16 September 2009
Can Infrastructure Spending Lead the Way to Recovery?
Better roads stimulate economy now, lay foundation for long-term growth
Washington — U.S. government officials believe that modernizing the country’s transportation infrastructure not only will make travel and shipping goods easier and safer, but also will stimulate the economy.
Many analysts agree. “Infrastructure spending has very high returns and it’s very worthwhile for governments to invest in,” said Mark Zandi, chief economist at Moody’s Economy.com. “Because we’ve underinvested, a lot of our infrastructure is old and [constitutes] a threat; some of it is crumbling.”
Economic stimulus legislation implemented in 2009 provides $135 billion in government funds for infrastructure projects. Every dollar of infrastructure spending adds between $1.50 and $1.75 to the gross domestic product a year later, according to Zandi. Construction projects create jobs, and construction workers funnel their earnings into the broader economy. Money also flows to material and equipment suppliers, who in turn create more jobs.
Every $1 billion in nonresidential construction creates 28,500 jobs, of which one-third are direct construction positions, one-sixth are supplier positions and the rest are positions created through spending by business owners and workers filling those positions, according to a study by George Mason University professor Stephen Fuller.
The largest chunk of the 2009 stimulus funds dedicated to infrastructure goes to transportation projects. The rest goes in descending amounts to buildings, energy and technology, water and other environmental projects, according to Ken Simonson, chief economist for the Associated General Contractors of America, the trade group that commissioned Fuller’s study.
“This is a great time to do construction because materials costs are substantially lower than they were a year ago” and contractors are more available, Simonson said. “The biggest reason to be putting stimulus money into infrastructure instead of other uses is the long-term benefit it provides to the economy.” He cited other long-term benefits, including pollution reduction and improvements in productivity, quality of life and safety. Better roads, for instance, mean fewer traffic bottlenecks, which are costly to shippers.
Tony Dorsey, of the American Association of State Highway and Transportation Officials, said that a Washington-area project to widen a bridge from six to 12 lanes has made it dramatically easier to travel up and down the Eastern Seaboard. Furthermore, Dorsey said, safety will improve when future roadways communicate information about driving conditions to vehicles and when vehicles communicate with each other to avoid collisions.
Some economists caution that massive infrastructure spending failed to pull Japan out of recession in the 1980s. But Zandi counters that the Japanese had already invested heavily in their infrastructure, so they experienced diminished returns. In the United States, he said, there is a clear need for more investment.
The United States has woefully underfunded its national infrastructure, according to a bipartisan congressional commission, the National Surface Transportation Infrastructure Financing Commission. “Our surface transportation system has deteriorated to such a degree that our safety, economic competitiveness and quality of life are at risk,” a commission report says.
Between 1980 and 2006, traffic roughly doubled, while the number of highway miles grew by less than 5 percent, the report says. Real highway spending per mile traveled has fallen by nearly 50 percent since the late 1950s.
The needs are so great that the stimulus spending can be seen only as a down payment, according to the commission. The gap between available and needed infrastructure funding will total nearly $400 billion from 2010 to 2015 and will grow to $2.3 trillion through 2035, according to the commission. Mobilizing funds of this magnitude will be a challenge at a time when the government is running deep budget deficits and the cost of guaranteed social benefits looms larger and larger.
In the long run, the U.S. needs a more efficient and better coordinated process for infrastructure financing and development, the report says.
Traditionally, the country has relied on a gas tax to pay for highway repairs, but the tax has not been increased since 1993. Options on the table include a national infrastructure bank, greater use of bonds, public-private partnerships and increased use of toll roads.
The full text of Fuller’s congressional testimony on his study (PDF, 150K) is available from the House of Representative’s Committee on Transportation and Infrastructure.
The full text of the report by the bipartisan congressional commission can be viewed on the commission’s Web site.
Smart-Grid Planet