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Infrastructure Delusion

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Infrastructure Delusion

Public-works projects are a risky strategy for reviving America’s economy. June 26, 2020
Economy, finance, and budgets
Infrastructure and energy

When discussing economics, New York governor Andrew Cuomo turned his daily Covid-19 press conferences into a surreal experience. Cuomo hardly mentioned how strict lockdowns brought small businesses to the brink of bankruptcy. Instead, he touted grand plans for big infrastructure projects, gleaming airports in remote parts of the state, and more trains and tunnels. Though he assured New Yorkers that the government could create economic demand to spur a recovery, he said almost nothing about how the cash-strapped state would pay for any of it—except for one passing mention that the government can print money. In other words, those remote airports—perhaps named for our leaders, or their fathers—would be paid for by the printing press.

Now, as the economy climbs out of the shutdown, we can expect politicians in both parties to promise more infrastructure projects. Since the Great Depression, infrastructure spending has been viewed as salvation for low growth and unemployment. And it’s extremely popular: more than 70 percent of Americans think that the government should spend more to build things. Even the most hardened conservatives admit that they’d love a fast train from Manhattan to LaGuardia Airport. Some infrastructure projects, no doubt, could be useful and enhance growth, but most states can’t afford them, the federal government already carries a significant level of debt, and it’s far from assured that such efforts would boost the economy.

In theory, infrastructure is a free lunch. The government invests in worthy projects, such as roads and solar panels, which, in turn, create well-paid jobs. Those jobs then boost economic demand, which creates even more jobs in the private sector. Some economists speculate that $1 spent on infrastructure can create $1.50 of economic growth. But this spectacular rate of return relies on numerous assumptions, including that the selected projects will prove useful or start up quickly. In fact, few shovel-ready projects exist. Rather, the selected projects almost always reflect political priorities, not economic need.

Politicians tend to romanticize the Depression-era New Deal, which featured plenty of infrastructure spending and a jobs program. Almost 27 percent of New Deal grants went to work programs, specifically for out-of-work Americans, who completed small-scale construction projects at a set wage with limited hours. Another 17.8 percent of spending involved large-scale projects, like roads and dams, that paid market wages and hired from the broader labor market. But the New Deal’s success in these areas was mixed. The public-works projects, for example, had a multiplier of about one—that is, for every $1 the government spent, it translated into about $1 of income. Though New Deal public-works programs did reduce deaths and crime, it’s important to remember that they preexisted large-scale unemployment insurance. So, while they saved people from dire poverty, they’d be less beneficial today because we have a better safety net. Evidence also suggests that the projects didn’t lead to job growth in the private sector and may have hindered it, since the government jobs paid more and were considered more stable.

We have good reason to expect even less success from similar-type efforts today. Economists estimate that states with big New Deal projects didn’t experience much growth because 50 percent of the materials used in construction came from other states. Today, those materials would probably come from abroad and therefore have even less economic benefit to America’s economy (and Buy America provisions won’t help, either). Regulation and red tape have grown substantially since FDR’s time, too, and that would slow the process and make building less efficient. In addition, construction jobs have become more skilled and technical since the Depression era. It’s hard to imagine unemployed hotel concierges making an easy transition to a job building a railway to LaGuardia.

States and the federal government will face record deficits in the coming years. Pouring money into expensive public works is a risky strategy for reviving the economy. Supporting the income of poor Americans and helping businesses get back on their feet through loan programs would be cheaper, more efficient, and more sustainable.

Photo: MikeVanSchoonderwalt/iStock

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