Infrastructure is All the Rage in Washington. But Does it Boost the Economy?
This week, the Problem Solvers Caucus — a bipartisan group of 58 U.S. House lawmakers — came out in support of the $1.2 trillion infrastructure bill negotiated by the White House and moderate GOP and Democratic members of the U.S. Senate. The announcement is a serious boost for the plan, which House and Senate leaders hope will be the basis of legislation to be brought to the floors of both chambers of Congress in the next few months.
But will this plan provide a boost to the U.S. economy? How will it impact the federal budget deficit and national debt — and will the scale of that impact have long-term repercussions for U.S. growth? We tackle those questions below.
Lessons From The Great Recession
In May 2020, well before the current bipartisan agreement was even a figment of lawmakers’ imaginations, the Congressional Research Service (CRS), a nonpartisan research arm of Congress, released a report examining how the American Recovery and Reinvestment Act (ARRA) of 2009 impacted the U.S. economy.
Readers will recall that the ARRA was the basis of the Obama administration’s economic policy response to the Great Recession. The bill, referred to back then simply as “the stimulus,” provided a total of $48.1 billion to the U.S. Department of Transportation. About half of that sum, $27.5 billion, went to highway infrastructure programs. Another $8.4 billion was designated for public transportation; $8 billion was allotted for high-speed rail; and the balance went to rail and air transport. It passed the House and Senate largely along party lines. (Democrats had significantly larger majorities in both chambers in 2009.)
In remarks when he signed the ARRA, President Barack Obama said, “Because we know we can’t build our economic future on the transportation and information networks of the past, we are remaking the American landscape with the largest new investment in our nation's infrastructure since Eisenhower built an interstate highway system in the 1950s.” He promised that the legislation would result in “nearly 400,000 men and women” going to work to rebuild America’s “crumbling” infrastructure.
A year after the bill was signed, then-Vice President Joe Biden said, “The economy has been growing at a rate of nearly 4 percent in the last three quarters … We would be barely growing at all had [ARRA] not been passed in the first place."
Is that true? According to CRS, the evidence is dubious. “Based on approximately a decade or more of program and other data,” the CRS report concluded:
Infrastructure spending is not the fastest way to provide stimulus. The ARRA also included a boost to unemployment insurance benefits. The CRS report noted the “ARRA transportation funding was expended more slowly than other types of assistance,” including jobless benefits. In fact, only 9 percent of DOT funding was spent within the first six months of its availability, compared with 44 percent of unemployment compensation. And then there is this fact: only 61 percent of the DOT funds were spent over the next two fiscal years. Presuming this experience holds true more than a decade later, the country might get an economic boost from the $1.2 trillion bipartisan bill, but it will not be an immediate one.
State policy still matters. The federal government is not the only entity in the infrastructure spending game. In fact, according to CRS, “State and local expenditures make up around 75 percent of transportation infrastructure expenditures.” In 2009, some states reacted to the ARRA by cutting their overall highway funding. If states once again slow down their own spending in the wake of a large federal program, the economic impact of the $1.2 trillion spending bill could be very uneven across the United States.
Job gains were nothing to write home about. According to CRS, “Employment effects were modest.” In fact, “Employment in highway construction, for example, rose slightly in the year following the passage of ARRA” and a “sustained increase in employment did not begin until 2015.” In the near term, therefore, a $1.2 trillion infrastructure spending bill is unlikely to drive down unemployment — especially given the fact that so many industries, including construction and manufacturing, are having trouble finding workers.
The size of the 2009 infrastructure component of the ARRA obviously pales in comparison to what lawmakers have planned today — which is why it is helpful that CRS also has provided a more recent report examining how infrastructure spending impacts the economy.
How Much Will $1.2 Trillion Expand The U.S. Economy?
The CRS released its most recent report on the economic impact of infrastructure spending on July 1, just days after President Joe Biden agreed to the $1.2 trillion bipartisan framework.
President Biden has said the infrastructure framework will create “millions of good-paying jobs, and position America to compete with the rest of the world in the 21st century.” He also argued that the agreement is “a blue-collar blueprint to rebuild America.” Republicans also have argued that infrastructure investment will spur the economy (as long as infrastructure legislation does not come with tax increases, that is).
Again, evidence to support this claim, particularly on the jobs side, is not clear cut. CRS’ review determined:
A one percent (approximately $157 billion) increase in public capital stock (or infrastructure) would increase private-sector economic output by 0.083 percent ($14.7 billion) in the short-term and 0.122 percent ($21.6 billion) over the long term. Extrapolating those numbers for the current $1.2 trillion agreed-upon plan, the overall macroeconomic impact would be around $140 billion in the near term and around $200 billion over the long term.
Faced with a unique public health crisis that created a recession, an additional $300 billion in federal infrastructure grants in 2020 would have increased the size of the overall economy by about $360 billion per year for 2020 and 2021.
Most economists agree the short-term economic and jobs boost from infrastructure investment is smaller than those from other types of government spending (again, like federal jobless benefits).
Still, there are other benefits to infrastructure investment, but many of those are hard to capture. CRS acknowledges, “Economists generally agree that infrastructure is a critical factor of economic well-being, enabling private businesses and individuals to produce goods and services in a more efficient manner.” Additionally, “For businesses, infrastructure can help to lower fixed costs of production, especially transportation costs, which are often a central determinant of where businesses are located.”
All of these benefits come with an important caveat, however, and CRS touches on that problem too.
Is Adding To The Deficit A Good Idea?
The July 2021 CRS report has a bit of something for everyone when it comes to whether and how much infrastructure should be spent by adding to the annual federal deficit and, as a result, cumulative national debt.
On the one hand, CRS offers, “deficit-financed investments may indirectly increase economic output even further” since they have a multiplier effect. In fact, “The multiplier effect suggests that $1 of government spending may increase economic output by more than $1, particularly during economic downturns.” On the other hand, CRS said economists tend to agree, “Although deficit-financed investment may increase short-term economic output, the medium- to long-term impact may be reduced due to the ‘crowding out’ of private investment.”
While Republicans (and economists) might be willing to add some portion of a $1.2 trillion infrastructure bill to the national debt in order to finance physical infrastructure capabilities, that argument is harder to make for the “family infrastructure” plan that Democrats want. Indeed, Senate Minority Leader Mitch McConnell (R-Ky.) made that clear again this week. As the New York Post reported, back home at an event in Kentucky, Sen. McConnell vowed “to make the passage of a partisan infrastructure package as difficult as possible — calling Democrats’ multi-trillion dollar “human infrastructure” spending plans ‘wildly inappropriate’ due to the impact previous mammoth spending packages have had on the national debt.”
And how do Americans feel? According to a new survey by the Committee for a Responsible Federal Budget, 79 percent of Americans agree that the federal government should rebuild the country’s roads and bridges. However, 80 percent of Americans also think that the federal government wastes a lot of money and 75 agree that Americans should worry about the national debt and should consider whether too much federal debt could hurt the economy.
The United States’ infrastructure is in disrepair. But Americans will weigh whether the cost of rebuilding it is too much for future generations, and the American economy, to bear.