Looking into infrastructure and economic growth

By Kevin Theissen

The Infrastructure Investment and Jobs Act (IIJA) was signed into law last week, and the Build Back Better Act (BBBA) passed the House of Representatives and moved on to the Senate.

For decades economists have tried to determine how spending on infrastructure — roads, bridges, canals, railways, broadband and other projects — contributes to economic growth. There are diverse opinions on the subject. Here are a few:

• “Increasing infrastructure investment has significant macroeconomic benefits. Near term it has a large so-called multiplier — the increase in GDP for a dollar increase in investment. It is among the highest compared with other types of federal government spending and tax policy… In a full-employment economy, the GDP multiplier on traditional infrastructure is estimated to be 1.23 one year after the investment, and 1.12 for nontraditional infrastructure. It is higher when the economy is operating below full employment,” said Mark Zandi and Bernard Yaros, Jr. of Moody’s Analytics on July 21, 2021.
• “Infrastructure spending by government can boost long-run economic growth by making an economy more productive, in part by improving connectivity — both physical and digital…The point here is that there can be diminishing returns from spending…I view infrastructure investment primarily as a way of boosting the economy’s speed limit. Government should focus on high-value projects,”said James Pethokoukis of American Enterprise Institute on April 2, 2021.
• The Economist on May 1, 2021 stated: “A new era of large-scale infrastructure investment would necessarily be less revolutionary than the railways and roads of the past. Yet it might nonetheless prove surprisingly transformative in its direct economic impact, its knock-on effects on private industry — and in the psychological spur it provides to a country that could do with a bit of reinvigoration and renewal.”
• “Finally, even if infrastructure investment had no impact on employment, productivity, and growth, it’d still deliver public goods that should be available to all but that may not be profitable to produce privately (such as rural broadband),” said Marcela Escobari, Dhruv Gandhi and Sebastian Strauss of Brookings Institute on March 17, 2021.

The IIJA will invest approximately $1.2 trillion, including $550 billion in new spending, on infrastructure projects across the United States. IIJA is expected to increase the deficit by about $256 billion over the next 10 years, according to the Congressional Budget Office.

Kevin Theissen is the owner of HWC Financial in Ludlow.