed Rendell and Republican mayor Scott Smith of Mesa, Arizona have a piece in yesterday’s Wall Street Journal (subscription required) noting that the U.S. lags many other countries in infrastructure spending.
“As recently as 2005, the World Economic Forum ranked the U.S. No. 1 in infrastructure economic competitiveness. Today, the U.S. is ranked 15th. This is not a surprise considering that the U.S. spends only 1.7% of its gross domestic product on transportation infrastructure while Canada spends 4% and China spends 9%.”
While China’s not a good comparison, because any developing country has greater infrastructure needs and correspondingly higher ROIs on those investments, Canada makes a pretty good comparison. According to Rendell and Smith, Canada spends more than twice as much as the U.S. on infrastructure as a share of GDP. Now, we’re different from Canada in meaningful ways including geography, population density, and tolerance for socialistic European ways, but still – that’s an enormous difference. So it should be no surprise that we have such a large and growing backlog of needed infrastructure spending.
How large? The American Society of Civil Engineers (ASCE) estimates that we need to spend $2.2 trillion dollars on infrastructure in the next five years to clear the backlog of needed, outdated, and crumbling infrastructure. While ASCE has a clear conflict of interest, which means I don’t trust their number, the validity of their point is made clear by stories like the Minneapolis bridge collapse or the 2008 break of a 66″ water main just outside the Maryland Beltway that transformed River Road into, well, River Road.
Here’s an example of the need. A report in last Sunday’s Lancaster, Pennsylvania newspaper cited recent studies that tagged about 25% of all bridges in Pennsylvania – more than 5,000 – as “structurally deficient.” The estimated cost of completing the needed repairs and upgrades is $8.7 billion, but Pennsylvania’s budget is just $600 million per year – not enough to keep up with ongoing deterioration. The state has already chosen to close a few small bridges rather than fix them; this will become more common in the coming years unless additional funding sources are identified, and even then it will take many years to catch Pennsylvania bridges up.
Unless, that is, we come to our senses as a nation and take advantage of the opportunity the current economy has provided. That’s right: opportunity.
- Unemployment is at 9.1% nationally; among construction workers it’s 13.6% – a number that will climb as American Recovery and Reinvestment Act (ARRA) stimulus spending ends. There are plenty of available workers who can be hired by governments today without any concern about crowding out private investment or creating a shortage of workers.
- Interest rates on federal government debt are at all-time low levels; the government can borrow money for 5 years at 1% per year, for 10 years at less than 2.5%, and for 20 years at less than 3.5%. With rates so low, government borrowing can’t rationally be blamed for much of a reduction in private sector borrowing (though some still try).
There’s no logical reason we shouldn’t be borrowing huge amounts of additional money to fund clearing as much of the infrastructure backlog as we can.
In Pennsylvania, it would take 15 years for the state to pay for current bridge repair needs, $600 per year. But if the federal government was the intermediary, selling Treasuries to fund all $8.7 billion of work in the next few years, all the work would be done in the near-term, employing tens of thousands of workers idled by the private sector. Paying off the debt could be accomplished by a combination of taxes collected on the construction projects, reduced unemployment benefits, and Pennsylvania’s annual bridge budget, which would pay off the debt in 15 years or less.
Look at the benefits if the federal government gets involved: Pennsylvanians gets needed infrastructure sooner; tens of thousands of our fellow citizens get work now when they need it; potential future crowding out of private investment is eliminated; and state and federal budgets aren’t impacted at all.
It’s a win-win-win-win-win.
Rendell and Smith say that Canada spends 4% of its GDP on infrastructure and the U.S. spends 1.7%. That gap, 2.3% of GDP, is about $345 billion per year. A quick look at construction job creation estimates from infrastructure spending (7,000-10,000 jobs per $1 billion of spending) makes me think it’s not reasonable for us to spend another $345 billion per year. We just don’t have enough construction workers! Besides, it’s unclear to me that we should spend as much as Canada. But we have two million fewer construction jobs today than we did four years ago – a number that will increase as ARRA winds down this year.
So why not fund infrastructure spending to create two million construction jobs for two or three years? This would be $200-$285 billion per year of additional infrastructure spending, bringing it up perhaps as high as 3.6% of GDP for a couple of years.
But didn’t we try big infrastructure spending with the stimulus? Actually, no. Of ARRA’s $800 billion over more than two years, only $70 billion to $100 billion went to funding infrastructure spending. The vast majority went to tax cuts and grants to states in support of education, Medicaid, and unemployment benefits.
Suppose we made the new jobs stimulus a $250 billion per year program for 2 or 3 years. This would be 5-7 times more infrastructure stimulus per year than ARRA provided, while costing less; as with the Pennsylvania bridges, stimulus-created tax revenue, reduced safety net spending, and already-planned future state and local budgets would go a long way to repaying the new debt.
This level of infrastructure spending could create between 1.75 million and 2.5 million construction jobs, and another 1-2 million indirect support jobs, at a time when 14 million people are unemployed. And this doesn’t include downstream multiplier effects of those people’s impact to the economy – the jobs supported by 3-4 million people spending their earnings. The impact on unemployment would be huge, cutting the unemployment rate by as much as 2-3 percentage points. Absent Great Depression II, the private sector will be in recovery mode by 2015, and private construction jobs will replace public ones.
The real challenge is getting as much of this work going as quickly as possible. It would require a massive, coordinated effort at all levels of government. Don’t get me wrong, this is a big challenge – but the potential payoff is enormous.
The U.S. has failing bridges, water systems, and levees, insufficient and poorly maintained roads, and seven million fewer people working today than four years ago. If we can put four million of them to work now on projects financed at historically low rates that we’ll have to pay for in the next decade anyway, why wouldn’t we?