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Infrastructure & Payback

As the water from Hurricane Sandy receded, tens of thousands of homes remained without power for weeks.  New York Governor Cuomo was livid – “The utility system we have was designed for a different time and for a different place,” Cuomo told a news conference. “It is a 1950s system.”  The ConEd grid is, of course, managed entirely by private money, but it is a highly regulated utility.  You can bet that the hammer will fall on them as they are forced to rebuild a completely new system in areas where the old one was more or less washed away.

Down the coast in Washington there is a different focus, one that highlights how a developed nation can have such a terrible problem with antiquated infrastructure.  There, the talk is about how to avoid a “Fiscal Cliff”, a political problem focusing and complicating a very real problem with excessive deficits built not around long-term investment but merely keeping the government running.

The divide between the two is bigger than the 3 hours 25 minutes it takes the Amtrack Acela to cover the distance.  It is the gap between the reality that infrastructure investment has an incredible immediate impact on the economy, pays for itself in the long term – but remains neglected as too expensive.

The infrastructure deficit is a global problem, not a US one.  Developing nations are rushing to put in place the rails, roads, ports, and utilities needed to support their growing industry.  Increasing urbanization is putting the pinch on water and sanitation, too.  The estimate worldwide is that $41 Trillion will have to be spent between now and 2030 – $6.5 Trillion of that in the US and Canada.

If that sounds daunting, you can imagine how it’s not really figuring into the deficit negotiations.  But it should.  Infrastructure not only defines a competitive economy, it pays for itself.

A study written by the Thomas Jefferson Program in Public Policy at the College of William & Mary has some startling conclusions about infrastructure expenditures by government.  This report, from May 2012 and supported by trade group Associated Equipment Distributors, had some startling conclusions about the tremendous effects of infrastructure investment:

Estimated Short-Run Effects

  • In the short-run, a dollar spent on infrastructure construction produces roughly double the initial spending in ultimate economic output.
  • The biggest effects of infrastructure spending occur in the manufacturing and business services sectors.
  • In better economic times, spending on infrastructure construction generates a larger return. Yet even in a recession, the overall effects of initial spending still double output as they ripple through the economy.

Estimated Long-Run Effects

  • Over a twenty-year period, generalized ‘public investment’ generates an accumulated $3.21 of economic activity per $1.00 spent.
  • Over twenty years, investing $1.00 in highways and streets returns approximately $0.35 in tax revenue to federal and state/local governments, of which $0.23 specifically accrues at the federal level.
  • Over twenty years, investing $1.00 in sewer systems and water infrastructure returns a full $2.03 in tax revenue to federal and state/local governments, of which $1.35 specifically accrues at the federal level.

In short, the middle of a Depression is the perfect time to make such an investment, given the tremendous short-term benefits to the economy.  But the effects continue to accrue over the life of the infrastructure, making them either more than pay for themselves or, in some cases, merely come close.

Why is infrastructure one of the last things we are willing to invest in?  The short answer is that when you’re having trouble keeping food on the table the last thing you’ll worry about is fixing the roof.  Our negligence today is likely to have grave implications for many years to come if we don’t get our act together fast.  It’s another dimension to add to the budget negotiations – and it highlights exactly why a long-term solution is absolutely necessary to get us back on track.

Will this message be received in time to make a difference?  It’s not as though the size of the infrastructure deficit and the potential benefits are not well known.  They are.  But it is also the easiest thing to leave off the table when it comes down to a difficult negotiation.

If we’ve learned one thing in recent weeks it’s just what a good infrastructure means to ordinary life.  Hopefully, that extreme lesson will carry over beyond the hammer dropping down on ConEd in the coming months and extend to the whole nation.

20 thoughts on “Infrastructure & Payback

  1. I am a little surprised at the payback but not really. This is what government is there to do first & if we can’t get this right we are failing the next generation in more ways than just debt.

  2. I hold the view that the previous stimulus bills were too small. Perhaps they should have amounted to $3-$4 trillion. That way the US economy would not have sputtered.

    i feel pro-growth measures shouldn’t be part of the fiscal cliff negotiations, though. That should be the work for next year.

    The fiscal cliff is about out year entitlement spending that has no revenue stream.

    To me states and localities understand their infrastructure needs. The federal government could give subnational governments amounts equal to the budget amounts they cut during the recession. The thing is you want them to use it for infrastructure not operating expenses or else they become dependent.

    • Apparently you were right – I remember you saying this some time ago and it looks like it is a much bigger need and a good source of jobs.
      Yes, state and local units are much better positioned. Bond rates are low for them now, but they are also pretty tapped out. I would say that the Feds should consider some kind of infastructure program that pays out for nearly any project up to the state and local amount in matching grants.

  3. I really like seeing the specifics. Not only will investment in infrastructure bring a payback, but these investments can also be a platform for the next round of innovations!

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