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5 Bad Arguments for Public Infrastructure Spending

Ryan Bourne

With healthcare reform stalling, President Trump’s
administration seems ready to shift focus onto infrastructure.

Good infrastructure, especially highways, bridges, and airports,
can certainly improve economic mobility and lower costs by reducing
travel time between locations. This, however, says nothing about
the kinds of institutions most likely to produce good
infrastructure or who should fund it.

Here’s a handy guide to some of the bad economic reasoning
you will likely hear as the debate about infrastructure spending
heats up.

1. Past benefits don’t mean future benefits

A handy guide to some of
the bad economic reasoning you will likely hear as the debate about
infrastructure spending heats up.

In his joint address to Congress, President Trump declared that
“the time has come for a new program of national
rebuilding.” The implication was clear: building new
infrastructure was a success in the past, so it would be good for
the economy today.

Past experience and the experience of other countries lead to
mixed conclusions about the value of public infrastructure project.
Highway construction can substantially boost productivity for industries
associated with road use, but the same research finds those
benefits to be largely one-offs. More recent research has found that too many
new highways were built between 1983 and 2003. It has also found
that marginal extensions to the highway system are unlikely to
increase social welfare because the cost savings from reduced
travel times are relatively small.

We should judge new projects on their own merits, not against
old examples or countries in different circumstances.

2. Don’t ignore opportunity costs

“Traffic Congestion Costs Americans $124 Billion A
Year” is a headline from 2014. As legislation for
infrastructure is pushed, we will hear plenty about the costs of
delays to the economy.

These costs are undoubtedly very real, but so are the costs of
building new infrastructure, and that money can’t then be spent on
other things that we might have preferred to spend them on. Without
the aid of clear market signals, it’s very difficult and maybe
impossible for governments to determine the optimal amount and
nature of infrastructure spending. It would obviously be
prohibitively expensive to eliminate all congestion by expanding
every freeway to 15 lanes but building no new highways would also
be problematic. How far should a road expansion go? How often
should it be repaired? How much transportation should go by train?
How much money should be spent on research and development for
completely new ways of meeting transportation demand? Markets are
good at finding the optimal mix over time and rewarding those who
are better at satisfying demand. Governments, even with the best of
intentions, lack the necessary knowledge about each of our
individual opportunity costs to find that mix. They certainly lack
the incentive structure to improve over time.

3. But what about that one bridge…?

Individual catastrophic events can lead to concern about the
physical conditions of infrastructure. The I-35W bridge collapse in
Mississippi in 2007 is a recent example. Even more recently,
commentators have used the I-85 bridge fire and collapse in Georgia
as justification for more infrastructure
investment
. But these are rarities that tell us little about
the quality of infrastructure overall.

You often hear that 58,791 bridges are structurally deficient,
for example, which sounds kinda scary. Less often will you hear
that, according to the Federal Highways Agency, “structurally
deficient does not mean that it is likely to collapse or that it is
unsafe.” You also won’t hear that the proportion of bridges
labeled structurally deficient has fallen from 24.1 percent in 1990
to 9.6 percent in 2015.

When you hear individual statistics on the dire state of U.S.
infrastructure, ask questions like, “compared to
what?,” “how has this changed over time?,” and
“is there a demand for this to be replaced?”

4. Cheap debt doesn’t make everything a
bargain

In 2015, Nobel Laureate Robert Shiller argued that “the
government should be borrowing, it would seem, heavily and
investing in anything that yields a positive return.” The Brookings
Institution recently spelled out similar logic, suggesting that low
interest rates should also be inducing private sector
investment.

The mistake here is to conflate a less costly time to invest
with a “good time” to invest. Take the example of a
toll road. If the long-term growth and population outlook for an
area has seriously slowed, then the expected use of that toll road
would fall, as would demand for investment opportunities. This
would cause lower interest rates, all else being equal.

Those lower interest rates, however, would not indicate that it
was a good time to invest. They would be signalling lower expected
future revenues.

Similar logic applies to government investment in transport
infrastructure without user fees — if there are structural
reasons why demand for transportation use is falling, then any
investment would yield far fewer economic benefits.

Infrastructure decisions should be judged by robust estimates of
costs and expected benefits, not just how cheap it is to
borrow.

5. How stimulus actually works

Leaked documents show that the Trump
administration is likely to prioritize “shovel ready”
projects and those that are “direct job creators.” But
previously on his campaign website Trump’s team had
suggested the goal of infrastructure development was “more
rapid productivity gains.”

This conflates two well-known arguments for infrastructure
investment. The first is that government investment spending can be
used to “stimulate” the economy and put people back to
work. The second is that smart, efficient investments can help
enhance long-term productivity growth.

These two ambitions often conflict. Attempts to stimulate
quickly and get people back to work will likely result in sloppy
project selection and the hiring of more labor than would be most
efficient. And since government is, well, government, it’s a pretty
good bet that infrastructure funds will go preferentially to the
well-connected.

Ryan Bourne,
former head of public policy at IEA, occupies the R. Evan Scharf
chair in the Public Understanding of Economics at the Cato
Institute.