Should we spend more money on infrastructure?

That’s a good question. Recent posts on Transportblog have looked at the case for a greater focus on providing better transport choices in Auckland, the need to start discussing rapid transit provision in smaller but growing cities, and the need for better connections between New Zealand’s cities and towns.

A key theme running throughout those posts is that there are opportunities to spend money better, rather than just spending more money on the whole. There may be a case to spend more, but before we get to that we should see where we can do things more efficiently.

I mention this because I’ve been thinking about a piece that StrongTowns’ Charles Marohn wrote in early January, in which he critiqued arguments for spending more on infrastructure:

Your road have potholes? Commute congested? Know a guy up the street that is underemployed? Want to make the country greener? Macro economists have the perfect response to all of this: infrastructure spending. Lots of it.

Spending on infrastructure is seen as the consequence-free way to boost the economy. It’s the rare thing a pickup-driving blue-collar worker and a tree-hugging PhD candidate can both agree on: America would be better off if we spent a lot more on infrastructure. Just look around! Is there anything more obvious? Economists even have nifty equations with fifty year projections that prove it. Who could be against that?

Sadly, those applying equations from the top of America’s economic ivory towers misunderstand the impact of infrastructure spending on cities, towns and neighborhoods. Whether or not a policy of borrowing money to build infrastructure really works at the national level — and there are really smart people who question whether it does — it’s not without consequence for local governments.

Marohn’s got some valid critiques. I particularly appreciate his argument that cities need to ensure that their investments are financially sustainable as a prerequisite for achieving their other aims:

Economics is a social science that often concerns itself with the well-being of people and things like environmental impacts, social justice and quality of life. These are admirable pursuits that can benefit from economic thinking and the work of economists. There are very good reasons for macro economists to study, quantify and pursue policies aligned with social objectives.

It is also perfectly acceptable for local governments to pursue similar aims. The difference is that local governments face hard financial constraints that the federal government does not. As we say at Strong Towns, financial solvency is a prerequisite for long term prosperity for local governments..

This means that cities have to #DoTheMath. Projects must pencil out, today and into the future. If something is done at a loss for a purely social aim, that’s perfectly acceptable so long as everyone understands that the ongoing revenue must be accounted for from somewhere else. Financial solvency is a prerequisite for local governments in a way that it never will be for the federal government.

However, I also think that Marohn’s being a bit unfair to economists! As I discussed in a post last year, there’s disagreement within the discipline about whether (and how) we should spend more money on infrastructure. And the economists who do make the case for spending more most strongly tend to come at it from a Keynesian perspective – ie spend a bit more during recessions, when there are unemployed people and machines to do the work.

Moreover, economists have researched the economic effects of more infrastructure spending in quite a bit of depth. A range of papers have investigated whether building more roads (etc) leads to increases in economic output (GDP) or increased employment, either at a local or a national level. They have generally found that building more transport infrastructure had strong positive effects in the 50s and 60s, and smaller or even negligible impacts since.

For instance, a literature review on the relevant evidence undertaken by the Ministry of Transport concluded that:

In developed countries that already have a high quality, well-connected transportation infrastructure network, further investment in that infrastructure will not on its own result in economic growth. However, where the potential for economic growth is present, lack of investment can inhibit the potential growth… Evidence for a ‘special role‘ for the effect of transport infrastructure investment on economic growth is limited.

In a similar vein, a 1999 paper by US economist John Fernald investigated the impact of road spending on economic productivity in the US, finally concluding that:

In essence, the evidence suggests that the massive road-building of the 1950’s and 1960’s—which largely reflected construction of the interstate highway network— offered a one-time increase in the level of productivity, rather than a continuing path to prosperity.

There’s less New Zealand-specific evidence, but one paper by three OECD researchers (Balázs Égert, Tomasz Koźluk, and Douglas Sutherland) that I reviewed in a post last year found that in New Zealand over the 1960-2005 period:

  • Road investment had a positive impact on economic growth throughout the period
  • So did rail investment, although the effect was not quite as strong
  • However, motorway investment had a negative impact on economic growth.

Basically, anyone arguing for a systematic policy of building heaps more roads (or infrastructure in general) isn’t taking the economic evidence seriously. At this point, there are unlikely to be abnormally high economic returns from building more infrastructure.

It isn’t hard to understand why. The first bridge, first decent road, or first rail line you build is likely to be transformational, just as the Auckland Harbour Bridge transformed the North Shore. But the third, fourth, or fifth bridge will make an incremental difference, at best. They may even do harm by ‘crowding out’ routine maintenance or pushing up construction costs across the economy. So we need to keep a close eye on how we’re spending our money and what we’re trying to accomplish.

What do you think about the economic returns on infrastructure spending?

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  1. Guess it is hard to say what is best without knowing the opportunity cost. If you are talking about canning or down sizing some other roading projects for LR down don road then I am all for it. I think the business case (CBA) and MCA must stack up for any project. Money is a finite resource, so it must be used wisely.

  2. Regrettably the current government (especially under its first two Ministers of Transport) and, as far as I can tell much of the advice from MoT(?), have held that it is the mode, not the quality of the project, that defines its value. Hence that both pompous and simplistic doctrine that has defined their government in this area: Roads of National Significance. National Significance = Roads = National Significance. Additionally we have the nation wide transport institution, NZTA, that despite its name is essentially a road builder. An entire agency that asks not what is the problem we are trying to solve here, but rather, where can we put the next State Highway?

    So if we are to have a serious discussion on the value of infrastructure, and we ought because the architect of the RoNS doctrine has just made himself Infrastructure Tsar, then we had better start here. RoNS needs to become IoNS. Replace Roads with Infrastructure. Reform NZTA into a transport agency from a road agency, and separate funding and building parts (again), bring rail in from Siberia, or Coventry, or wherever it is now.

    However there is another question, isn’t it a rather odd time to be getting all Keynsian in NZ? It’s hardly counter-cyclical in either the economy as a whole nor especially the civil and construction sectors? Yet there is a strong case to be made that there is a serious lack of certain urban infra, especially in Auckland; Housing, and Rapid Transit, and RT in other cites, that likely deserves funding not for Keynsian reasons, but simple need….?

    PS: I still maintain the most positive legacy of the Key era will turn out to be the cycleways; both rural and urban. Huh.

    1. Didn’t NZ used to have a “IoNS” building agency called variously the “Public Works Department” or “Ministry of Works”?

      Who used to take on the job of all this planning and building and nation building for the Governments of the day.

      Maybe we go backwards a little and realise that if you have an agency who employs only a large bunch of road designers and builders then each year a whole lot of roads [and little else] will get built – whether you intend that outcome to happen or not.

  3. Not necessarily MORE, but sort the current infrastructure to make it more efficient. Our motorways are a mess. Sort them for consistent lanes, proper flows.

  4. Government has a poor history of spending other people’s money. Especially when betting on the future. Any new major transport infra should be rail and even then it needs to stack up economically. We don’t need more roads, just maintain the ones we have.

    1. No it doesn’t. It has just as good a record as any private money. State Housing for one.
      This mantra of the government doesn’t spend money well is just lies, peddled by those who don’t want to pay their fair amount of tax.

    2. Please explain transport spending for the last 20 years? Has that been a good use of money? Please explain the old farming subsidies to me. Please explain Think Big. Please explain The Hobbit tax credits. Please explain the entire superannuation scheme. Please explain the selling off of money making SOEs. The government borrowed a lot of money to pay for this stuff and it all transferred to the hands of the wealthy. There is a reason why people say the government is a poor investor. Because it is true. It isnt a lie or myth. It is fact. You provide one example with questionable merit. The state taxed or borrowed to build houses it later sold into private hands. Enormous transfer of wealth from public into private hands. Money spent and nothing to show for it. Great use of funds huh? We will never get that money back.

      The difference is that private money is private money. Investors have a choice where their money is invested and lost. I have no problem paying tax, so don’t try and suggest otherwise. But I don’t have a choice where my tax money is wasted. Whether it is wasted on hand outs to old people who never saved for retirement like I have to or to subsidise the freight industry or into to a screwed up tertiary education sector. I don’t get the choice where my money is badly spent. That is the difference.

      1. Two points.

        First of all, NZ’s definitely ‘invested’ in a few boondoggles, but my experience has been that our government is generally more responsible than many others. We’re comparatively well-run, but not perfect.

        Second, it’s a bit misleading to say that you don’t get a say in how tax money is spent. You do – it’s called voting. Sure, your individual preferences get aggregated up and weighed against others’, but when providing public goods (or doing things that are widely perceived as having some public benefit) that’s probably the right way to go. Furthermore, there are many other opportunities for democratic participation – submissions, consultation, calling your MP(s), etc.

        1. The problem is incentives. Private boards stay in power by making a profit for their shareholders. Governments stay in power by being popular. The easiest way to do that is tax people and spend the money on anything that might induce people to vote for you regardless of whether it will ever make a return or increase welfare. The advantage of small government is it keeps them out of areas the private sector would do anyway. The advantage of larger government is you get things that are intended to have low fiscal return but high social returns. Electricity was once viewed as one of those goods and it resulted in a huge improvement for the country as a whole. The real problem is finding the balance between small government and large government and making sure they spend money with an equal level of responsibility as the private sector has. I have no answers to that. The political system won’t do it. For example since amalgamation my rates dollars get spent on keeping animals in cages so solo fathers have somewhere to take their kid on weekend. Arms length doesn’t work either. Manukau Consutlants used to buy work by tendering low, knowing they faced no downside risk. If they made a loss they just got the Council to charge higher rates. Private contractors had to reduce staff couldn’t compete.

  5. I for one, hate incrementally, ever widening motorways and what it is doing to our beautiful Auckland. There has to be a better way of moving our increasing population than using motor vehicles with an average loading of 1.2 persons, always having to provide parking some where and continually covering our city with evermore tarmac.

    But our Government, MOT who whoever, seem to think this is the only answer, when by now, we should be putting all our resources into the catch-up mode of public transport. Talk about short-sighted planning…………………………………..!

  6. Given how poor our rural roads are I think there is significant potential for infrastructure investment there to yield really good results. It doesn’t have to be new infrastructure though, upgrades to the existing will do for a lot of what exists now.

  7. And I see in this mornings Herald that China Construction Bank wants to become more involved in funding NZ infrastructure projects. They are apparently involved in the Puhoi Motorway extension.

    I am fearful that this will be a fund our Infrastructure Tsar Joyce will want to utilize as a funding source for yet more provincial motorways.
    I just hope commonsense prevails. Mr Joyce, we want a decent metro system in Auckland and soon.

    1. “I am fearful that this will be a fund our Infrastructure Tsar Joyce will want to utilize as a funding source for yet more provincial motorways”

      Or worse, for yet more urban motorways!

      Or even worse, not only for funding, but also building said motorways as well.

      Its one thing for locally domiciled companies to use our tax money to source [unknowingly they all say] dodgy Chinese sourced steel with fake certificates of compliance for use in motorways and bridges.

      Its quite another when that dodgy steel supplying company, is but one arm of the company which is doing the funding, sourcing and the construction as well so the levels of accountability and oversight such as they are, are that much further reduced/eroded.

      Would we even know about the substandard steel or concrete used in recent NZTA motorway projects if the bulk of the parties were overseas conglomerates?

      As Australia and NZ found out the hard way with steel product certification and hidden asbestos in Chinese sourced products, its hard, very, very hard to ensure that the supply chain (and environment) is 100% protected when the supply chain is longer and a lot of money is at stake.

      I don’t think we [NZ Inc] want yet another taxpayer funded, [but KR caused], DL loco type disaster on our hands quite so soon.

      As a rule, no matter how cheap the price first seems, it seldom if ever, is going to stay like that. Whether it be CAF EMUs or a new motorway project.

      I am well aware that many of the large Chinese engineering construction companies are reputable and ethically upright as most are around the developed world.

      But there are also many places along any long supply chain from there to here, where what is compliant and certified as such, as it leaves the factory and what is actually installed into your bridge or motorway are simply not actually the same thing at all, even if “the bit of paper says they are”.

      We have seen evidence for many brand new big ticket infrastructure projects in China that have suddenly collapsed (invariably blamed on “corruption” at one or more levels of government) – to know that happens in China.

      And we don’t want the same here anytime soon. Its bad enough to waste money on yet more roads, its even more criminal to have to do it a second time over as the first one fell apart too soon.

      So be careful what you wish for – it may come true.

      1. I think CCB are just an investor/financial backer – essentially NZTA are buying a motorway on hire purchase (you spread your costs over a longer time period). I don’t think there is any link to chinese construction materials being used – we have quite a few suppliers here who get their backs up about that sort of thing.

        1. “I don’t think there is any link to chinese construction materials being used – we have quite a few suppliers here who get their backs up about that sort of thing.”

          Oh Really?

          Those local suppliers only get upset only if they’re not ones doing the sourcing from China and thus clipping the fat margin ticket.

          Anyway the local suppliers seem just as culpable as the overseas ones of supplying “non certified” product using fake certificates of compliance from China and elsewhere.

          NZ Steel and Tube – looking at you kid, for both steel you supplied on recent NZTA motorway projects and incorrectly labelled as 3rd party certified, “low ductile” steel mesh that wasn’t.

          The only difference with a local outfit [if they’re big enough] is they’ll have to have decent insurance cover, and maybe a member of IPENZ or such and therefore “have skin the game” – so can be brought to heel and made to correct their behaviour.

          Overseas suppliers? Not a chance in hell. They’ll have moved on.

      1. I hate to introduce politics into such an academic discussion, but it seems to me that unless we can pretty-soon get a government with a strong Green influence then the motorway-mania and railway-repression is set to continue. Who else has the vision and priority for anything else?

        To National, massive spending on poor-business-case highways is just business-as-usual, it’s in their DNA, it’s what they do.

        Labour doesn’t appear to have a transport policy, or if it has it doesn’t want anybody to know. However if partnered with a strong Green showing then maybe, just maybe, it will have the humility to admit that it’s clueless and defer to the Greens in this important area of policy.

        But here’s the rub. While NZ First makes all the right noises about supporting rail, king-maker Winston is far more likely to partner with National than play 3rd fiddle to Lab/Green, so it’s not hard to see where a strong NZ First vote will leave us.

        So unless a significant chunk of the electorate can get over its somewhat irrational ‘Green-phobia’ and give Lab/Green enough support to squeeze out Winston, we will remain stuck with National, which means ‘moar roadz’, and very little else.

        1. I don’t think Winston would be third fiddle to Lab/Green, I think he will end up with a significantly higher vote than the Greens and given his position in the centre will be quite powerful.

        2. Indeed, if NZ First outpolls the Greens then that would change the dynamics. Could happen, particularly if Green support dwindles due to the party’s relative quietness since the departure of Russell Norman.
          And Grant, if National are to remain in govt then I hope you are right that they will lean to green, but even assuming they do, how much further down the wrong path will they take us before they wake up to this?

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