Is Congress really going to miss its free lunch on infrastructure?

February 11, 2013

Since the election, there have been hints that we could be entering a period with some actual productive, bipartisan dealmaking, most explicitly on immigration reform. But the Republican reaction to Obama’s expected proposals on infrastructure in Tuesday's State of the Union address may be a better indicator of whether we are in for a year of real legislative give-and-take—or a return of the ugly politics of the last several years.

It will also be an indication of whether the U.S. government is going to let a once-in-a-lifetime opportunity to rebuild the nation's roads and bridges more or less for free slip through its fingers.

Planes, trains, and automobiles all need infrastructure in order to go. (Robert Thomson - The Washington Post)
Planes, trains, and automobiles all need infrastructure in order to go. (Robert Thomson - The Washington Post)

The early buzz from the White House is that while Obama will discuss the current legislative hot-buttons of immigration and gun control, the economy is a major focus of his speech. In particular, he will call for new infrastructure investment—roads, bridges, power grid, that sort of thing.

The big question on infrastructure is whether the White House is correctly reading the politics of the moment. Could Congressional Republicans be ready to sign on to some form of large-scale investment in the nation’s transportation and energy infrastructure? Or is Obama tilting at windmills (literally, in this case).

It comes as we may be approaching the end of a five year period in which investing in the nation’s physical infrastructure has been something close to a free lunch. With interest rates near all-time lows and millions of construction workers unemployed, the last few years have been a time that it would have been a historical bargain for the United States to do upgrades to roads, bridges, and airports that will eventually need to take place anyway. It has been a political breakdown—in particular conservatives’ view of almost any non-defense federal spending as wasteful—standing in the way.

This graph shows total private fixed investment relative to the nation’s potential GDP, going back to 1949. (That's how much the private sector is spending on both houses and commercial installations). After averaging 15.5 percent from 1949 to 2007, private investment fell as low as 10.6 percent in the economic collapse starting in 2008 (it was 12.2 percent at the end of 2012).


Private fixed investment as a percentage of potential GDP. When it gets back to historical norms, the free lunch on infrastructure investment will be over.

In other words, for the last few years private construction activity has been far below its historic norms. And so long as the private sector isn’t building houses and office buildings and factories, the government can build without crowding out private investment.

But that window might not last much longer; at the current pace, private investment will be back to its historical average in another few years. It’s not now or never, exactly, but it very likely will be cheaper now to spruce up the nation’s transportation and energy infrastructure than it will be in the not-too-distant future.

In concept, this is an area where there should be room for the two parties to work together. Business interests tend to favor new infrastructure spending, for both the benefits it brings for the companies that would like faster and more efficient ways to ship their goods and the construction companies that stand to make money actually building the stuff. Even small government conservatives want to have quality roads in their districts. Wisely chosen infrastructure spending should not increase the national debt over time, as upfront expenditures are paid back either through tolls and user fees, greater economic development, or both.

Over the last few years, though, those facts have crashed headlong into a widespread view in the Republican caucus that any federal spending is wasteful. "Anything that is akin to the stimulus bill is not going to be acceptable to the American people," House Majority Leader Eric Cantor said in September 2011, after Obama proposed a series of job-creation measures centered around new infrastructure.

But a few things have changed since then. First, Republicans have seen electoral damage by their image as an obstruction-at-all-cost party, losing the White House and seats in both houses of Congress in the 2012 elections. Cantor himself delivered a speech last week aimed at presenting a more pragmatic face to the party. Second, the president has been re-elected, so there is no longer the odd dynamic where bipartisan dealmaking could make Obama look more statesmanlike and help his re-election chances.

Much of the Republican opposition to infrastructure spending has been rooted in a conviction that all government spending is a boondoggle, taxing hard-working Americans to give benefits to a favored few, and exceeding any reasonable cost estimate in the process. That’s always a risk with new spending on infrastructure: that instead of the Hoover Dam and the interstate highway system, you end up with the Bridge to Nowhere and the Big Dig.

In that sense, this is a great test of whether divided democracy can work, and whether Republicans can come to the table to govern. One can easily imagine a deal: Democrats get their new infrastructure spending, and Republicans insist on a structure that requires private sector lenders to be co-investors in any projects, deploying money based on its potential return rather than where the political winds are tilting.

In other words, the two sides could negotiate in good faith and, in the process, get a better outcome for the U.S. economy than either party could operating on its own. Now that would be something to see.

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Dylan Matthews · February 11, 2013