Infrastructure, Deficits, and Global Recovery

Block: The Infrastructure Economy

A TALE of two episodes in the life of a bridge tells us a lot about the dilemmas facing governments around the world. The Bay Bridge linking San Francisco and Oakland was originally built between 1933 and 1936 at a cost of $77 million. After the 1989 Loma Prieta earthquake, the eastern span had to be rebuilt. The project began in 2002 and is supposed to be completed in 2013, with cost estimates now running at $6.3 billion. Despite our technological progress, replacing just half of the old bridge will take four times longer and cost five times more, after adjusting for inflation, than the initial construction. Rush hour tolls were recently increased to $6 roundtrip to help cover these mounting costs.

Even if we allow for some waste and inefficiency in the rebuilding project, the historical cost differences are still enormous. Some of this is because safety practices were casual in the 1930s, and because they didn’t have to work around hundreds of thousands of commuters already using the bridge. But the key problem is that bridges and other infrastructure projects don’t benefit from the astonishing productivity gains that we have made with mass-produced goods. Bridge-building is much more capital intensive than it was seventy-five years ago, but you can’t simply pop out another bridge segment the way that cars, computers, or toasters now jump off heavily automated assembly lines. Almost all infrastructure projects resist standardization; they have to be adapted to particular physical sites, and this drives up costs. Nor do we let employers pay workers the prevailing wage in China; earnings for the skilled workers and managers on such projects have risen much faster than inflation.

When we generalize from the story of this bridge to all infrastructure projects, it becomes clear that the cost of maintaining and rebuilding our infrastructure will inevitably rise as a percentage of GDP, even if our infrastructure needs remain constant. And they won’t: we need more infrastructure now than ever before.

The growing need is most obvious with transportation. Today, we need to maintain the shipping infrastructure of harbors, ports, and navigable waterways while also developing and maintaining infrastructure for railroads, mass transit, motor vehicles, air travel, and even space travel. Similarly, on top of the old electrical grid, telephone lines, water treatment systems, and pipelines for oil and gas, we now need the new infrastructure of a smart electrical grid, cell towers for wireless, and high speed broadband lines. And if we are to avoid catastrophic climate change, we need hundreds of billions of dollars worth of new clean energy infrastructure.

With all of these needs, it is hardly surprising that the American Society of Civil Engineers gave a grade of “D” to the existing infrastructure in the United States and estimated that we need $2.2 trillion of spending over the next five years to bring our infrastructure up to acceptable levels—twice the amount currently budgeted.

Moreover, we can think of investments in science and technology as “soft infrastructure.” Breakthroughs in the laboratory are essential for industries such as computers, biotechnology, and nanotechnology. Such research and the transformation of laboratory findings into new products share certain features with the bridge-building example. They use lots of sophisticated and expensive equipment, their cost relative to GDP will rise because the skilled labor force is expensive, the work cannot be standardized, and productivity gains will inevitably lag behind those of mass production.

Hard and soft infrastructure together currently represent roughly 6 or 7 percent of U.S. GDP, but twice that amount could be invested productively. Costs are shared among the federal, state, and local governments, as well as corporations. These infrastructure responsibilities are a major source of the fiscal strain at the state and local level, as federal support has declined for years. And even those forms of infrastructure provided by the private sector often depend on government subsidies or tax breaks to persuade firms to make large and often risky investments.

In short, infrastructure outlays are creating a huge fiscal dilemma for the United States and pretty much every other country on the planet. Infrastructure costs are rising rapidly as a share of GDP at the same time that all governments are being told that they have to cut spending and make do with current revenues. If governments cut back on infrastructure spending, they risk cutting off future economic growth. If they don’t, they must either run huge deficits, make dramatic cuts in transfer programs that protect the poor and the elderly, or take the politically unpopular step of raising taxes.

It is this set of difficult choices that threatens the recovery of the global economy. Deficit hawks–both in the United States and abroad–are working to impose austerity measures that will likely kill the recovery from the Great Recession. Cuts in transfer payments and social programs will further weaken already soft consumer demand. Just as importantly, the failure to make adequate infrastructure investments assures that private firms will continue to hesitate in authorizing significant new spending, even though many large firms have piles of cash on hand. Any real recovery in business investment depends on strong increases in infrastructure spending.

TWO STEPS are critical for escaping the unattractive horns of this dilemma. First, we need to understand that we are living through a paradigm shift that parallels the Keynesian Revolution. In the 1930s and 1940s, political leaders came to understand that the economy required more government spending and a more directive governmental role than in earlier decades. Now, we are transitioning to an era of “infrastructure economies,” when the future of the global economy depends on sustaining significantly higher levels of infrastructure spending. In some countries, such as the United States, this means that the government’s share of GDP has to grow.

But we cannot expect that government and the tax system can do all of this work. So the second step is to create new mechanisms to finance these big increases in infrastructure spending. Loan guarantees are one promising instrument that the federal government has used for years to support lending for students and homeowners. Congress has given the Obama administration authority to guarantee about $100 billion in loans for investments in non-carbon energy and electric vehicles. This is a good start, but the scale has to be much larger.

Another promising idea is to link loan guarantees with new financial structures that would specialize in directing capital toward needed infrastructure. For example, green banks would develop expertise in alternative energy projects and provide financing for clean energy projects to homeowners, businesses, and state and local governments.

But ultimately the necessary scale of financing will exceed the capacity of national governments. Global financial institutions such as the World Bank should sell bonds to finance the hundreds of billions of dollars worth of infrastructure needed each year in both developed and developing nations. These global institutions would recycle the vast pools of savings held both in sovereign wealth funds and in the currency reserves of China, Japan, and other countries. By providing a productive outlet for the global “savings glut,” this lending would significantly reduce the danger of new asset price bubbles, which lead inevitably to new crashes.

To be sure, it is extremely important that people get the infrastructure that they actually want. Highway projects that displaced low-income communities or dams that forced tens of thousands to relocate are powerful reminders that infrastructure involves the power to destroy people’s lives and livelihoods. So it is vitally necessary that these projects be subject to high levels of democratic accountability and special protections for vulnerable populations. But it is also the case that the things that people most want—clean water, sewage treatment, communications technologies, and reliable electricity—are not terribly controversial so long as they are produced sustainably and made available to the poor.

The big question is how quickly we can make this paradigm shift. The longer we stay trapped in the old ways of thinking, the more misery from unemployment and public sector cutbacks, the more environmental destruction, and the greater the chance that the world will spin out of control as it did in the 1930s.

Fred Block is a research professor of sociology at the University of California at Davis. His book, edited with Matthew Keller, State of Innovation: The U.S. Government’s Role in Technology Development has just been published by Paradigm.

Homepage Image: Bay Bridge, San Francisco (Daniel Schwen / 2006 / Wikimedia Commons)