The Microeconomics of Government Spending $2 Trillion Dollars on Infrastructure

 In this blog post, I’d like to sketch out some “rules of the game” to raise the likelihood that Americans will earn a good rate of return on the $2 Trillion dollars that the Biden Administration has proposed to be spent on infrastructure.

I will spend no time here discussing the specifics of pieces of capital (highways, airports, seawalls) that will be invested in or the money that will be spent on human capital programs (worker training, encouraging more under-represented people to enter STEM education fields).

I have written two Hamilton Project Papers for Brookings on specific infrastructure investments focused on highways and climate resilience.

In any investment decision, there is a selection of which projects to invest in and how to measure its stream of future benefits and how to pay for the project.  These issues become even more important when the investment’s cost is measured in Trillions.

My Questions;

1.  What process will be used to select which projects get implemented?   How will the distribution of political power in the US Congress affect the economic geography of which areas get these contracts?  Put simply, will $ flow to where it has the greatest economic benefit or to the political districts featuring the most powerful political leaders?  

2.  What process will be used to select which firms get the contracts to do the work?  If the “Buy America Act” binds here, what international firms could have done a better job building the infrastructure?  What do we lose in terms of time to completion, cost and quality by relying on domestic firms? 

3. For the firms who win the contracts, what are their incentives to do high quality work at the agreed upon cost?  Who will verify the quality of the work?

4.  What are America’s performance criteria for judging whether the new infrastructure is of high quality and has a causal effect on improving our quality of life?  If New York’s airports are rebuilt, how will we know that they have offered a much better experience?  If new Seawalls are built to protect Florida, how will we know that they are effective?  What area the performance criteria for judging the impact of this public investment?  What is the “counter-factual”?

5.  Should local jurisdictions have significant “skin in the game”? For example, if a local highway will be upgraded, should the local jurisdiction have to pay 40% of the project cost?  This would have two beneficial effects. It would nudge the local elected officials to prioritize which projects they really want done and local taxpayers would pay attention to actual decision and implementation because they won’t perceive the $ as “free money”.  

6.  As taxes rise to pay for these public investments, what are the real effects of higher taxes?  What investment decisions will households and firms not make as their taxes rise?

7.  Given the fundamental nature of uncertainty in the modern world (did you anticipate the COVID crisis of 2020) and given ongoing progress in civil engineering, will the new infrastructure designers incorporate “option value” so that they build a capital stock that can be easily retrofitted in the future as we learn more about engineering and we learn more about the severity of emerging threats (climate change)?

8.  Will the Federal Government create an open data base of which firms are obtaining which infrastructure contracts, to do what work, at what price tag?  

Together the answers to these questions determine what is the “bang per buck” when we spend an extra dollar on infrastructure.  What is the tangible improvement in our capital stock (both physical and human capital) when government spends more money?   This blog post has sketched out a group of ideas that if they could be implemented would raise the “bang per buck” and this would increase the confidence of the taxpayers in supporting President Biden’s plans.

Trust but Verify!