Time for infrastructure investment
"Every valley shall be exalted, and every mountain and hill shall be made low: and the crooked shall be made straight and the rough places plain." Isaiah 40:4
Groups that are usually at odds, including liberals and conservatives, Republicans and Democrats and business and labor, often agree, at least in general, about the value and importance for the economy of infrastructure investment. An unusual confluence of events suggests that now might be the time to focus on these types of investments.
Infrastructure is broadly defined as the facilities and services that support the functioning of the economy. The term includes transportation (roads, bridges, rail, airports, etc.), energy generation and transmission, communications, water and public sanitation facilities that undergird production and consumption activities in the economy. Infrastructure is often provided by governments, but the private sector is also deeply involved. The term is sometimes expanded to include education services.
Although economists have not been able to decompose precisely the contributors to productivity growth such as private firm-specific capital investment, human capital investment and infrastructure investment, infrastructure is clearly an important input in most production processes and a key contributor to economic growth.Since it is always important, why is now the time for a special focus on infrastructure? First, there has been a general neglect of public investment in recent years. For example, the federal gasoline tax that funds road and mass transit has not been increased since 1993.
Since it is a specific tax (denominated in cents per gallon), inflation has eroded revenues in real terms as has increasing fuel efficiency that has reduced the taxes per mile driven. In addition, much of the mid-20th century public investment such as the interstate highway system is aging and in need of renovation. For example, former Gov. Jim Thompson characterized the 30-year old State of Illinois Building in Chicago (named in his honor) "a scrap heap. ... It's terrible, just terrible." Even if the alarmist warnings such as potential bridge collapses are exaggerated, continuing maintenance and updating remain important.
The near-zero interest rate environment that has persisted since the 2007-2009 recession also provides an unusual opportunity. The interest rate is a measure of the opportunity cost of directing resources to activities that will produce future benefits. In a recent blog posting, former Fed Chairman Ben Bernanke paraphrased a statement by Nobel-winning economist Paul Samuelson that echoes Isaiah: "At a negative (or even zero) interest rate, it would pay to level the Rocky Mountains to save even the small amount of fuel expended by trains and cars that currently must climb steep grades." This is clearly an overstatement since low rates will not continue indefinitely, but the low rates provide a strong incentive for investment.
Not only are interest rates low, but most other inputs including labor that are needed for infrastructure development are available at relatively low cost. A recent Wall Street Journal headline read: "World awash in too much of almost everything." While infrastructure investment is still far from free, now is a propitious time for action. Low fuel prices provide a window for increasing energy taxes in a relatively painless way to pay for some of these investments.
An infrastructure investment program should not be confused with Keynesian stimulus programs such as those enacted in the recent recession. The prime goal of these programs was to stimulate economy on the demand side through public spending and tax cuts with relatively little concern for the intrinsic merits of the programs. Targeted infrastructure investment, however, is intended to increase the overall productivity of the economy. The results should not be measured in terms of jobs created in the construction phase for new investments, but in long-term increases in productivity created by the public capital.
If as suggested there is a convincing case for infrastructure investment, hard decisions remain. Infrastructure is not a homogeneous good. Decisions must be made about what types of investments have the greatest potential, the mix of public and private investment and the methods of financing activities. We should not wait too long.
This outcome is far from certain.
Economist J. Fred Giertz is on the faculty of the University of Illinois' Institute of Government and Public Affairs. He can be reached at 217-244-4822 or email@example.com.