September 23, 2018
Activities: Administration, Housing / Shelter, Public Works, Transportation
Geography:
Demographics:
Annual ROI: 0.0%
Image source: Unsplash
How adequate is our public infrastructure? Are we investing enough in upgrading our public infrastructure stock? What are the costs of avoiding this upkeep? What are the benefits from increasing the stock?
Benefits of infrastructure on social well-being
New York Fed economist Andrew Haughwout investigated these questions in his study “Infrastructure and Social Welfare in Metropolitan America.”
Infrastructure investments can affect social welfare in two ways. One way is by adding to economic growth. The relationship between infrastructure and economic growth has been the subject of intensive economic research over the past decade.
The second way in which infrastructure investments can affect social welfare is by potentially improving the quality of life of those living in the invested area. For example, public parks, water systems, and other facilities can improve social welfare without having any effect on residents’ incomes.
Benefits of infrastructure on economic growth
Elizabeth McNichol writes in a paper by the Center on Budget and Policy Priorities:
The condition of roads, bridges, schools, water treatment plants, and other physical assets greatly affects the economy’s ability to function and grow.
Commerce requires well-maintained roads, railroads, airports, and ports so that manufacturers can obtain raw materials and parts, and deliver finished products to consumers. Improving many types of public infrastructure boosts the productivity of businesses by reducing their costs.
Growing communities rely on well-functioning water and sewer systems. State-of-the art schools free from crowding and safety hazards improve educational opportunities for future workers.
Better roads and public transit make it feasible (or more efficient) for workers to get from their home communities to more of the places where the jobs are.
The report goes on to cite a study done that looked at the United States’ infrastructure growth between 1949 and 1985, finding that a 10% increase in public-sector stock (e.g., roads, transit, buildings) increased productivity growth by almost 4%.
Current state of affairs
What’s most interesting about infrastructure is the seeming lack of maintenance being done across the country. With so much apparent upside in investing in these projects, it is curious why governments continue to delay spending.
What the math tells us
Using America’s 2016 total GDP of $18.57 trillion, we can try to gauge what increased public spending would mean for economic growth.
Using the bottom chart as a basis for opportunity, if we can get our current level of 2.0% just halfway to the high point in 1965 of 3.0%, that would imply an increase from $371 billion to $557 billion.
In this simplified example, if this additional $186 billion is added to the public stock, total productivity would grow by 20% (using the study cited above). Using 2016’s GDP growth of 1.6%, this would imply a new total growth of 1.9%–a net impact of $56 billion per year.
Now, while many skeptics argue the validity of this study, it should be obvious that deteriorating public infrastructure would negatively impact economic output. So, at the very least, getting investment back up to par with what’s required historically would be a bare-minimum measure toward improving our economies. And if any positive impacts resulted, all the better.
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