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1 Infrastructure Investment As An Elixir For Ailing U.S. Productivity Growth October 11, 2019 Key Takeaways • For more than a decade, growth in U.S. labor productivity (as measured by output per hour of work) has generally declined—sometimes rather sharply. • S&P Global believes this lost decade of productivity gains could have been far different had the federal government increased infrastructure investment to match the levels of just a few decades earlier. • Most experts say U.S. transportation, water, and other systems face major shortfalls. The country’s vast network of transportation infrastructure along with its power grids and communications facilities were, in many cases, built decades ago (or more). Delayed maintenance and updates have effectively clipped the economy’s wings. • While research suggests that infrastructure could be the catalyst the U.S. economy needs to generate productivity and growth, today infrastructure spending remains neglected. Public investment could be used to spur productivity growth. Authors Beth Ann Bovino U.S. Chief Economist Primary Analyst Joe Maguire Writer Molly Mintz Research Contributor www.spglobal.com October 11, 2019 As the U.S. economy chugs along in what is now the longest expansion in the country’s history, there’s one factor that hasn’t contributed much to the record run: productivity growth. In fact, for more than a decade, growth in U.S. labor productivity (as measured by output per hour of work) has generally declined—sometimes rather sharply. S&P Global believes this trend is at least partly responsible for an economic recovery that, while historically long, has also been comparatively lackluster. We also think that this lost decade of productivity gains could have been far different had the federal government increased infrastructure investment to match the levels of just a few decades earlier. In February of 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act (ARRA) in an effort to save and create jobs in the wake of the Great Recession—an outcome that economists today largely agree was achievable, though the labor market recovery was the slowest in the U.S. post-World War II. The legislation earmarked more than $100 billion for infrastructure investment with the idea that productivity gains and state and local infrastructure investment would be a major boon to growth. That didn’t happen to the degree that many had hoped. On the contrary, productivity growth in the nonfarm business sector has averaged just 0.9% from 2011-2019. That’s less than half the average from 1956-1975, and well below the 3% in the decade from 1996-2005, when investments in information and communications technology— specifically internet connectivity—spurred a revolution in the American workplace. We believe that the disappointments of the ARRA may have more to do with the comparatively small amounts dedicated to infrastructure than its intent. Consider that the U.S. spends roughly $700 billion a year on defense. Heck, the government pays almost $500 billion a year in interest Despite economic expansion, U.S. labor productivity has generally declined
Transcript of Infrastructure Investment As An Elixir For Ailing U.S ......1 Infrastructure Investment As An Elixir...
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Infrastructure Investment As An Elixir For Ailing U.S. Productivity Growth
October 11, 2019
Key Takeaways
• Formorethanadecade,growthinU.S.laborproductivity(asmeasuredbyoutputperhourofwork)hasgenerallydeclined—sometimesrathersharply.
• S&PGlobalbelievesthislostdecadeofproductivitygainscouldhavebeenfardifferenthadthefederalgovernmentincreasedinfrastructureinvestmenttomatchthelevelsofjustafewdecadesearlier.
• MostexpertssayU.S.transportation,water,andothersystemsfacemajorshortfalls.Thecountry’svastnetworkoftransportationinfrastructurealongwithitspowergridsandcommunicationsfacilitieswere,inmanycases,builtdecadesago(ormore).Delayedmaintenanceandupdateshaveeffectivelyclippedtheeconomy’swings.
• WhileresearchsuggeststhatinfrastructurecouldbethecatalysttheU.S.economyneedstogenerateproductivityandgrowth,todayinfrastructurespendingremainsneglected.Publicinvestmentcouldbeusedtospurproductivitygrowth.
Authors
Beth Ann Bovino
U.S. Chief Economist
Primary Analyst
Joe Maguire
Writer
Molly Mintz
Research Contributor
www.spglobal.com October11,2019
AstheU.S.economychugsalonginwhatisnowthelongestexpansioninthecountry’shistory,there’sonefactorthathasn’tcontributedmuchtotherecordrun:productivitygrowth.Infact,formorethanadecade,growthinU.S.laborproductivity(asmeasuredbyoutputperhourofwork)hasgenerallydeclined—sometimesrathersharply.
S&PGlobalbelievesthistrendisatleastpartlyresponsibleforaneconomicrecoverythat,whilehistoricallylong,hasalsobeencomparativelylackluster.Wealsothinkthatthislostdecadeofproductivitygainscouldhavebeenfardifferenthadthefederalgovernmentincreasedinfrastructureinvestmenttomatchthelevelsofjustafewdecadesearlier.
InFebruaryof2009,PresidentBarackObamasignedintolawtheAmericanRecoveryandReinvestmentAct(ARRA)inanefforttosaveandcreatejobsinthewakeoftheGreatRecession—anoutcomethateconomiststodaylargelyagreewasachievable,thoughthelabormarketrecoverywastheslowestintheU.S.post-WorldWarII.Thelegislationearmarkedmorethan$100billionforinfrastructureinvestmentwiththeideathatproductivitygainsandstateandlocalinfrastructureinvestmentwouldbeamajorboontogrowth.Thatdidn’thappentothedegreethatmanyhadhoped.
Onthecontrary,productivitygrowthinthenonfarmbusinesssectorhasaveragedjust0.9%from2011-2019.That’slessthanhalftheaveragefrom1956-1975,andwellbelowthe3%inthedecadefrom1996-2005,wheninvestmentsininformationandcommunicationstechnology—specificallyinternetconnectivity—spurredarevolutionintheAmericanworkplace.
WebelievethatthedisappointmentsoftheARRAmayhavemoretodowiththecomparativelysmallamountsdedicatedtoinfrastructurethanitsintent.ConsiderthattheU.S.spendsroughly$700billionayearondefense.Heck,thegovernmentpaysalmost$500billionayearininterest
Despiteeconomicexpansion,U.S.laborproductivityhasgenerallydeclined
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onthenationaldebt.Meanwhile,spendingontheroads,bridges,andenergyandcommunicationsystems(amongothers)thatkeeptheworld’sbiggesteconomymovinghasbeenonadownwardtrendformorethanahalf-century.GovernmentinvestmentininfrastructureasashareofGDPisnowapproximately1.3%,downfrom1.7%adecadeagoandhalfthehighof2.5%in1967.frameworktocommunicatethestandardsandpracticesofsustainableinvesting.Developinginternationallyacceptedprinciplesandperformanceindicatorswillhelpincreaseinvestmentinsuchinitiativesascleanenergyandsustainableinfrastructure.Inshort,investors’abilitytospeakacommontonguewhenevaluatingopportunitieswouldallowthemtobetterassesstherelativemeritsofoneprojectorassetagainstanother.
Notthateffortshaven’tbeenmade.In2015,abipartisaneffortsawthepassageoftheFixingAmerica’sSurfaceTransportation(FAST)Act—thefirstlawinmorethanadecadetosecurelong-termfederalfundingforhighways,transit,passengerrailway,andothersurfaceinfrastructure—tothetuneof$305billionforfiscalyears2016-2020.TheFASTActallowedfederalfundstobeusedinpublic-privatepartnerships(P3s)forinfrastructure,andoversawtheHighwayTrustFund,atransportationfundthatreceivesmoneyfromfederalfueltaxesandfinancesmostfederalspendingonhighwaysandmasstransit.Onthedownside,theCongressionalBudgetOfficesaysthefundmaybecomeinsolventby2021,andtheFASTActfacestheoptionforrenewalinthecomingyear.
Atthesametime,PresidentDonaldTrumphasemphasizedtheimportanceofstrengtheninginfrastructureacrosstheU.S.—albeitwithlimitedlegislativesuccess.Followinghis2018StateoftheUnionAddress,inwhichthepresidentintroducedhisBuildingAStrongerAmericainitiative,theadministrationproposed$200billioninfederalsupporttostimulateatotalof$1.5trillionininfrastructurespendingovera10-yearperiod.Inmakingstates,municipalities,andtheprivatesectorresponsibleforcompletingthemajorityofprojectsneededtoaccomplishthisgoal,theplanseemedtoruncountertotheadministration’sfiscal2019budgetproposal—whichcutfundingfrommanyexistingfederalinfrastructureprograms.ThePennWhartonBudgetModelestimatedin2018basedonpastevidencethatthenewfederalaidwouldleadtostateandlocalgovernmentsincreasinginfrastructureinvestmentbylessthanthevalueoftheaiditself,withlittletonoimpactontheeconomy.Nevertheless,inamuch-discusseddeal,DemocratsandRepublicationsagreedinApriltospend$2trilliononAmericanroads,bridges,powergrids,water,andbroadbandinfrastructure.Howthatplanwouldbepaidforwasleftundetermined,asPresidentTrumpnixedtheagreementshortlyafterward,pressuredbyRepublicanlobbyinggroupsandcitingthevariouspoliticalinvestigationsofthepresidentasreasoningforabandoningtheplan.Administrationofficialshavestatedthatfurthereffortstopasssuchplansareunlikely.
MostexpertssayU.S.transportation,water,andothersystemsfacemajorshortfalls.Initsmostrecentreportcard(2017),thetradegroupAmericanSocietyofCivilEngineersgavetheU.S.agradeofD+—thesamescoregivenin2013.Thecountry’svastnetworkoftransportationinfrastructurealongwithitspowergridsandcommunicationsfacilitieswere,inmanycases,built
MostexpertsayU.S.transportation,water,andothersystemsfacemajorshortfalls
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decadesago(ormore).Delayedmaintenanceandupdateshaveeffectivelyclippedtheeconomy’swings.Forexample,theDepartmentofTransportationsaidasrecentlyaslastyearthat64%ofthecountry’shighwaysareinlessthangoodcondition,alongside25%ofbridgesinneedofsignificantrepair—withanestimatedbacklogof$836billioninunmetcapitalandinvestmentneeds.Atthesametime,internationalpeershaveleapfroggedtheU.S.withmoreefficientandreliableservices,andtheirpublicinvestmentininfrastructureisonaveragenearlydoublethatoftheU.S.
ResearchbytheMcKinseyGlobalInstitutein2015foundthatwhiletheworldspent14%ofglobalGDP,or$9.5trillion,oninfrastructurethatyear,$3.7trillionwasneededininvestmentininfrastructureeveryyearuntil2035tokeeppacewithglobalGDPgrowth.Meanwhile,theU.S.’squalityofoverallinfrastructuredeclined0.34%from2007-2017,accordingtotheWorldEconomicForum’s2017GlobalCompetitiveIndex,withthecountryranking10thoutof137countries—aboveGermanybutbehindHongKong,Singapore,theNetherlands,Japan,theUnitedArabEmirates,Switzerland,France,andSouthKorea.
It’simportanttoidentifythepotentialbenefitsofaninfrastructureinvestmentonproductivityandfutureeconomicactivity.Thiseffectivenessdependsonanumberoffactors,includinghowmuchslackisintheeconomy,howhighinterestratesare,andhowinvestmentsarefinanced—allofwhichmakesitdifficulttodeterminethelong-termeffectsofsuchprojectsonoveralleconomicactivity.But experience helps us come to certain conclusions.
It’sclearthattheproverbial“bridgetonowhere”wouldresultinlittleeconomicgain.Butbasedonnumerousstudies,ifaninfrastructureprojectisdonewisely,economicgainsfromtheproductivityenhancementwouldboostGDPformanyyears.Moreover,policymakersneedtorecognizehowdetrimentalreductionsininfrastructureinvestmentcouldbeoneconomicgrowthandgovernmentnetworthinthelongrun.
AseriesofpapersbyeconomistDavidAschauerinthelate1980sandearly1990s,supportedbyresearchbyAliciaMunnellattheFederalReserveBankofBostonin1989and1990,foundthattherateofreturntopubliccapitalwassignificantlyhigherthanthatofprivatecapital.Criticsarguedthatthetime-seriescomponentusedintheirresearchsufferedfrombothcausalityandsimultaneityproblems.LaterresearchbyJamesHeintzin2010addressedthesimultaneityproblemusingavectorerrorcorrelationmodel,andalsofoundthatsolvingthesimultaneityproblemthiswaywouldalsosolvethecausalityproblem.ReplicatingHeintz’sanalysisfortheperiod1949-2015,JoshBivensoftheEconomicPolicyInstitutefoundthata10%increaseinthepubliccapitalstockboostsprivate-sectoroutputby1.5%-2%orarateofreturnof30%-40%.1TheCouncilofEconomicAdvisorsseemstoagreethatinfrastructureinvestmentwouldbeanetgaintoeconomicgrowth.InaFebruary2018reporttitled“InfrastructureInvestmenttoBoost
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International peers have leapfrogged the U.S. with more efficient and reliable services
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ProductivityandGrowth,”theyestimatedthat“a10-year,$1.5trillioninfrastructureinvestmentinitiativecouldaddbetween0.1and0.2percentagepointtoaverageannualrealgrowthingrossdomesticproductunderarangeofassumptionsregardingproductivity,timing,andotherfactors.”
WhilereamsofresearchsuggestthatinfrastructurecouldbethecatalysttheU.S.economyneedstogenerateproductivityandgrowth,todayinfrastructurespendingremainsneglected.Averagegrowthinthereal(inflation-adjusted)stockofpubliccapitalwasahealthy4.5%from1949-1973,whileaverageproductivitygrowthwasaround2.6%.Itdroppedsignificantlyfromthenuntil1995,asdidproductivitygrowthoverthesameperiod.Productivitythenpickedupdramaticallyinthesecondhalfofthe1990sthroughtheearly2000s,drivenbyalargeincreaseinprivate-sectorinvestmentsininformationandcommunicationstechnology(ICT)equipment.Throughcapitaldeepeningandbetterproductionprocesses,theseinvestmentleadtoasignificantreboundinoverallproductivityoverthatperiod.
Productivitygrowthhassincebeenstagnant.Tobesure,theunderlyingtrendinproductivityhasbeengreatlydistortedbytheseverityoftheGreatRecession.Butgiventhatthepost-1995accelerationinproductivitywasdrivenlargelybytheriseinICTinvestments,andthatbothproductivitygrowthandICTinvestmentshavedeceleratedsincetheearly2000s,itseemslikelythattheICTboomwon’tbeanengineofeconomicexpansioninthecomingdecade.
So,howdowereturntothestronglevelsofproductivitygrowthseeninthepast?Maybetheprivatesectorwillseeinvestmentopportunitiesinsomeas-yet-unrecognizedsector,butthat’suncertain.Whatiscertain,however,isthatpublicinvestmentcouldbeusedtospurproductivitygrowth.Giventhatpubliccapitalhaslaggedorstagnatedasbothashareoftheoveralleconomyandrelativetotheprivatecapitalstockinrecentdecades,thereshouldbeampleopportunityforhighreturnsonpublicinvestment,withlittleworryaboutquicklyreachingapointofdiminishingreturns.
It’salsoworthlookingatgovernmentinvestmentoninfrastructurebeyondtheshort-termbenefitstojobsandaggregatedemand.Suchspendingyieldslong-termbenefitsaswell;significantinvestmentsinlargeprojectscanenhanceefficiencyandallowgoodsandservicestobetransportedmorequicklyandatlowercosts.
Naturally,the“multipliereffect”ofinfrastructurespendingontheeconomyislowestwhenGDPgrowthisstrongest,ashigherproductioncostscutintoinvestmentreturns.Weunderstandthetemptationtodelayprojectspendinguntiltheinevitablenextdownturn,butgiventhematurityoftheongoingU.S.expansion,thetimetostrikemaybenow.Yes,atightlabormarketisputtingupwardpressureonwages,andthevarioustradeandtariffdisputestheTrumpadministrationhasengagedinhavebolsteredthecostofbuildingsupplies(particularlysteel);but,giventhepotentialproductivitygainsfromwiseinvestment,payingalittleextranowwouldlikelybeworth
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ResearchsuggeststhatinfrastructurecouldbeacatalystfortheU.S.economy
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it.Moreover,givenheightenedeconomicriskstotheU.S.economy,itwouldnotsurpriseusiftheU.S.fallsintoarecessionjustasshovelsfortheseprojectsbreakground.
ThisisespeciallytruewhenwelookatthegrowingsignsindicatingthattheU.S.economyhasweakened.S&PGlobaleconomistsnowseetheriskofarecessionstartinginthenext12monthsat30%-35%—morethantwicewhatitwasayearago.Weforecastfull-yearU.S.GDPgrowthtoslowto2.3%thisyearandjust1.7%nextyear,followedbyaverageannualexpansionsof1.8%for2021-2023.
Inarecession—oranythingclosetoit—jobswillsurelybelost.Nowisthetimetoplanforthiseventuality.Thisway,onceprojectsare“shovelready,”theU.S.willbereadytoofferjobstoworkersstrandedbyanotherdownturn.
1SeeJoshBivensEPI,“Thepotentialmacroeconomicbenefitsfromincreasinginfrastructureinvestment”,July18,2017.
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Infrastructure Investment As An Elixir For Ailing U.S. Productivity Growth
