Congressional Budget Office

The Macroeconomic and Budgetary Effects of Federal Investment

Economics of Infrastructure Investment National Bureau of Economic Research

Cambridge, MA

February 2, 2017

Wendy Edelberg

Associate Director for Economic Analysis

This presentation provides information published in The Macroeconomic and Budgetary Effects of Federal

Investment (CBO, June 2016), www.cbo.gov/publication/51628, and Federal Investment (CBO, December

2013), www.cbo.gov/publication/44974.

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In 2015, the federal government spent $293 billion on investment for nondefense purposes. That amount equals 1.6 percent of gross domestic product and 8 percent of federal spending. Those shares have been on a downward trajectory in recent years.

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Federal Nondefense Investment as a Share of GDP Through 2015

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Composition of Nondefense Investment

This chart shows the average composition from 1988 to 2008, a period chosen to exclude the effects of the American Recovery and Reinvestment Act of 2009, which temporarily boosted certain types of federal investment spending.

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Effects of Federal Investment

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Federal investment affects the economy mainly by changing overall demand in the short term and private-sector productivity in the longer term.

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CBO’s Interpretation of the Empirical Literature on Long-Term Economic Effects of Federal Investment

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Consider an illustrative policy that CBO analyzed in June 2016:

A one-time $100 billion boost in funding for federal investment.

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Funding and Outlays in the Illustrative Policy, by Year

Billions of Dollars

Year After Enactment

Total,

1 2 3 4 5 6 7 8 9 10 1-10

Additional Funding for Investment 100 0 0 0 0 0 0 0 0 0 100

Estimated Outlays 14 35 21 14 9 3 2 1 * * 98

* = between zero and $500 million.

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The Share of Federal Investment That Becomes Productive Under the Illustrative Policy

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How much a boost in federal investment increases the size of the public capital stock, on net, depends primarily on two factors: The response of state and local governments

Acknowledging great uncertainty, CBO estimates that one-third of the change in the typical dollar of federal investment is offset by changes in investment by state and local governments.

How quickly that capital depreciates The typical dollar of federal investment depreciates at an annual rate of 2 percent, CBO estimates.

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Limitations and Uncertainty

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Estimates for typical investment should not be used to directly infer the effects of particular investment proposals.

• Some investments start improving productivity soon after they are made, whereas others take much longer.

• Similarly, some investments have stronger effects on productivity than others do.

• The way that states, local governments, and private entities adjust their own investment spending and borrowing in response to changes in federal investment can also vary, depending on the proposal.

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When possible, CBO’s analyses of proposals reflect specifically estimated effects on timing, productivity, and responses of other investors.

• In many cases, however, empirical evidence is scant–particularly on productivity effects of some kinds of investment and the responses of other investors.

• In such cases, CBO uses the estimated effect of typical federal investment.

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CBO’s Likely Range of the Effect on Output From an Increase in the Typical Kind of Federal Investment

In CBO’s assessment, there is roughly a two-thirds chance that the effect on GDP would be in a “likely range” between zero and 10 cents.

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Estimates for Illustrative Policies

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The Effect of the Illustrative Policy on Output and the Deficit

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Cumulative Effects of Illustrative Policy Over 10 Years

Billions of Dollars

Increase in Gross Domestic Product

Central Estimate 19

Likely Range 0 to 39

Decrease in Deficit From Macroeconomic Feedback on the Budget

Central Estimate 2

Likely Range 0 to 5

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How federal investment is financed matters. For illustrative purposes, consider the same policy—a one-time $100 billion boost in funding—financed by federal borrowing.

(In the previous example, the method of financing was assumed to leave federal borrowing unchanged and have no economic effects.)

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The Effect on Output and the Deficit of the Illustrative Policy Financed by Borrowing

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Billions of Dollars

Increase in Gross Domestic Product

Central Estimate 45 Likely Range -32 to 129

Increase (-) in the Deficit From Macroeconomic Feedback on the Budget

Central Estimate -13 Likely Range -5 to -22

Total Increase (-) in the Deficit, Including Direct Effects

Central Estimate -110 Likely Range -102 to -119

Cumulative Effects of Illustrative Policy Financed by Federal Borrowing Over 10 Years