The Myth of the Infrastructure Cure-All

Every year the American Society of Civil Engineers (ASCE) comes out with a report card on the condition of America’s infrastructure. We got a D+ this year. According to them, “Deteriorating infrastructure is impeding our ability to compete in the thriving global economy, and improvements are necessary to ensure our country is built for the future.”

They calculate that every family in America will lose $3,400 a year because of infrastructure deficiencies. If the problem isn’t fixed, they say, GDP will lose $4 trillion a year by then (2025) and 2.5 million jobs will be lost. They recommend an additional $1.1 trillion of spending on transportation (roads and bridges) over the next 10 years to correct this problem.

President Donald Trump says that we need to spend $1 trillion to “transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains.”Massive spending won’t create any permanent jobs.

Liberals and conservatives alike get teary-eyed when they hear this. They think that massive spending, especially on roads and bridges, will “put people back to work” and make America more productive.Productivity is not suffering because of our infrastructure. 

Here is the reality: America’s infrastructure is not crumbling, massive spending won’t create any permanent jobs, and productivity is not suffering because of our infrastructure. These are economic myths that lobbyists, infrastructure contractors, and the ASCE perpetuate to get fat contracts.

Let me back up for a moment and say that, yes, our transportation system, for example, is an important factor in productivity and inefficiencies could harm productivity. Los Angeles is a glaring example of inefficiency since it again was the world’s worst metro area for traffic congestion (104 hours per year wasted in traffic; NYC – 89; SF – 83). Surely commuters’ time would be better spent in more productive activities than listening to NPR.

Let me also note that by “we” as in “we need to spend $x trillion …”, the “we” are your local, state, and federal governments who own and operate our roads and bridges. They are the reason we have transportation infrastructure problems. You have only to look to your politicians to place the blame.

When the ASCE comes out with their Report Card every year, our news media dutifully start their reporting by showing a bridge or road somewhere that is crumbling and it is cited as an exemplar of the problem of “our crumbling infrastructure.” What they don’t tell you is that if you look at transportation issues over time, things have been getting better, not worse (except the aforementioned traffic congestion).

The Reason Foundation’s studies on state-owned highways (they are widely recognized as being leaders in this field) and other studies on highways and bridges reveal that there have been significant improvements in infrastructure measures like road and bridge quality and fatalities over the past 20 or 30 years. The facts are that, on the state level, overall spending on highways doubled during that period, and overall measures of highway transportation have improved. Most of the noise is from those who would benefit from infrastructure spendingThey also found there was not a good correlation on a state by state basis of spending to improvements—in some states spending resulted in improvements, in others, not. They also say that problem areas are usually concentrated in a few states, such as California and New York’s congestion.

So, some infrastructure is “crumbling”, but the overall trend is that it isn’t. Most of the noise is from those who would benefit from infrastructure spending and the politicians who enjoy ribbon-cutting.

The idea that massive government spending on infrastructure will create jobs is another myth. If you recall the $787 billion 2009 American Recovery and Reinvestment Act (ARRA), the Obama Administration told us that such fiscal stimulus would create jobs and promote economic recovery. There is simply no credible evidence that such Keynesian stimulus did anything to help economic recovery. Curve-fitting estimates at the time by the bill’s proponents were wildly incorrect. The $100 billion or so of ARRA that was spent on “infrastructure” had no impact at all on the economy and those “jobs” came and went along with the wasteful spending. ARRA did not produce anything but massive budget deficits and more debt while the economy stagnated.

President Trump campaigned on a dark vision of America that the economy was in shambles, along with our infrastructure, that he would fix it, create jobs, and revive the economy.

The facts suggest the opposite of his campaign rhetoric.

Presently the economy is considered to be at full employment with unemployment at its lowest rate since 2001.If the goal is to boost America’s productivity, then one needs to ask if massive infrastructure would accomplish that. One could argue that there is little slack in labor supply. Thus, if the goal of infrastructure spending advocates is to boost employment, that is unnecessary.

If the goal is to boost America’s productivity, then one needs to ask if massive infrastructure spending would accomplish that. As I have pointed out, the state of our transportation system is not crumbling, and in fact, has been improving over the years. That is not to say that some states or counties don’t need upgrades, but they are in the minority.

If the ASCE’s assumption that poor infrastructure is impeding progress, then we should look at the LA metropolitan area where traffic congestion is the worst in the world to see if they are correct. Based on their logic, LA’s economy should be suffering. But it is not. In fact, if you compare LA’s GDP to the rise in total US GDP, LA’s upward trend is almost identical if not rising even faster.

What the proponents of massive infrastructure spending fail to understand is that productivity is based mostly on private capital spending on more efficient means of production, distribution, and sales: new factories, new machinery, new software to improve production and logistics, new methods of sales, and so on. These are the primary causes of economic growth. We should be thinking about better ways to handle infrastructure projectsFor example, the “crumbling infrastructure” seems to have done little to impede the efficiencies created by the “just-in-time” supply chain that relies on quick transportation.

While many of the Trump Administration’s populist themes will do much to harm the economy, their proposal on infrastructure has some merit if done properly. We can forget their claims of economic transformation, but we should be thinking about better ways to handle infrastructure projects. This is why we need public-private partnerships (P3).

P3s let private companies design, build, and operate new infrastructure projects. According to Bob Poole, the Reason Foundation’s expert on privatization, P3s will result in projects that will be more economically productive (no bridges to nowhere) and would be much more cost effective.

Remarkably, the Trump Administration is proposing P3s to accomplish future infrastructure spending.The risks of these projects are shifted to private companies rather than to taxpayers The Trump proposal relies on tax credits for P3 projects, not $1 trillion in new spending. These projects would be based on privatized systems which generate an income stream, and are financed by revenue bonds. Thus, the risks of these projects are shifted to private companies rather than to taxpayers.

The Trump P3 proposal has many “ifs” in it to result in an effective program. But, if these hurdles can be overcome, then, as Poole says, “this election has opened the door to major changes in what the federal government does and how it goes about it. … My guess is that these changes will be very positive for P3 infrastructure.”Remember, if it weren’t for the government, who would neglect the roads?

                                                                  Reprinted from An Independent Mind