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.