Nov 7, 2016
Americans on Tuesday will vote to elect the next president of the United States. It is not clear who will win, but one thing is certain: the next commander-in-chief will have promised a large package of infrastructure spending.
Democratic candidate Hillary Clinton has a
plan to spend $275 billion over five years. Her plan includes $250 billion of direct public investment in
prioritieslike roads, bridges, airports, and clean energy. A further $25 billion would fund a national infrastructure bank. Clinton has
stated that these investments would be one of the
two major initiatives of her first 100 days in office. (The other would be comprehensive immigration reform). Donald Trump, the Republican candidate, has
said he wants to double the amount of infrastructure spending proposed by his Democratic opponent.
Why the bipartisan interest in infrastructure? For one, we have failed to address it in the past. According to William Galston, "Over the past three decades, America has
systematically underinvested in infrastructure by about 1% of GDP each year, resulting in a shortfall of trillions of dollars.” As a result, we are a nation of bridges, roads, and airports that the American Society of Civil Engineers (ASCE)
gives an overall grade of D+. Despite ranking third on the World Economic Forum’s Global Competitiveness Index, the United States
ranks 11th on infrastructure. In 2013, the ASCE
estimated that the United States needed to invest $3.6 trillion by 2020.
We are a nation of bridges, roads, and airports that the ASCE
gives an overall grade of D+.
The timing of these demands may not be bad, given today’s tantalizingly low interest rates. US 10-year Treasury bonds are
yielding less than 2.0%. At some point, rates will rise, resulting in the need to pay more interest on borrowed money. But financial costs are not the only consideration. As Philip K Howard
writes, "Delays due to infrastructure bottlenecks cost about $200 billion per year on railroads, $50 billion per year on roads and $33 billion on inland waterways.” Not fixing crucial conduits of commerce exacerbates everyday inefficiencies.
The benefits from investing in infrastructure would be numerous. First, it could give the economy a much needed and almost immediate boost during a time of stubbornly low growth. According to
one paper, "In the short-run, a dollar spent on infrastructure construction produces roughly double the initial spending in ultimate economic output.” Infrastructure investment could also boost long-term growth. Over 20 years, the authors of that paper note, every $1 spent on infrastructure can
generate $3.20 worth of economic activity. According to McKinsey, investing dollars in this way
could "boost GDP by about 1.3 percent,” and create 1.5 million jobs.
A second, less-discussed benefit of investing in our physical infrastructure is it would likely help fight climate change. According to a report summarized in the
Guardian, "60% of the world’s greenhouse gases are
associated with ageing power plants, roads, buildings, sanitation and other structures.” This means that investing in clean energy and improving our transport system might have a needle-moving impact on the challenges of climate change.
Sure sounds like spending on infrastructure is a no-brainer, right? Not so fast; there are important caveats. For one, as Politco’s Danny Vinik
points out, there are already widespread labor shortages in the construction industry, so a wave of new projects might simply shuffle resources rather than generating net new economic activity. According to the National Association of Homebuilders, the U.S. currently
has 200,000 construction jobs unfilled. A survey conducted by the Associated General Contractors of America
found that 69% of contractors were "having difficulty filling hourly craft positions.” And imposing new demands on a tight labor market may generate higher wages and stoke inflation, disproportionately affecting small and medium sized businesses.
There are already widespread labor shortages in the construction industry.
Another limitation is the massive challenge of actually implementing infrastructure investments. Many projects funded by the 2009 stimulus package
took much longer to get off the ground than anticipated. As President Obama
admitted, "there’s no such thing as shovel-ready projects.” Of course, this is not an argument against pursuing them, but it probably does limit the speed at which these projects will impact the economy. Notable exceptions, Larry Summers
points out, include deferred maintenance projects, which "do not require extensive planning or regulatory approvals.”
Regardless of the difficulties, however, there is no doubt that the United States is in massive need of infrastructure investment. One barrier to making it happen, notes comedian John Oliver, is that it’s not “sexy.” As he points out, millions of us head to the movie theaters each summer to see movies that depict “our infrastructure threatened by terrorists or aliens." “But,” Oliver adds, “we should care just as much when it’s under threat from the inevitable passage of time. The problem is, nobody has made a blockbuster movie about the importance of routine maintenance and repair….Or they hadn’t—until now.” Oliver then
presents a movie trailer rendering of what a Hollywood endeavor focused on infrastructure upkeep and investment might look like.
Hollywood blockbuster or not, the infrastructure boom is coming – regardless of who occupies the White House next year. It won’t solve all of our economic problems, and it may even exacerbate some situations, but it’s needed and will help. But perhaps the best thing we can all do is to stop thinking about infrastructure investing as an economic tool. Instead,
as advised by Roger McNamee of Elevation Partners, we need to "start thinking about it as a strategy...economic stimulants produce Bridges to Nowhere. Strategic investment in infrastructure produces a foundation for long-term growth."
Vikram Mansharamani is the President of Kelan Advisors, LLC and the author of Boombustology: Spotting Financial Bubbles Before They Burst(Wiley, 2011). To learn more about him or to subscribe to his free mailing list, visit hiswebsite. He can also be followed on Twitter @mansharamani or by liking hisFacebook page.
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