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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


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


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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