September 2, 2020
Activities: Public Works
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Annual ROI: 0.0%
Image source: Unsplash
Investments in public infrastructure bring high returns. Ongoing research over the past few decades shows that funding public assets brings a return on public investment of between 15-45%.
While there appear to be more studies coming out ever year stating similar conclusions, why is it so hard to keep up with our crumbling infrastructure?
Is it that we don’t know how to invest in governments? Or that they simply can’t pay us back with standard financial returns? How can we best quantify these returns, so maybe some of these things are possible?
The connection between public infrastructure and private sector productivity makes sense. Transportation improvements, for example, mean that raw materials and finished products can be shipped more quickly, more reliably, and at a lower cost to the producer and consumer. A clean and reliable water supply is essential to most any business, as are police and fire services that protect business assets.
What is perhaps surprising is the magnitude of the benefit to the private sector: public investment substantially raises private economic productivity, and in so doing raises rates of GDP growth and could lower future budget deficits even if that investment is financed by issuing bonds.
The increased growth and income that would follow from a substantial level of new public investment would generate sufficient tax revenue to not only cover the debt payments but to reduce deficits.
Importantly, the benefits of infrastructure investments are shared among everyone — individuals as well as businesses. The same road improvement that reduces shipping costs reduces the time workers spend commuting and families spend driving to school or the grocery store.
The improvements to the quality of life that result from reduced travel time, cleaner water, better access to health care and recreation, or safer streets are shared broadly among the general population. Thus the total payoff from infrastructure investments is even larger than the 15 to 45 percent return measured by gains in private sector productivity.
A recent report makes a strong case for states increasing their investments in infrastructure as a way to put workers back to work, increase productivity and job growth, and enhance the quality of life for a state’s residents: “Reversing the decline in state investment in transportation, public buildings, water treatment systems, and other forms of vital infrastructure is key to creating good jobs and promoting full economic recovery — and this is an especially good time for states to do it.”
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