The Economic Impact and Financing of Infrastructure Spending

I was recently having a debate with a conservative friend about the efficacy of infrastructure spending by the government vs. private sector.  His point was that any dollar spent by the private sector will be more efficient than the same dollar spent by government.  I generally agreed, but pointed out that the private sector under-invests in things like infrastructure and R&D as a matter of basic economic theory (to read more on this check out my article about the concept of “market failure” here).

Additionally, I made the point that borrowing $1 at near-zero rates and investing in infrastructure & R&D, which have good returns on investment, makes sense whether it’s a corporation doing it or the government (after all, the actual construction work often goes to private bidders, so we’re really just talking about who is financing the work).

On that note, I found a great study by economists at William & Mary that reviewed a number of other studies on the question of the short and long-term economic impact of infrastructure spending.  The conclusion is that 1$ of infrastructure spending results in $2 of economic impact in the short-term and $3 of economic impact in the long-term (over 20 years).  I will paste the concluding paragraphs below, but when you look at this reality in the context of the Republican opposition to ANY spending, it paints a disturbing future where investments we desperately need and which will pay for themselves 2-3 times over are opposed by an ideological minority of our country with the power to obstruct.  Opposing $1 of spending that returns $3 is not a tenable position, but it has become the status quo dogma among the Republican party.

Here are the concluding paragraphs from the study:

The United States faces an increasing shortfall of revenue for much-needed infrastructure investment. According to the CBO the US has already fallen behind the level of funding required to maintain our current network of highways and streets. However, money spent on infrastructure does much more than just maintain current stock. The effects of that spending multiply as they ripple throughout the economy, stimulating growth and output in other sectors, and ultimately return substantial tax revenue to the government per our findings.

In the short-run, spending on infrastructure produces twice as much economic activity as the level of initial spending. These effects are most heavily concentrated in the manufacturing and professional and business services sectors, but also accrue to smaller sectors like agriculture. In the long-run, spending on all types of infrastructure generates substantial permanent positive effects across the economy as a whole. Money spent now will produce significant tax revenue returns to the government’s budget over twenty years.

Given the substantial economic benefit of infrastructure spending, current budget deficits, and concerns regarding the future economic growth of the economy, it is crucially important that the United States invest in infrastructure like road networks, power stations, sewer systems, public safety buildings, and airfields. We must find innovative new ways to fund infrastructure construction and maintenance, and we can be secure in the knowledge that our economy will grow and strengthen as a result.


About Cyrus

Cyrus Tashakkori is Vice President at Pioneer Green Energy, a wind and solar power developer based in Austin, TX. He has an MBA and a Masters in Public Policy from the University of Texas in Austin and a Bachelor's in Science & Economics from the University of North Carolina, Asheville.
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