Don't Drink the Tea. Think With the WE.
Dec
2012
19

ON INFRASTRUCTURE: “Increasing investments in the midst of a jobs crisis and during a period of near-record low financing costs is a no-brainer.”

When experts were recently asked what their first policy change would be if elected President, Andrew Fieldhouse, Federal Budget policy Analyst for the Economic Policy Institute, proposed a massive infrastructure program that would return the U.S. economy to full employment. The former staff member of the House Budget Committee looked into the reapable benefits from a complex infrastructure plan in terms of jobs and services:

The U.S. economy faces a huge shortfall in aggregate demand—with output running $988 billion (6.0 percent) below potential—which is holding back employment. In today’s liquidity trap, boosting demand with deficit-financed fiscal stimulus remains the most effective lever for restoring full employment. A mass surface transportation, water, and energy infrastructure investment program—exceeding $1 trillion over 5–7 years—would efficiently accelerate the return to full employment, and more opportune timing is difficult to imagine.

Infrastructure spending achieves maximum return in times of economic recession. Despite conditions now being better than in 2008 — when a strong infrastructure program would have produced an incredible stimulus effect — it is never too late to do the right thing:

Infrastructure spending is particularly cost-effective in boosting demand in a depressed economy; Moody’s Analytics estimates that $1 of infrastructure spending presently generates $1.44 in demand. Consequently, the sticker price of infrastructure investments overstates their effective cost; the cyclical deficit shrinks about 37 cents for every dollar output rises toward potential, so more than 53 percent of outlays are self-financing. This undertaking would reduce long-run economic scarring by employing a higher level of resource utilization today, but also increase the productive capital stock, laying the foundation for higher potential output.

Infrastructure is a classic two birds with one stone winner, creating jobs while renovating unsafe, outdated systems. As we have argued many times on this website, our nation’s transportation systems and power grid are in dire need of repair.

According to Fieldhouse,

The American Society of Civil Engineers estimates that $2.2 trillion of investment is needed over five years just to raise our infrastructure from “poor” condition to “good.” Only half of this investment is expected to be met. State budgets are in no position to pick up this slack. The federal cost of financing investments is also near record lows: Treasury’s 10-year borrowing cost is under 1.7 percent and in the negatives for real interest rates (that is, TIPS). Further deferring maintenance increases net-present-value costs to taxpayers, because upkeep and rehabilitation is cheaper than replacing defunct infrastructure.

Federal infrastructure investment should muster bipartisan support; it traditionally has and it’s supported by business groups and organized labor alike. Increasing investments in the midst of a jobs crisis and during a period of near-record low financing costs is a no-brainer.

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