The Argument Over Infrastructure Spending

One of the very few really interesting discussions going on in the media/blogosphere is over infrastructure spending. On the pro side is The Economist:

FOR a country as wealthy as America, the dilapidated state of its infrastructure sure is a sorry sight. Three weeks of motoring around Spain—an economic basket-case by comparison, with over twice the unemployment and less than two-thirds the per-capita income of the United States—has been an eye-opener for Babbage. Wide, well-engineered roads criss-cross the country, with clover-leaf accesses everywhere, and modern concrete bridges spanning ravines and gullies. Babbage returned to the crumbling freeways and surface streets of California more despondent than ever.

Once the envy of the world, America’s 47,000 miles (75,000km) of interstate highways and 115,000 miles of freeways and other dual-carriageways were built in a furious burst of road construction during the 1950s and 1960s. Half a century of heavy use later, and with little maintenance in between, America’s arteries have become clogged and cracked. “We’ve got about $2 trillion of deferred maintenance,” President Obama warned recently. The figure comes from a detailed study by the American Society of Civil Engineers. So far, however, the president’s plea to a divided Congress for $50 billion to begin fixing the country’s ageing infrastructure has fallen on determinedly deaf ears.

On the con side, James Pethokoukis:

If Democrats have one big economic idea, it’s this: build. Crank up the infrastructure spending. Last summer, for instance, President Obama floated a “grand bargain for middle-class jobs” to cut the US corporate tax rate and use billions of dollars in revenue generated by eliminating tax breaks to fund infrastructure projects. And in his State of the Union address, he called for $50 billion in new public works spending.

But that’s just a beginning. Progressives think the US suffers from a massive “public investment” deficit. They point to a much-hyped “report card” from the American Society of Civil Engineers — folks who like infrastructure spending, mind you — that calls for an additional $2 trillion in spending to get US road, bridges, and water works up to a solid “B” grade from the current “D+” by 2020.

[…]

But dig a little deeper and you find claims of a supposed infrastructure crisis are wildly overstated. US public construction spending has averaged 1.8% of GDP since 1993, with a low of 1.6% in the first quarter of this year and a high of 2.2% in the second quarter of 2009. Over the past two years, it’s averaged about 1.7%.

But is that a lot or a little compared to what our needs are? A Bloomberg piece last August highlights research that finds US public investment has tracked the OECD average since at least 1970. ”The US. is about where it should be — close to peer nations such as Canada, Germany and Australia,” concludes reporter Evan Soltas. “Nations that spend substantially more tend to be in a phase of catch-up growth, such as South Korea and Poland.”

I’m skeptical of the ASCE report for a reason I’ve mentioned here before. The report doesn’t evaluate the usefulness of the bridges it’s rating. Many of them probably should be taken out of service, possibly by simply blocking them and/or churning up the road on either side. A bridge that made sense seventy years ago doesn’t necessarily make sense today. Seventy years ago population distribution was enormously different from what it is today, we didn’t have interstates concentrating traffic on a relatively few large arteries, etc.

However, I’m also skeptical of Mr. Pethokoukis’s argument. It isn’t often a comment on a post is better than the post itself but the first comment on the Pethokoukis post, by TMLutas, an occasional commenter here whose observations are invariably sensible, is. I’ll reproduce it in full:

This is, unfortunately, the blind leading the blind. I want what everybody wants when they turn the faucet, for clean, safe water to come out of the tap. The way you determine that is not to compare spending with some other country and see if we track ok according to their spending levels but rather to go through all our governments, find out who has water pipes as part of their responsibilities, and get their inventories, lifespan estimates, and estimated cost to replace for each pipe.

You count the infrastructure pieces and calculate their TCO. Everything else is hogwash.

The scary part is, so far as I know, nobody has actually gone out and done the work. It’s all guesses and estimates all the way down. Some irresponsible governments, such as the city of Los Angeles, don’t even regularly inventory infrastructure investments like their sidewalks.

Instead of drawing a conclusion in advance of facts, it would be much better to create a framework where we have the facts as a routine matter and then do the simple math to draw a conclusion. For every infrastructure item, every government should be asked to put its inventory online and keep that inventory up to date. Pull all the inventories together and you can make real estimates as to infrastructure spending needs to maintain our civilization. Tack on expenditures to shut down ghost towns and expenditures to build up expanding jurisdictions and you have a budget that is based on reality.

This is a big job and the best time to have started it was about ten years ago because it’d be done by now. The second best time to start it is right now.

I’d like to add two observations. I’m skeptical about infrastructure spending, defined as building roads and bridges, for several reasons. First, contrary to what you might read from its supporters, I think the evidence is that we are enormously overbuilt. At this point every city in the United States with a population of 50,000 or more is served by a federal interstate. Building more federal interstates so that every town with a population of 25,000 or will probably add bupkis to the national productivity. It will simply be burning money and burning it by giving it to a relatively small number of politically connected large construction companies. That will have only a minor effect on increased consumption—they’ve already purchased their equipment, they’ve already hired their staffs, and the effect of giving them more money will be making them more profitable which will only be reflected on larger political contributions and price inflation in whatever the owners and stockholders of these large, politically connected construction companies buy.

It’s the same story with bridges. If memory serves we presently have 152 bridges across the Mississippi, most in the lower 1,500 miles. A bridge every 10 miles rather than every 15 miles probably won’t do much for productivity. The same story is repeated on every major waterway in the U. S. We’re overbuilt, not underbuilt.

Federal infrastructure spending tends to be for such new construction. It’s a lot easier to justify (and campaign on) than patching potholes in Poughkeepsie. Minor projects like that are usually tackled by state and local governments. If you really want to patch potholes in Poughkeepsie, reduce healthcare costs. I’d connect those dots but you can probably do so yourself by now.

The reason that infrastructure spending is such an evergreen among Democratic politicians is at least three-fold. They like to bring home the bacon. They like to please their union constituents. And far too many subscribe to a sort of folk Keynesianism in which any spending is fiscal stimulus (and investment!).

Thinking of the kinds of infrastructure being talked about either as fiscal stimulus or as investment relies on a terribly dated view of the American economy. It might have worked seventy years ago but it no longer does. It’s not an investment for the reasons I’ve outlined above and it’s not good fiscal stimulus because, frankly, we import too much. Imports subtract from GDP rather than adding to it. If you import everything you sell from somewhere else and then sell it at a gross margin of one or two percent, only the one or two percent counts as domestic growth and only the retailers’ employment is affected. That’s as good a description of Wal-Mart’s business model (or that of most major retailers these days) as I can produce in twenty-five words or less. Wal-Mart doesn’t add sales clerks or stock assistants when their volume goes up 1% or 2% or even 5%. They don’t need to.

The foregoing notwithstanding I could think of a dozen major infrastructure spending projects that desperately need doing right off the top of my head. None of them will be done because the private sector won’t tackle them, they won’t employ a lot of people, and they aren’t highly visible.