The Role of Public Works Infrastructure in Economic Recovery

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Infrastructure is a public good that produces positive externalities for production. The provision of adequate infrastructure is a necessary condition for private firms to be productive. Even if infrastructure is also provided for its amenity value i. Just imagine an economy without roads or telephones to think about the impact that infrastructure has on productivity. Few would argue that infrastructure isn't important to economic activity. A Mercatus Center researcher observed that "economists have long recognized the value of infrastructure.

Roads, bridges, airports, and canals are conduits through which goods are exchanged. Thus, public roads are important, but by themselves, they don't produce anything. Yet they are linked in complex ways to economic growth.

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Economically, what is important are the services that roads provide in transporting goods and people, mitigating congestion, etc. Academic interest in the issue of economic payoff associated with public infrastructure spending was motivated in part by recognition of declines in public investment in the early s and declines in economic productivity growth at about the same time. The question for researchers was whether there was linkage, or causality, between public investments and economic productivity and, consequently, whether underinvestment in infrastructure helped to explain the slowdown in productivity growth.

Research reported in the late s found that there are very large returns on investment from infrastructure spending and, by implication, argued that part of the U. Subsequent investigations by others found that the initial results were highly sensitive to numerous factors, such as minor changes in data, or time period, or sectors of the economy that were analyzed. During the s, further research on this issue modified the methodology used to analyze the economic effects of investing in public infrastructure and either affirmed or challenged the findings of the initial work.

Although not all subsequent studies found a growth-enhancing effect of public capital, a general consensus has developed over time that there are positive returns on investment in public infrastructure, but that the impact is less than was first reported. Some of this research suggests that investments in energy infrastructure have the greatest impact on long-term wages and investment, followed by mass transit, and water and sewer.

Another aspect of the issue is the interconnected nature of multiple infrastructure systems and the argument that being competitive in a global economy requires investment in what some refer to as "supply chain infrastructure," that is, ports and associated road, rail, and air connections that facilitate manufacturing, transport, and export. According to this view, inefficient connections and capacity limitations lead to delays that raise the price of a company's product and make it harder to compete globally, especially if global competitors out-perform the United States in this regard.

One conclusion of more recent research is that both the average return and range of return to the economy vary, based on the type of infrastructure and the amount of infrastructure already in place. In other words, the larger the existing stock and the better its efficient use and current quality, the lower will be the impact of new infrastructure. Also, the effect of new public investment will crucially depend on the extent to which spending aims to alleviate bottlenecks in the existing network of infrastructure systems and facilities.

Since mid, Congress and the Administration have attempted to address the nation's significant economic difficulties through a variety of policy approaches. Policymakers have debated a range of options for doing so and, as noted previously, have used a combination of tools to stimulate the economy. Throughout these debates, some have argued that economic stabilization can best be achieved through monetary policy i.

Others have argued for governmental policy to provide fiscal stimulus, which can involve tax cuts, government spending increases, or both. During debates that preceded enactment of ARRA in February , a wide range of experts—including economists who generally differ in their economic policy views, such as Martin Feldstein 21 and Paul Krugman 22 —contended that, in times when neither consumers nor businesses are spending, a massive infusion of government spending is needed quickly to energize economic activity.

Infrastructure investment, they argued, can be an important source of stimulating labor demand when the labor market is underutilized, and enhancing U. The economic value of infrastructure investments follows from the cumulative, or multiplier effect, which is described by CBO. Infrastructure spending directly increases employment because workers are hired to undertake construction projects.

It also adds to demand for goods and services through purchases of material and equipment and through additional spending by the extra workers who are hired … that increase in demand leads to further hiring. According to this view, spending on projects to address unmet infrastructure needs presents an opportunity to contribute significantly to economic recovery. During recessionary periods and the beginning of recovery, the state of the U. Large number of workers are unemployed, especially in the construction sector, which reported a This same argument was raised during debate that preceded enactment of ARRA, when similarly high unemployment prevailed among construction workers.

Proponents argue that the cumulative, or multiplier, effect of infrastructure spending on the economy, discussed previously, makes it especially beneficial to economic recovery. In CBO's analysis, the output multiplier of infrastructure spending was the same as ARRA provisions for purchases of goods and services by the federal government, and both were greater than impacts of other ARRA provisions such as tax cuts for individuals. Public infrastructure's potential role in contributing to job creation at a time when the economy continues to sputter raises several questions, including does infrastructure spending really create jobs, does it invest in assets with long-term value, and how are needs and priorities determined?

These issues, along with the potential contribution of investments in "green" infrastructure, are explored in the remainder of this report. One of the ways in which Congress has tried to spur job growth and stem job losses to mitigate the impact of recessions is by directly raising demand for i. That is to say, Congress has increased federal spending to counteract the labor market effects of decreased consumer purchases. Most often in the postwar period, Congress has engaged in direct job creation by increasing federal expenditures on public works. When Congress has considered raising spending on infrastructure or other federally funded activities to help stimulate a flagging economy, a commonly asked question is "how many jobs will be created?

It thus reflects how much of the purchased product comes from final and supplier industries. An I-O table might show, for example, the dollar value of concrete produced by the nonmetallic minerals product manufacturing industry and of steel produced by the primary metals manufacturing industry that the construction industry uses to produce its various final outputs e. The output requirements from each intermediate and final goods industry are then converted to employment requirements. Employment requirements are derived from productivity estimates for each industry at a particular point in time.

The employment requirement associated with a given type of final demand is the employment in the industry producing the final product or service plus the employment in supplier industries. In other words, it is an approximation of both the direct and indirect employment dependent upon supported by the economic activity. It commonly is expressed as the number of jobs per billion dollars of expenditures valued in a particular year's dollars. Like an I-O table, an employment requirements table is a matrix of hundreds of columns and rows.

Each column displays the number of jobs supported in each of the industry rows by an expenditure of one billion dollars in an industry as defined in the North American Industry Classification System NAICS. Actual job creation may differ from estimated job creation, however, because I-O models assume that resources are unlimited.

If, for example, the economy were performing at a fairly high level i. In addition, I-O tables may not differentiate between imported and domestically produced goods. As a consequence, the domestic employment impact of expenditures might be overstated to the extent that inputs are imported.

Employment requirements tables also do not distinguish between jobs by number of hours worked part- or full-time or length of employment short- or long-term. Induced jobs, that is, the number of jobs resulting from purchases of goods and services by those in first-round direct and indirect jobs, may be included in job creation estimates as well.

The Role of Public Works Infrastructure in Economic Recovery - Digital Library

For example, workers who are directly or indirectly employed as the result of a highway construction program might spend some of their wages in grocery stores, at auto repair shops, etc. Estimates of induced jobs i. The jobs multiplier will further depend on economic conditions e. Job creation estimates vary from one source to another depending on such factors as industry definition and time period. First, the job estimate "utilizes the national average mix of construction materials and labor inputs.

Specific projects and local utilization ratios will alter the actual employment supported.

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Second, the 30, jobs estimate "includes 'new jobs' to the extent unemployed labor is hired; Another source of job creation estimates is the employment requirements table of the U. The updated I-O table and labor productivity data were then used to develop an employment requirements table for The figure from the BLS employment requirements table for construction expenditures 11, is lower than the direct and indirect jobs figure for highway expenditures from the FHWA 14, The main reason for the disparity in estimates is that each state has a different mix of industries within its borders.

As a result, one state varies from the next in its capacity to supply all the intermediate goods needed to carry out construction projects. A secondary explanation is that earnings vary by state.

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Funding infrastructure is a long-term investment, not quick-fix spending, that should lead to something durable, useful, and financially productive. The long-term nature of such investments can be at odds with the goal of quickly injecting money into the economy. Thus, the overriding question in debating infrastructure spending as part of a job creation package is, what will the increased spending buy? Two important considerations regarding any such proposal are, will the proposal produce short-term or long-term benefit, and will it produce a significant amount of incentive for the economy, relative to its budgetary cost.

Some analysts are cautious about the effectiveness of infrastructure spending in this regard because of one key issue: This concern was described in testimony by the Director of the Congressional Budget Office in The timing of fiscal stimulus is critical. If the policies do not generate additional spending when the economy is in a phase of very slow growth or a recession, they will provide little help to the economy when it is needed Poorly timed policies may do harm by aggravating inflationary pressures and needlessly increasing federal debt if they stimulate the economy after it has already started to recover.

For federal purchases [of goods and services, such as infrastructure spending], the primary issue in targeting the spending is that of timing By definition, the goal of stimulus spending is to get money into the economy swiftly. But that objective conflicts with the reality of building infrastructure projects that typically are multiyear efforts with slow initial spendout. Public works projects are likely to involve expenditures that take a long time to get underway and also are spread out over a long time.

Large-scale construction projects generally require years of planning and preparation, including cost analysis, land acquisition, engineering, environmental review, and securing financing. Economist Mark Zandi, who has been an advocate of infrastructure spending to stimulate economic recovery, acknowledged that it does take a substantial amount of time for funds to flow to builders, contractors, and the broader economy. However, advocates of infrastructure spending have two responses to this concern.

First, to the extent that recovery from a lengthy recession is slow—as it is now—projects with extended timeframes can still contribute to recovery. Thus, the general concern about timing is less relevant, they say. Second, because every major infrastructure category has significant backlogs of projects that could proceed except for funding, advocates are confident that large amounts of actual construction work can be undertaken with increased financial assistance.

In , policymakers concerned about these timing issues included requirements in ARRA that stimulus funds be awarded to "shovel ready" or "ready to go" infrastructure projects that could proceed to construction and contribute to economic output quickly. ARRA's effectiveness in meeting that challenge is not fully known, but may be less than was hoped for, at least according to CBO: By the end of fiscal year , outlays for infrastructure spending from ARRA made up less than 10 percent of the budget authority granted for infrastructure in that year. A related concern raised by some is whether spending that is undertaken in efforts to stimulate economic recovery will represent investment in long-term assets for society.

Critics contend that emphasizing "ready to go" projects is likely to result in spending on many with marginal value, such as projects with plans that have been backlogged for some time because they lack sufficient merits.

Critics contend that most projects are small and do not solve long-term problems or have strategic value. Infrastructure projects should be justified on the merits, not as job-creating instruments. One such critic of additional infrastructure spending noted, "If additional infrastructure is worthwhile, it should be constructed. Such determinations are most likely to be accurate, however, when they are made without the haste associated with an attempt to respond to economic weakness. Undoubtedly, some types of public jobs programs support jobs that have little long-term impact, such as hiring workers to sweep streets or rake leaves, sometimes called "make work.

Some infrastructure, such as highway resurfacing and minor road repairs or replacement of pumps and compressors at water facilities, does benefit the value of the nation's capital assets and can be done more quickly than new construction. Likewise, acquiring new clean fuel buses or rehabilitating transit stations can occur more rapidly than extending collector sewer lines into unsewered communities. Many public officials believe that it is possible to balance both short-term and long-term goals through infrastructure projects. Some economists contend that public infrastructure investments benefit economic growth only if the impact of the infrastructure outweighs the adverse effects of higher taxes that are needed to finance the investment, or if it outweighs the adverse effects of spending cuts in other areas, such as properly maintaining existing public works systems.

Higher deficits that result from stimulus spending slow economic growth in the long run, it is sometimes said, because government borrowing crowds out private investment. According to this alternative view, government spending in a severe and lingering economic slowdown affects resources and labor that are idle, and it does not fully displace private investment.

Other economists say that if federal assistance merely provides fiscal relief by paying for spending that would have occurred anyway—that is, if federal dollars merely substitute for or replace local dollars invested in the same activity—it provides no economic boost. In response, state and local public officials say that that is not the case in today's economy. Because of the pressures that they continue to face, states and cities have been cancelling and delaying infrastructure projects.

Another way of describing this situation could be to say that what is under discussion is in reality about holding state and local governments harmless in order to encourage them to carry out projects that they could not otherwise do, because of budget shortfalls. Traditionally, setting priorities for infrastructure spending is based on a combination of factors. Estimates of funding needs are one factor that is commonly used as a measure of the dimension of a problem and to support spending on some activities relative to others, as in: One widely cited estimate of the nation's infrastructure needs is presented in the finding of the American Society of Civil Engineers ASCE that the condition of the nation's infrastructure merits a letter grade of "D.

ASCE reported the condition of a dozen categories of infrastructure, including roads "Poor road conditions cost U. In the infrastructure context, funding needs estimates try to identify the level of investment that is required to meet a defined level of quality or service. Essentially, this depiction of need is an engineering concept. It differs from economists' conception that the appropriate level of new infrastructure investment, or the optimal stock of public capital infrastructure for society, is determined by calculating the amount of infrastructure for which social marginal benefits just equal marginal costs.

The Role of Public Works Infrastructure in Economic Stimulus

The last comprehensive national infrastructure needs assessment was conducted by the National Council on Public Works Improvement that was created by the Public Works Improvement Act of P. One of the major difficulties in any needs assessment is defining what constitutes a "need," a relative concept that is likely to generate a good deal of disagreement.

This current level of provision may be judged to be too high by some and too low by others, but nonetheless it provides a basis for comparison as future spending needs can be estimated in terms of maintaining or improving the current condition and performance of the infrastructure system. Needs estimates in highway and public transit are calculated in this way by the U.

Department of Transportation DOT. EPA defines a "need" as the unfunded capital costs of projects that address a water quality or water quality-related public health problem existing as of January 1, , or expected to occur within the next 20 years. In some cases, estimates are intended to identify needs for categories of projects that are eligible for assistance under various federal programs. By being defined in that manner, assessments based solely on funding eligibility may not take into consideration needs for non-eligible categories, such as replacement of aging infrastructure or projects to enhance security.

Some federal agencies estimate the funding necessary to bring the current infrastructure system to a state of good repair. The resulting funding estimate is sometimes referred to as the infrastructure "backlog. It is worth noting, too, that needs assessment are often conducted by organizations with a vested interest in the outcome. This is most obviously a concern when a needs assessment is conducted by an advocacy group, but may also occur with government agencies.

A second major difficulty with needs assessments is estimating future conditions, especially consumer demand for services that infrastructure provides. To begin with, estimating demand is difficult because it is based on a host of assumptions such as the rate of population and economic growth.

The Role of Public Works Infrastructure in Economic Recovery

Typically, the longer the time period over which conditions are forecast, the harder it is to accurately predict them. Particularly hard to predict, and, thus, the effect they have on infrastructure needs, are structural changes in the economy and technological change. In addition, however, consumer demand can vary enormously depending on how a service is financed and priced, as well as other public policy decisions including regulation and conservation. For example, highway infrastructure is primarily financed by fuels and other taxes that provide a vague signal or no signal at all about the total cost of driving, particularly the external costs such as the fuel and time wasted in congested conditions.

Highway tolls, on the other hand, particularly those that fluctuate in line with congestion, provide a direct price signal for a trip on a certain facility at a certain time of the day. Pricing highway infrastructure in this way has been found to reduce travel demand, thereby affecting infrastructure need. For example, water supply needs can be reduced by employing water conservation methods.

Finally, it is worth mentioning that the need for public funding to supply infrastructure, including federal support, may often be an open question because the roles of the public and private sector can and do shift over time. Even within the public sector, the roles of federal, state, and local governments change and these shifting intergovernmental relationships may even affect the assessments of infrastructure needs.

A third major difficulty with infrastructure needs assessments is that needs estimates for individual elements of public infrastructure are rarely comparable. Some estimates of need are developed for the purposes of short-term, fiscally constrained spending plans, while others are developed to assess long-term needs based on current system condition and performance, future demand, and the effects of pursuing different policy options.

Some needs assessments are for public sector spending by all levels of government, while others focus only on federal spending. Furthermore, needs estimates are rarely directly comparable because of differing underlying assumptions, such as those about economic and population growth, based on when the assessment is being done and for what purpose. Even comparing assessments for the same category over time can be difficult, if criteria of what gets counted change. Needs surveys are likely to be conducted at different times, and thus will be expressed in different years' dollars. Comparing dollar estimates of infrastructure needs from different assessments is difficult.

Many estimates are prepared in nominal dollars for the reference year, while others, particularly multi-year estimates, are sometimes prepared in constant dollars for a base year. Because there are different ways to inflate and deflate nominal dollar estimates, it should not be assumed that dollar estimates for the same year are necessarily comparable. Because of major differences in coverage and methodology, individual needs assessments cannot be added together to provide a single estimate of future public infrastructure needs, despite the political desire to do so. Moreover, as needs assessments are typically prepared separately, there may be instances where a need for a type of infrastructure is included in more than one estimate, resulting in double counting, and other instances of omission, resulting in undercounting.

As separately estimated, these assessments also ignore competitive and complementary situations in which spending levels in one area may affect needs in another. For example, in the case of transportation infrastructure, an improved freight rail line might reduce the need to improve the highway system to accommodate truck traffic. A further complication arises in the context of evaluating job creation plans—whether infrastructure funds are targeted to true need, and whether "need" is defined by engineering assessments and established distribution methods, or by economic measures such as unemployment or the effectiveness of programs to pull in or leverage private capital.

A relatively recent addition to debate over the issues discussed in this report is the concept of growing the economy and creating jobs with investments that will promote clean energy and environmental protection. In the current context of economic recovery, consideration of "green" projects is less prominent than it was preceding enactment of ARRA in , 51 but the concept continues to have advocates who contend that investments in technologies with improved energy efficiency, energy security, or environmental protection will benefit the economy.

Several interest groups have advocated these types of proposals. Several questions arise concerning such proposals. First, what, exactly, is "green infrastructure? Renewable energy technologies generate electricity from resources such as the sun or wind, or produce transportation fuels from biomass, with essentially no net greenhouse gas emissions. Most of the future growth in green jobs is generally envisioned as coming from the growth in deployment of renewable energy technologies. Attention also has been given to mass transit projects that can decrease energy consumption and reduce global warming pollution.

Similarly, many advocates favor such other technologies or techniques to retrofit schools and public buildings for greater energy efficiency. A second question is, can investment in "green" projects create jobs that benefit the economy's recovery?