The economic case for rebuilding America's aging infrastructure
THE REAL ECONOMY |
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While traveling around the country speaking to various groups about the U.S. and global economies, there is one observation that is continuously repeated: America’s transportation and communications infrastructure are in poor shape. According to the Society of American Engineers, there is an $846 billion gap in unfunded surface transportation needs alone that require near-term action. Meanwhile, the combined state of roads, transit, bridges, waterways, ports and broadband in the United States pales in comparison to peer competitors and trade partners and acts as an approximately $100 billion per year net drag on growth.
With the current business cycle aging, and given the increasing probability that auto production will begin to slow in 2017 as the large number of leased vehicles re-enter the market, a well-timed, multi-year trillion-dollar infrastructure project carries with it the potential to boost productivity, improve overall growth and raise standards of living. Given that long-term interest rates will likely remain constrained along the zero boundary, infrastructure fiscal projects will carry far more bang for the buck in terms of economic stimulus than another round of asset purchases by the Federal Reserve.
MIDDLE MARKET INSIGHT: On a micro level, transportation bottlenecks increase costs of operation for middle market firms. This shows up in higher labor costs, longer inventory hold periods to compensate for shipping delays and a reduction of working capital.
The objective of a large infrastructure project should be organized around increasing efficiencies in the transportation sector, a more productive economy and the creation of high-paying jobs that will attract people back to the labor market. The multiplier effects on transportation are traditionally higher than other forms of fiscal outlays. In our estimation, for every one dollar spent on rebuilding the domestic infrastructure, one should expect 1.3 dollars in return, with the potential for an even higher return given the spillover effects into other sectors in the economy. The Congressional Budget Office estimates that the multiplier effect is actually closer to 1.6 dollars.
Just as important would be the job creation such a project would bring. For every $1 billion in infrastructure spending, there would be about 21,000 jobs created. Thus, within the framework of a five-year $1 trillion-dollar rebuilding project, there would be as many as 4.2 million jobs per year created. Given that there are over 30 million men between the ages of 20 to 50 that are not meaningfully participating in the labor market, such a project that creates high-paying jobs would reduce that number significantly.
The confluence of an improved American economy that serves as a magnet for capital and central banks around the world keeping policy rates at zero while purchasing assets to suppress long-term interest rates presents a tremendous opportunity to rebuild this country’s infrastructure at what is effectively bargain-basement prices. With the 30-year Treasury yield at 2.82 percent, there is a reasonable argument that financing a multi-year trillion-dollar infrastructure project will pay for itself through increased economic efficiencies and by bolstering overall growth.
The cost to the economy of transportation bottlenecks is staggering. According to the U.S. Department of Transportation, highway bottlenecks result in about 243 million hours of delays per year at a cost of $7.8 billion annually. The Texas Transportation Institute estimated that American commuters lose 5.5 billion hours stuck in traffic, and that congestion requires the purchase of an extra 2.9 billion gallons of gasoline at a cost to households of about $120 billion. On a micro level, especially for middle market firms, transportation bottlenecks increase costs of operation. This shows up in higher labor costs, longer inventory hold periods to compensate for shipping delays and a reduction of working capital.
While the economic advantages of infrastructure repairs are clear, the challenge for policy makers lies in finding a fair compromise that protects taxpayer interests while simultaneously creating the conditions for improved private sector profits. Fortunately, there is a case from recent history where partisan differences were put aside to rebuild badly-damaged infrastructure in a short period of time.
After the 1994 Northridge earthquake, which caused a portion of U.S. Interstate 10 in Los Angeles and Interstate 5 north of the city to collapse, President Bill Clinton, a Democrat, and California Governor Pete Wilson, a Republican, cooperated by both declaring a state of emergency in Southern California and moving to waive environmental requirements while preserving open bidding on reconstruction projects. A mix of incentives to get projects completed and penalties to avoid cost overruns were incorporated into the acceptance of publicly-financed construction projects. The result was the completion of the primary rebuilding projects under budget and ahead of schedule. The Santa Monica freeway was completed in 66 days rather than the six-month time estimate.
As Congress now debates replenishing of the Federal Highway Trust, this bipartisan approach is something worth considering. The longer policymakers wait to upgrade the country’s infrastructure, the more expensive the repairs will be and the greater the overall drag on economic growth.