Will Infrastructure Spending Really Revive U.S. Economic Growth?

Infrastructure is one of the key sectors that will see a large investment as part of the massive $787 billion package signed by President Obama last month. The bill titled “American Recovery and Reinvestment Act” will promote investment in infrastructure such as roads, bridges, electricity grid, etc. Billions of dollars will pour into these projects over the next months.

But is this infrastructure spending necessary now? And will it help revive long-term economic growth?

According to the Organization for Economic Cooperation and Development (OECD), spending on infrastructure projects will be beneficial for long-term prosperity. On March 3rd, the OECD released the 'Going For Growth' 2009 report. This flagship “annual periodical provides an overview of structural policy developments in OECD countries from a comparative perspective.” In this report, Klaus Schmidt-Hebbel, OECD Chief Economist, says that infrastructure performs a vital role in the functioning of our economy. However in the past, some investments made in this sector have been wasteful.

The report identifies many policies that can both boost demand in the short term to soften the impact of the recession, and also raise economic growth over the long term. This ‘double dividend’ can be achieved by pursuing policies in areas such as:

• Increased spending on infrastructure
• Increased spending on active labor market policy
• Reduction of personal income taxes

Charts - Investment in Infrastructure Sectors (click to enlarge)

A) Infrastructure Investment as a % of Total Investment

The above diagram shows that the US has lagged in infrastructure spending on energy and water, transport and communications in the last 5 years when compared to other OECD countries such as Sweden, Denmark, S. Korea and Great Britain.

B) Electricity, Gas and Water Investment as a % of GDP

In the years 2000-2006, we spent below the average in electricity, gas and water investment as a % of GDP. Less than 1% of the GDP went into these areas. Sweden, Norway, Israel, Korea, Ireland spent more than USA in these sectors during this time period. The US invested a higher portion of the GDP during the 70s and 80s but has slipped in the past few years.

C) Transport and Communications Investment as a % of GDP

Source: OECD -Going For Growth 2009

Investments in transport and communications were less than the average of all OECD countries during 2000-06. Only France spent less than the U.S. in the same period. Many countries such as Austria, Australia, Sweden, Korea, Spain spent a larger portion of their GDP on these two sectors.

In summary, from the above three charts it is clearly evident that infrastructure spending needs to be increased in the US. The OECD report mentions that infrastructure investments may have positive spillovers throughout the other parts of the economy. But to reap the full benefits of such investments, it is essential to carefully select projects that will deliver the most benefits. Furthermore strong regulatory measures must be in place to ensure competition among market players in executing the projects.

While I agree with Klaus Schmidt-Hebbel on the “double dividend” theory, it is not 100% certain that infrastructure spending will revive growth in the US. This is due to the fact that the US economy was mostly supported by consumer spending. It is unlikely that the consumer will start spending again just because of all the new roads, bridges, schools, green buildings and such. However in the long-term having high-quality infrastructure will promote sustainable growth and improve the standard of living.

Comments

[Dave Wrixon:]

Frankly, much of the much vanted transport Infrastructure spend which is a lot smaller then the initial hype suggested is not an expansion of new infrasture but emergency maintenance of existing infrastructure that is dropping to bits.

Mar 05 08:05 AM

[sheople:]

Increased deficit spending is like a small dose of heroin to a dying addict. It will give a small high, then it's back to the dying. We encouraged our factories to move outside our borders. The slow death began. Wall Street and the Feds wanted easy money. Our elected officials whored themselves out, spelling the death knell for Main Street.

Mar 05 08:21 AM

[Tesa:]

US is spending in stimulus far more money now on infrastructure that it has before and if that is not good enough for the bears who also claim that too much money is being spend then its the bears that have no clue. You can't have it both way.

Mar 05 09:25 AM

[ArkansasAngie:]

Infrastructure spending is more helpful than direct government handouts. At the end of the day, there is something of value. After handing out money all you have is ... well ... manure.

Mar 05 10:05 AM

[PainfullyAware:]

Government Spending is mostly smoke and mirrors in the fact that they take a dollar from someone, skim much of it to support the bureaucracy, then hand much less to the end user. The More Bureaucracy - The Greater the Leeching Of Value. Only Producers Add Value - Government Produces Nothing - Their Inefficiency Is Legendary.

How much Bureaucracy has the Federal Government been allowed to implement? I have read many estimates (if the government used industry standard accounting we would not have to deal with estimates) that the end user gets 10 to 15 cents max on every dollar run through.

Think about this the next time you hear that the Government is handing out Billions.

Mar 05 11:44 AM

[teal:]

Name a few companies that will possibly benefit.

Mar 09 05:35 PM