Wednesday, August 24, 2016

The Infrastructure Investment Debate

While Noah Smith makes the standard case for public infrastructure spending, he only lightly touches on the right wing critiques:
Some question the need for road and bridge repair. Others deny the need for federal infrastructure spending in the first place. Still others claim that while spending is good in theory, the U.S.’s high infrastructure costs mean we should hold off until those costs can be brought down.
This last line left me speechless as real borrowing costs are incredibly low right now and with a continuing weak economy, one would think this is a great time to hire construction workers. We will turn to material costs later. Noah links to Adam Millsap of George Mason:
In inflation adjusted dollars (the top panel) infrastructure spending has exhibited a positive trend and was higher on average post 1992 after the completion of the interstate highway system...The bottom panel shows that spending as a % of GDP has declined since the early 80s, but it has never been very high, topping out at approximately 6% in 1965. Since the top panel shows an increase in the level of spending, the decline relative to GDP is due to the government increasing spending in other areas over this time period, not cutting spending on infrastructure... Another interesting thing that jumps out is that state and local governments provide the bulk of infrastructure spending.
Adam’s source is the 2015 CBO analysis, which confirms this last claim:
Public spending—spending by federal, state, and local governments—on transportation and water infrastructure totaled $416 billion in 2014. Most of that spending came from state and local governments: They provided $320 billion, and the federal government accounted for $96 billion.
Alas Adam choose to omit the rest of the summary which also notes:
In 2003, the average price of materials (asphalt, concrete, and cement, for example) and other inputs used to build, operate, and maintain transportation and water infrastructure began to rise rapidly. Nominal public spending on that infrastructure increased by 44 percent between 2003 and 2014, but because prices of materials and other inputs rose more quickly than nominal spending, real (inflation-adjusted) public purchases decreased, falling by 9 percent from their peak in 2003 to their level in 2014 (see the figure on page 2)...The decline in real public spending (adjusted using infrastructure-specific price indexes) on transportation and water infrastructure between 2003 and 2014 occurred almost exclusively within the category of capital purchases, which fell by 23 percent during those years. The construction and rehabilitation of highways, in particular, declined over the period. By contrast, real public spending for the operation and maintenance of infrastructure continued its historical tendency to grow, rising by about 6 percent over that period, primarily because of increases at the state and local level.
The debate is over the lack of capital spending – not the cost of ongoing operations. I have a hard time believing that Adam missed this point even as he choose not to note it to his readers. Incidentally, if material costs are way up do we have any reason to believe that they will dramatically fall? I’ll provide links to the FRED series on two price indices - asphalt and cement. Both nominal price indices rose from 2003 to 2009 as China was undergoing its own construction boom. While the Great Recession moderated these increases for now – I seriously doubt either commodity will ever see the relative prices observed before the commodity boom. Now is the right time for infrastructure investment.


Thornton Hall said...

Imagine a homeowner was told, "Your roof is leaking and water is pooling in your child's bedroom."

If he were to respond, "Let's do some math to figure out if we should fix this." he would be guilty of child abuse.

mulp said...

Let's change the frame.

I as a worker say, "I should not work now in my 50s, but instead delay working until I'm 60s when work will cost me less of my remaining life drinking and carousing and running up debt."

All those arguing that needed work should be put off as long as possible would damn such irresponsible behavior on the part of an individual, imagining all the burdens this individual will place on youngerror and more responsible people.

Bruce Wilder said...

Of course, we might take climate change, peak oil and other evidence of global resource limits seriously and then plan the transformation necessary to eliminate carbon emissions and limit energy use. That requires that we replace current infrastructure, because we need a different architecture if our posterity is to have decent lives.
Infrastructure spending is about the future: will we have one?

ProGrowthLiberal said...

Bruce - an excellent point. The needs of our future differ from what we have been doing in the past. So when right wingers look at historical data on capital spending/GDP as the benchmark for what we should be doing in terms of investment, they are entirely missing the point.

Unknown said...

I agree with the desirability of infrastructure investment. I think the "until costs come down" means until we solve the structural issues, NAMBYism, etc. that supposedly make US investment more costly than it need be.

Unknown said...

"the U.S.’s high infrastructure costs mean we should hold off until those costs can be brought down"

we have the raw materials for infrastructure, we have underutilized labor force

the new wealth (upgraded infrastructure) created for society will increase productivity for many industries

and the income earned by people involved in the infrastructure building/rebuilding will increase demand and get us out of secular stagnation

is the downside that we will increase debt?

the increased productivity of all industries, facilitated by infrastructure, will give more than enough increased wealth production to cover that debt

Unknown said...

Plus "infrastructure" does not mean new cement and steel. I laughed hollowly when in 2009 people said there was just no "shovel ready projects". Because just about every government jurisdiction in the country had a list of literal shovel ready projects. It is just that you don't get a bunch of election ready photo-ops handing out equal amounts of dollars for each Congressional District with the instructions "hey! you have a 40-100 year old water or sewer line that needs replacing? want to combine that with undergrounding some electrical and cable lines? If so we got money and you just need to provide the laborers and shovels and backhoes and a willingness to pay prevailing wages"

That is you could literally have Keynes theoretical vision of people digging holes and other people filling them in come to life. And who cares if everything wasn't precisely targeted, as long as you are digging up century old sewer lines and lead plumbing and replacing them its all good.

Politicians and their tame economists like to fall back on "It takes TIME to plan out major infrastructure projects (to which they can get naming rights)" when the reality is that there is probably not a single Public Works or Public Utility Department in the country that doesn't have a backlog of simple replacement and repair projects. Not that things like replacing the I-35 Bridge before it collapses aren't important. But you get some broad based jobs and secondary jobs just by funding bridge upgrades and replacements on County Road 189 and Texas Farm Road 5849.

(And I bet that any resultant graft due to inadequate vetting of those projects wouldn't equal 1/100th of the cost overruns on the F-35 fighter)

Unknown said...

And I am serious about the equal funding per Congressional District. Because even the wealthiest CD's have poor areas and unmet road, sewer and utility needs. You just need to establish some minimal standard of showing that the particular project needing funding was already on somebody's approved list of deferred maintenance/if only we had $125,000 projects". Keep the grants reasonably focused on Public Works rather than say the Congressperson's spouses favorite arts project and let it rip. For that matter we got some damn fine public art out of the original Works Project Administration during the Depression. I am just pointing out that there were no actual barriers to finding "shovel ready" projects. Unless you are the City Fathers of Winchester, Carmel by the Sea or Palos Verdes Palisades there is never enough money to address the Public Works backlog.