Friday, June 22, 2018
Opinion

On U.S. infrastructure, spend now, gain later

When the American Society of Civil Engineers issued a report card giving D and F grades for major infrastructure assets in the United States, the group estimated that it would cost $2.2 trillion to rehabilitate them. Even though these public sector assets support the private sector of the economy, and despite the availability of cheap money, Congress has no current plans to remedy this situation.

Its reluctance to support investment in infrastructure is unfortunate because this is an opportune time to earn a better report card; presently, we can borrow at very low interest rates to upgrade our streets, roads, bridges, railroads, school buildings, Internet bandwidth and K-12 education. We have earned the trust of foreign investors, who value the safety of our financial markets and seek to loan us money through their purchases of U.S. Treasury bonds.

In the short run, infrastructure investment would stimulate business growth and employ otherwise unemployed resources of labor and equipment. In the longer run, when these assets are in good working order, they would support faster growth of the economy, a prerequisite for bringing down the national debt and putting workers back on the path to higher after-tax incomes.

What are we waiting for?

Congressional inaction reflects the public concern over "runaway spending" and the rapid rise in the debt over the past 30 years, and especially the last five. Much of this concern rests on the falsely imagined equivalence of all government spending. But consumption spending and investment spending play very different roles in the economy, whether done by a firm, a family or the government. Our national debate should pivot from a narrow focus on debt alone to one that separates investment from consumption, that is, whether the borrowed money is spent in ways that repayment can be expected through increased future productivity.

Carefully chosen infrastructure spending is an investment that pays for itself in greater economic growth; in fact, failure to make these investments can retard growth. Infrastructure investment spending is more likely to be accepted by struggling taxpayers than increased consumption spending on safety net programs such as food stamps or extended unemployment insurance, however dire the need for such programs may be.

Seriously? More debt?

How often have we heard that the size of our current national debt — some $15 trillion — prevents us from borrowing more money? Even with interest rates this low and opportunities so beneficial, the resistance to further borrowing is quite strong. The false and misleading claim is that we have already "mortgaged the future" and we "don't have the money." These slogans reflect a key concern: the ability to repay the debt.

The usual measure of the ability to repay debt is the ratio of debt to gross domestic product. Since infrastructure assets have very long lives, this measure should be calculated over a long time horizon. The public debt is projected to grow to $70 trillion over the next 75 years. If we experience 2 percent economic growth, national income over this period will total $2.46 quadrillion. The resulting ratio would be a mere 2.84 percent, demonstrating that as a nation, we are in a position to make cost-beneficial, growth-enhancing investments.

Some additional arithmetic makes this point more forcefully. Suppose the infrastructure investments enable the economy to grow just one-tenth of one percent faster (2.1 percent versus 2.0 percent). Due to the power of compound interest, the added GDP over those 75 years is $116 trillion. Yes, the projected national debt is large, much larger than this year's GDP. But arithmetic also shows that failure to invest in growth will deny future generations the enormous gains available from even tiny improvements in economic growth rates.

We've been here before

During the Cold War, President Dwight Eisenhower recognized that a well-functioning infrastructure and an educated citizenry were necessary to bolster the nation's long-run global competitiveness and security. To that end, he launched the interstate highway system and demanded expansion of math and science education. Because of his leadership, we invested in our future to the benefit of generations of Americans.

Charles O. Kroncke, left, is associate dean in the University of South Florida College of Business. William L. Holahan is a professor of economics at the University of Wisconsin at Milwaukee.

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