WSJ Pretends Public Infrastructure Spending Has No Positive Effect On Economy
Blog ››› ››› ALBERT KLEINE
The Wall Street Journal claimed that because private investment typically precedes infrastructure projects, President Obama's call for increased infrastructure investments is misguided. This position, however, ignores the historically positive effect of public investment on private activity and the nation's current need for infrastructure improvements.
In a series of recent speeches on the economy, President Obama has repeatedly called for increased infrastructure investment, claiming "[it] is a key ingredient to a thriving economy." In his July 30 speech in Chattanooga, TN, the president proposed combining a corporate tax rate cut with "new spending on infrastructure projects like roads and bridges."
Reacting to the president's push for increased infrastructure spending in The Wall Street Journal, University of Dayton history professor Larry Schweikart and Hillsdale College history professor Burton Folsom claimed that Obama is ignoring the history of infrastructure in the United States.
According to the authors, the president's position amounts to, "Create the infrastructure, in other words, and the jobs will come," which does not comport with historical evidence. The authors cite a number of examples -- the National Interstate and Defense Highways Act of 1956, the transcontinental railroad, and the Erie Canal -- all of which they use as evidence that private demand spurs the need for investment and not the other way around:
In all of these examples, building infrastructure was never the engine of growth, but rather a lagging indicator of growth that had already occurred in the private sector. And when the infrastructure was built, it was often best done privately, at least until the market grew so large as to demand a wider public role, as with the need for an interstate-highway system in the mid 1950s.
While it may be true that infrastructure typically follows private sector growth, this myopic view on the nexus between private and public investment completely ignores that infrastructure spending can further bolster private activity.
In fact, the authors' example of interstate highway development demonstrates how public investment can support private interests. According to a multitude of studies conducted by M. Ishaq Nadiri and Theofanis Mamuneas for the Federal Highway Administration, public investment in highways consistently results in positive gains for private industry, including productivity growth and general economic development. Indeed, in an overview of studies on the effect of public infrastructure investments on the U.S. economy, economists Alfredo Marvao Pereira and Jorge M. Andraz find that public investment complements private activity, with core infrastructure investments delivering the greatest returns.
Moreover, the current state of the economy suggests that increased infrastructure investment can help spur economic growth. According to November 2012 research from the Federal Reserve Bank of San Francisco, every dollar invested in highway development results in a long term economic gain of $2:
One concept often used to assess the effectiveness of government spending is the multiplier. The fiscal multiplier represents the dollar change in economic output for each additional dollar of government spending. Thus, a multiplier of two implies that, when government spending increases by one dollar, output rises by two dollars.
Based on the results shown in Figure 1, we find that multipliers for federal highway spending are large. On initial impact, the multipliers range from 1.5 to 3, depending on the method for calculating the multiplier. In the medium run, the multipliers can be as high as eight. Over a 10-year horizon, our results imply an average highway grants multiplier of about two.
Also absent from Schweikart and Burton's article is any recognition that infrastructure investment and repair is needed. Infrastructure spending in the United States has plummeted in recent years, with current levels reaching 20-year lows. The American Society of Civil Engineers recently graded America's infrastructure with an overall "D+", with roads and transit -- the type of infrastructure spending Obama has called for -- each receiving a "D" grade.