Elizabeth McNichol is a senior fellow at the Center on Budget and Policy Priorities and an old friend. As readers of this column know, I’ve been squawking about the need for a deep dive into public infrastructure investment for a long while now. The record shows that even if it were deficit-financed (borrowing rates remain very low), such investment right now would be both productivity-enhancing and job-creating. It would also be pro-education and, considering the extremely serious problems we’ve been having with some of our water systems, an essential investment in child health.
So, when I heard McNichol, an expert on state-level policy, give a talk based on her important new paper, I urged her to share her message. Here’s our Q and A:
Liz, you recently pointed out a number that might surprise some folks in the public infrastructure debate: State and local governments own over 90 percent of non-defense public infrastructure and they pay 75 percent of the cost of maintaining and improving this stock. Meanwhile, many of us have been arguing for the federal government to step up in this space. Are we talking to the wrong sector?!
Yes and no. There is an important role for the federal government, without a doubt. Don’t stop talking to them. But state and local governments also need to be a part of the conversation. They are the primary stewards of most of the country’s public capital. For example, states maintain the interstate highways. And states — along with cities, counties, and school districts — build schools, roads, bridges, water treatment plants and other public infrastructure that are key to the country’s continued growth.
Your recent report — a “must read” in this area of work — taps the oft-cited American Society of Civil Engineers grade of D+ for the condition of the U.S. infrastructure. But I always worry that asking these guys about this is like asking your barber if you need a haircut. What makes you convinced that we really need to improve our infrastructure?
First, you only have to look around to see crumbling roads and bridges, not to mention public transit systems that are all-too-often closed for repairs. And the Civil Engineers aren’t the only ones who have identified these needs. For instance, America’s drinking water treatment and distribution systems need $384 billion in investments over the next 20 years, according to the Environmental Protection Agency. A recent survey by the U.S. Department of Education found that over half of America’s public schools need to be repaired, renovated or modernized. And almost 20 percent of the country’s roads are in poor condition, according to the Federal Highway Administration’s most recent survey. In the face of these rising needs, state and local spending on infrastructure is at a 30-year low.
Besides being an unsexy word, “infrastructure” is pretty vague. Precisely where and on what should we consider spending the marginal infrastructure dollar to get the biggest bang-for-the-buck?
There’s lots to be done. Investments in well-maintained roads, railroads, airports and ports, as well as well-functioning water and sewer systems, help businesses and communities thrive. State-of-the art schools free from crowding and safety hazards improve educational opportunities for future workers.
You’ve written that investment in public infrastructure improves growth and productivity. Given my and others’ obsession with weak productivity growth, that’s obviously a really important finding. Could you say a bit about this research? How does this work?
The condition of roads, bridges, schools, water treatment plants and other physical assets greatly affects the economy’s ability to function and grow. Commerce requires well-maintained roads, railroads, airports and ports, so that manufacturers can obtain raw materials and parts, and deliver finished products to consumers. Improving many types of public infrastructure boosts the productivity of businesses by reducing their costs. Better roads and public transit make it feasible (or more efficient) for workers to get from home to work. Carefully targeted initiatives to maintain and improve public infrastructure boost a state’s long-term productivity, resulting in more economic growth and higher-wage jobs. In the short-term, under the right conditions — including the current ones — public infrastructure investments also can create needed high-quality jobs. The Center’s recent report includes a summary of the academic literature that shows the connection between infrastructure investment and productivity growth.
These effects are greatest when the economy is far below full capacity. In the depths of the Great Recession, for example, a dollar in infrastructure investment would have resulted in $1.50 in GDP growth, according to the Council of Economic Advisers. This impact will be significantly less but likely still positive during a time of economic growth, when there is still some slack in the labor market ― as in the economy now. Moody’s estimated that as of the beginning of 2015, after a number of years of economic recovery, an additional dollar of infrastructure investment would increase GDP by 86 cents. According to a review of recent academic studies, an additional dollar of capital spending would increase GDP modestly at best in the near term if the economy were at full capacity.
Years ago, you and I (with other co-authors) wrote various pieces about inequality among the states. Is there any connection between state-level inequality/poverty/incomes and so on, and their infrastructure deficits?
Yes, there are. For example, a higher percentage of public schools in poor areas are in need of repair than those in the wealthiest places. In addition, poorer areas are often home to outdated infrastructure beyond schools. For example, aging lead water pipes are much more common in the lowest-income neighborhoods or cities. This brings the potential for dire health problems and the associated health and economic costs — as the experience of Flint, Mich., has demonstrated. Increased investment by states that is targeted to low-income areas can help address these problems.
Some economists argue that with borrowing costs low and the productivity impacts just discussed, infrastructure spending is close to a free lunch. I’m skeptical. You? And if it’s not free, should there be “pay-fors?” Which ones?
States pay for public buildings, facilities, roads, and other infrastructure somewhat differently than other things. For example, they use debt more frequently and often rely on user fees like tolls to fund infrastructure. In addition, the federal government provides grants for roads, transit, and other infrastructure. But state revenues are required, regardless of the funding method that’s used. Borrowing must be repaid and federal grants often require matching funds. To get the biggest economic bang for the buck, states should choose to rely on taxes on high-income residents rather than tolls and the like, which fall more heavily on low-income taxpayers, or they should consider offsetting the negative effects of such fees through measures, like enacting or expanding the Earned Income Tax Credit, designed to help people who need it most.
States must turn their attention back to the infrastructure investments that will boost productivity, support business growth, create jobs, provide a healthier environment and improve opportunities for all of their residents. The specific investments needed will differ from state to state, depending on factors such as the condition of the existing infrastructure and the mix of industries in the region, but states continue to ignore needed investments at the country’s peril.