Is Infrastructure Spending a Good Investment?
Hillary Clinton says yes, but it's complicated.
Democratic presidential candidate Hillary Clinton has a plan to jump-start the economy. It would require an additional $250 billion in federal infrastructure spending over five years—on top of the $250 billion over the next five years that Congress already wants to spend—along with the creation of a $25 billion federal infrastructure bank.
Yet the plan is still vague and lacks specific details. For instance, no one knows how this new spending would be paid for—or who would pay for it. Clinton floated the idea that it would be paid for with business tax reform, but there aren't any specifics on what those reforms would entail. We can speculate that she would most likely propose a repatriation scheme to put her hands on U.S. corporations' foreign profits exiled overseas to avoid double taxation at the oppressive U.S. corporate tax rate.
Leaving aside the fact that—like most of Clinton's ideas—this is a tired proposal, it wouldn't do much for the economy. First, there's a debate about whether our infrastructure is in such bad shape or whether a massive investment in fixing it would really be such a bone for the economy.
Every year, the American Society of Civil Engineers gives America's infrastructure a terrible grade, which it thinks can only be improved with more spending. It would be easier to take the ASCE seriously if it weren't one of the biggest beneficiaries of the extra infrastructure cash. Second, the data suggest that things aren't that grim. In fact, the number of bridges labeled deficient and the highway congestion index are declining, and highway pavement and airport runway conditions have improved.
In addition, there's ample literature to show that although infrastructure spending may be a good long-term investment—depending on who is investing whose money—it is a particularly bad vehicle for stimulus and does not boost short-term job growth.
According to Keynesian economics, fiscal stimulus can be counterproductive if it is not timely, targeted and temporary. But by nature, infrastructure spending is not timely and very hard to target. That's because infrastructure projects involve planning, bidding, contracting, construction and evaluation. In other words, even when money is available, it can be months or even years before it's spent.
The data also show that government-funded infrastructure projects often aren't good investments, either, and tend to suffer from massive cost overruns, waste, fraud and abuse. Research shows that the political process encourages a systematic tendency to overestimate the benefit and underestimate the cost of infrastructure projects. In other words, it's not the best projects that get implemented but the ones that look the best on paper.
It is also a mistake to assume that it's the role of the federal government to pay for roads and highway expansions. With very few exceptions, most roads, bridges and even highways are local projects (state projects at most) by nature. The federal government shouldn't have anything to do with them.
A better alternative to federally funded projects could be private-public partnerships, privatization or simply devolution to the states.
So how about Clinton's infrastructure bank? It is unlikely that such a bank would deliver on its promises. First, like all other infrastructure spending, the investments would be driven by politics or would give priority to the pet project of the day (for instance, green investment). It's no surprise that the idea is cheered by the unions that would be guaranteed to win big under the proposal. Taxpayers, on the other hand, who would be underwriting the whole thing, should be wary of it.
Ultimately, taxpayers and consumers would be better off if these activities were privatized. And if states aren't ready for privatization, they can do what Indiana did a few years back when it leased its main highways to a private company for almost $4 billion. The state became $4 billion richer, and it still owns the highway. Consumers in Indiana are better off because the deal saved money.