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?