Will federal dollars for infrastructure boost the economy?

The news blasts about America’s crumbling infrastructure are hard to miss. Data available at USAFacts shows that in 2015, 14 percent of America’s bridges were functionally obsolete and another 10 percent were structurally deficient. Meanwhile, in 2014, commuters spent an extra 42 hours stuck in traffic.

The White House proposes to spend $200 in new federal money that it hopes will subsidize an addition $1.3 trillion in new infrastructure spending by state and local government and private enterprises.

But will those dollars achieve a high speed economy with higher wages and GDP? Our new report, Options for Infrastructure Investment: Dynamic Analysis, finds that it depends.

The blue bars in Figure 1 show that when the federal government directly spends $200 billion on infrastructure using deficit dollars, it’s an economic wash after 10 years. GDP and wages are no better with our current infrastructure programs. Why? While more public infrastructure helps magnify the output created by the private sector capital stock and labor, the deficit financing drags in the opposite direction, essentially neutralizing those gains.

However, the red bars in Figure 1 show what happens when the federal government uses those same dollars as an incentive for other governments and the private sector to invest an additional $1.3 trillion in public infrastructure. Now we find an on-ramp to growth, provided that the additional $1.3 trillion is not deficit financed. By 2027, the economy is 0.5 percent larger. Even then, the effects fade over time, in part because infrastructure doesn’t last forever.

Bottom line: Despite America’s existing massive infrastructure base, even more investment will likely stimulate growth. But only if the bulk is not deficit-financed.

Figure 1: The Effects on Key Variables Relative to Current Policy in 2027 by Implementation Plan, Percent Change

Figure 1.jpg

Note: Consistent with our previous dynamic analysis and the empirical evidence, the projections above assume that the U.S. economy is 40 percent open and 60 percent closed. Specifically, 40 percent of new government debt is purchased by foreigners. The government is assumed to focus spending on "shovel ready" projects and so, the above projections assume double the spending rates and building rates applied by CBO (2016). Consistent with empirical evidence, the projections above assume that the elasticity of output to a change in public capital is 0.05. The projections above assume a high rate of return to private capital. Projections that assume a low rate of return to private capital are not materially different. Revenue estimates change with the distribution of taxable income that reflect a dynamic economy.

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