- Because of the coronavirus pandemic, the longest U.S. economic expansion in U.S. history has abruptly ended: We forecast that U.S. economic activity will shrink by 11.8% ($566 billion) in real terms, peak to trough. The well over 30 million jobs lost at the trough will wipe out all the jobs created in 23 or more years. Economic damage will be three times greater than the Great Recession, in one-third the time.
- A $2.1 trillion boost of public infrastructure spending over a 10-year period, to the levels (relative to GDP) of the mid-20th century, could add as much as $5.7 trillion to the U.S. over the next decade, creating 2.3 million jobs by 2024 as the work is being completed. The additional 0.3% boost to productivity per year that it generates will lead to a net 713,000 more jobs on the books by 2029.
- GDP growth in the past 10 years floundered at around 2.25%--one-third the rate of 1959 when the Eisenhower Interstate Highway System was built. The opportunity to build infrastructure (and create jobs) during the Great Recession in 2009 was missed.
- Right now, the U.S. may have a second chance. COVID-19 has created an urgency to invest in much-needed public health infrastructure. Six months from now, we may look back on the pandemic as an event like Super Storm Sandy, which called attention to the need for investing in infrastructure to prevent damage from climate change. Either way, it all comes back to infrastructure investment, which we need to tackle now.
Amid the coronavirus pandemic, the U.S. has fallen into recession. In just two quarters, U.S. economic activity will shrink by 11.8%, or $566 billion in real terms, three times that of the Great Recession, but over a much shorter time frame. The U.S. GDP (its economic pie) will be smaller, in dollar terms, on average in 2020 than in 2019. We now expect U.S. productivity gains to eke out just 0.5% in 2020 in the aftermath of the "Sudden Stop" recession.
That's half the already meager 1.0% productivity gain that we had expected for 2020 in our December U.S. forecast. Already, over 30 million newly jobless workers filed unemployment claims over the last seven weeks through April 25 (fortunately the rate appears to be slowing). During the Great Recession, it took 65 weeks of initial jobless claims to reach those numbers. The U.S. will likely lose more than 30 million jobs by May, wiping out all the jobs created in 23 or more years (see chart 1).
That's also more than three times greater than the 8.7 million workers who lost their jobs during the Great Recession. The peak unemployment rate (expected to reach 19% this May) from the current "Sudden Stop" recession will be closer to the Depression-era peak of 25% than the Great Recession peak of 10%. A deeper recession, with COVID-19 staging a comeback this fall, would mean even more lost jobs, with the unemployment rate at 23% nearing the Great Depression peak of 25% (see chart 2). If the U.S. experiences a second wave, the risk is that social distancing could be longer than one quarter. Here, the economic impact would likely be nonlinear, with the damage more severe. In other words, "1 + 1" would be greater than "2".
How deep depends on the spread of the virus and how effective government policy is in containing it and in restarting the economy once it is safe to unlock our doors and go outside. The government's steps to contain the virus and recently passed economic relief package, as well as the Fed's own stimulus measures, will likely help conditions but not nearly enough to fully offset the drag on second-quarter economic activity. A big consolation is that these measures helped prevent the U.S. economy from falling into the abyss.
COVID-19 has created an urgency to invest in much-needed public health infrastructure. But the story doesn't end there. Six months from now, it may be like a collapsed bridge that had been in disrepair for years, or another Super Storm Sandy, which called attention to the need for investing in infrastructure to prevent damage from climate change. Let's hope the U.S. will respond.
There is now talk about ending the lockdown in some form or another, something that I personally am looking forward to. However, much like in the movie Jaws, the beaches opened too early, only for the shark to return with a vengeance.
COVID-19 is here to stay in the U.S., in some form or another. Maybe this wave has past.
But, in order to get ready for its eventual return, using the phrase in Jaws: "We're gonna need a bigger boat!"
By prioritizing infrastructure once again, we could again take pride in investing, not only in the physical health of our nation, but also its economic health, creating more jobs today, and, with the boost to productivity, more economic activity and jobs in the future.
We found that, if the U.S. invested $2.1 trillion into public infrastructure spending over a 10-year horizon, it could create 2.3 million jobs by 2024 as the work is being completed, helping those millions of unemployed workers displaced by COVID-19. But the productivity boost from the infrastructure investment, if done wisely, could add as much as $5.7 trillion to the U.S. over the next decade (see chart 3). The estimated potential real GDP growth over the next 10 years would be lifted to 2.2% from 1.7%.
The infrastructure investment will, over the long run, provide that productivity boost needed to help get the expansion back on track, essentially steepening the slope of the curve, with the "infrastructure" scenario catching up to the pre-virus expansion at a faster rate than the "no infrastructure" scenario. The additional 0.3% boost to productivity per year will generate a net 713,000 jobs on the books by 2029. Wallets will also be fatter, with per capita personal income $2,400 larger than the "no infrastructure" scenario.
Once Upon A Time In The West
Americans often look back fondly on how their country was built, whether it's the driving of the golden spike that completed the first transcontinental railroad, the public works projects of Roosevelt's New Deal, or the network of highways crisscrossing the country. And yet, while the U.S. continued to evolve economically, this former point of pride has fallen into massive disrepair--with even the information superhighway full of potholes and dead ends.
Since then, infrastructure initiatives have been left stranded by the side of the road, along with passengers in the form of additional productivity and GDP growth. This is happening while the U.S.'s international peers have driven right by with more efficient and reliable services, with public investment in infrastructure that is on average nearly double that of the U.S. as the quality of U.S. infrastructure falls in ranking against its peers (according to the World Economic Forum Global Competitive Index).
This does not have to be the case--and S&P Global Economics calculates that a revival of public infrastructure spending relative to GDP to levels of the mid-20th century could provide the salve that this injured economy so desperately needs. We see infrastructure investment as one way to get the U.S. back on track, once COVID-19 makes its exit, and may even help stave off its next attack!
A decade ago, the U.S. had a similar opportunity. Looking back, S&P Global Economics believes that the U.S. economy may have already missed a chance to experience a decade of healthier productivity gains and stronger GDP growth. The U.S. would have reached those gains, if, starting in 2009, the government increased infrastructure investment.
The infrastructure project would have created jobs--many middle-class jobs--and reduced the then unprecedented 25% unemployment rate in the construction sector (1). The productivity gains from the project would have later added to growth and much-needed job creation over the 10-year period. Instead, U.S. GDP growth over the past 10 years has struggled at around 2.25%--one-third the rate of 1959 when the Eisenhower Interstate Highway System was built.
An economy's productive capacity and output typically increase once infrastructure is built and absorbed into the economy. Overall, infrastructure investment, if done wisely, leads to increased productivity and thus to economic growth. This returns money back to the beginning of the investment cycle, to start the process over again (2). So investment could add jobs to the economy long after a project has ended.
Public infrastructure investment could "crowd in" private investment, with every dollar spent having a multiplier effect. If the project was wise, the multiplier from the infrastructure investment would be larger than the money spent.
For evidence of this, look no further than Eisenhower's Interstate Highway System. Costing about $500 billion in today's dollars, it has clearly paid for itself given all the products and people that travel on its 48,000 miles of roads on any given day. Ike's project is reportedly estimated to have a multiplier equal to six--or, for every dollar spent, the U.S. got six dollars back.
It's Not Too Late To Be Like Ike
Perhaps the U.S. has gotten a second chance to be like Ike. The economy could still benefit from increased infrastructure spending. In fact, in our "infrastructure" scenario, we calculate that the U.S. would add $5.7 trillion to GDP over the next 10 years if we were to boost annual government spending on our crumbling infrastructure by $2.1 trillion over a 10-year horizon. There would be an initial "lift off" over the first five years, with infrastructure spending as a share of GDP reaching levels seen during the mid-century. In our scenario, spending would then slow to a higher "steady state" of around 1.7%, more than the historically low share of 1.3% in 2018 (half of what it was 60 years ago) (3).
This scenario is based on the 2019 agreement between the White House and Democratic lawmakers on a $2 trillion infrastructure project that never came to fruition. Ironically, another infrastructure package is now being broached on Capitol Hill.
In our October 2019 infrastructure report (4), we surmised that, if policymakers follow through on earlier promises to invest in infrastructure, they might see the shovel hitting the ground when the next recession began. Now that we're in a recession, these earlier proposals would benefit the U.S. economy and workers right now. We know that a possible infrastructure package is in the concept stages--shovels won't hit the ground any time soon. But the post-pandemic recovery is also expected to be slow. Moreover, many planned projects have stalled, with shovels left in the ground. With the unemployment rate likely to be well above its pre-crisis rate until fourth-quarter 2023, those extra jobs will likely be a welcome relief.
Already, discussions on Capitol Hill revolve around infrastructure relief, with President Trump calling on March 31 for a $2.0 trillion package as part of the government's emergency response to COVID-19 (though it remains to be seen if Congress is game for signing another $2.0 trillion check). House Democratic leaders recently said that they would push for a more modest five-year $760 billion infrastructure plan as part of the next coronavirus stimulus package.
In our "infrastructure" scenario, we assume legislators had passed a $2.1 trillion infrastructure project last year, breaking ground in 2020 with spending out over the 10-year life of the project and much of the heavy lifting taking place over the first five years.
Once the projects are complete, policymakers would agree to fund repair or replacement as assets age. Infrastructure spending as a share of GDP would initially reach levels seen years ago, and then slow to a higher "steady state" of around 1.8% toward the end of the project. This is more than the historically low share of 1.3% in 2018 (see chart 4). And, while we've focused on public infrastructure spending, we recognize that the endgame may look different, with private investors chipping in.
With the U.S. sinking into a deep recession, now expected to be much worse than the Great Recession, the returns on investment from the infrastructure boost would be likely higher over the near term, given costs are lower in the now soft jobs market. And, assuming that the infrastructure spending was wise (prudent spending is sorely needed), the productivity gains later in the decade would generate a bigger boost to economic activity later on, with the multiplier averaging 2.7 over the 10-year period, helping to give the new post-pandemic expansion more fuel as it nears 2030. This translates to $2.70 back for every dollar spent, much larger than average multiplier estimates that range from 1.3 to 1.8 for infrastructure spending or the 0 to 0.4 multiplier for the corporate tax provision (5).
A 2012 San Francisco Federal Reserve report studied the effect of unexpected highway grants on state GDPs (GSPs) back to 1990 and found that, on average, each dollar of infrastructure spending increases the GSP by at least two dollars, a multiplier of 2.0 (6). Moreover, they found that spending in 2009 and 2010 was "roughly four times" more than average, indicating that it can be very effective during periods of "very high economic slack, particularly when spending is structured to reduce the usual implementation lags."
Research shows that increased infrastructure spending, if done properly, would boost U.S. productivity and economic growth (7). As a factor of the economic production function, public capital stock (or infrastructure) contributes to higher productivity growth and living standards. Indeed, investment in public capital is believed to "crowd in" private investment, according to a United Nations Industrial Development Organization 2009 research report (8). The argument is that public capital enhances the productivity of private capital, raising its rate of return and encouraging more investment.
The U.S. is a case in point. From 1947-1973, when growth in the stock of public capital, which is used to build and maintain U.S. infrastructure, averaged 4.5% in real terms, productivity growth averaged more than 2.6% (see chart 5). But, from 1974-1995, real growth in public capital stock slowed to an average of just over half that, with average productivity growth, at 1.6%, losing one full percentage point. And, after the 3% plus productivity boost from 1996-2005, resulting in large part from significant private investment in Internet connectivity, productivity growth fell further, averaging just 0.9% from 2011-2019.
Though the tech-driven productivity boost is likely behind us for now (see chart 12 in the Appendix), spending on communications systems would still optimally be an integral part of any large infrastructure initiative--even as the bulk of funds would go toward the repair and building out of the U.S. transportation, water, health care, and other systems that continue to face major funding shortfalls.
A shot in the arm today could also add as much as $5.7 trillion to the world's biggest economy in the next decade. (This scenario assumes the U.S. will be able to contain the virus by May.) In the "infrastructure" scenario, the U.S. would generate about 2.3 million more jobs sometime in the first five years of the project than the "no infrastructure spending" scenario (recognizing that project delays would push hires closer to 2023 than 2020). We believe that this initiative would still help some of those expected more than 30 million jobs lost by May because of COVID-19 (three times the 8.7 million jobs lost during the Great Recession).
While (we hope) many furloughed workers would go back to their jobs once the pandemic is contained, employers may be forced to close for good. One small business survey reporting that 43% of business owners believe that they have less than six months before they will have to permanently close, and 24% say that they have less than two months (9).
Though many of those infrastructure jobs would end with the projects, other jobs would be created from the net boost infrastructure gives to productivity. We could see a net 713,000 more jobs added to the economy by 2029 along with fatter paychecks each year, up 35 basis points, on average, than in the "no infrastructure spending" case.
That would add an additional $2,400 to per capita personal income by 2029. Fatter wallets would allow households to spend $3.5 trillion more over that 10-year period than in the "no infrastructure spending" scenario.
An earlier proposal introduced in the House of Representatives for a $760 billion, five-year infrastructure package that places a major emphasis on climate change would be a nice start, but it isn't enough. As it stands, the U.S. average productivity rate has barely reached 1.0%, with GDP growth in the past 10 years floundering at around 2%. This is one-third the rate of 1959, when President Eisenhower oversaw the construction of the Interstate Highway System, our last truly significant national infrastructure project.
The 1990 and 2001 recoveries soon got back to their pre-recession expansion path (see chart 6). However, the Great Recession significantly drifted off its pre-recession course. Now there is increasing worry that the same may be true for the "Sudden Stop" recession in 2020 (see "COVID-19 Deals A Larger, Longer Hit To Global GDP," published April 17, 2020). With little to no productivity gains expected in our current forecast (just 0.5% for 2020), it will take nearly two years for the post-virus recovery to reach pre-crisis levels. But the pace of the new expansion doesn't quite catch up to pace of economic activity that the U.S. enjoyed during expansions before the Great Recession. As discussed in the paper, one suboptimal path of recovery, and what is currently our U.S. baseline forecast, is that the economy could shift to a lower parallel path (see chart 7). While the growth of labor, capital, and productivity remains unchanged from the pre-COVID period, the level of one or more of these factors could be lower, such as productivity.
Indeed, what started as a severe demand shock to the expansion may have larger consequences. We expect the recovery will continue to face headwinds as lingering fears of another wave of COVID-19 will likely compel Americans to maintain some form of social distancing, opting for at-home dinners and movie nights on the couch rather than restaurant and theater outings.
Heading into the "Sudden Stop" recession, corporate debt levels were already at record highs, with profit markets squeezed, leaving businesses ill equipped to withstand months of closure. That said, we remain concerned that many businesses will not survive, and those businesses that do weather the two to three months of lost revenue may also be reluctant to quickly rehire all their workers as they clean up their books. Our baseline outlook forecasts that the post-virus economic expansion will take a while to catch up to the pre-virus path.
In our analysis, the productivity boost from infrastructure investment, if done wisely, would likely re-right the post-virus expansion's course. We expect little to no productivity gains in our current baseline forecast, but, in our "infrastructure" scenario, the productivity gains will help steepen the slope of the expansion's path, closer to the pre-crisis growth. In our "infrastructure" scenario, it will take four quarters to return to pre-crisis GDP levels instead of seven (see chart 8) without that spending. This investment will not only provide a short-term boost to the economy and create desperately needed jobs to a number of workers. It will, over the long run, assuming the investment is prudent, provide that productivity boost needed to help get the expansion back on track, essentially steepening the slope of the curve, with the "infrastructure" scenario catching up to the pre-virus expansion path at a faster rate than the "no infrastructure spending" scenario.
Roughly a decade ago, lawmakers approved $100 billion earmarked for infrastructure in the American Recovery and Reinvestment Act (ARRA). By way of comparison, the U.S. federal government spends about $500 billion a year on interest--just interest!--on the national debt. We readily support "national security" as key in protecting the American way. Perhaps we should widen that definition to include defending our cities from climate change or our citizens from a deadly disease.
In addition to the short-term benefit of job creation, wise investments in projects yield long-term benefits as well--including a productivity boost, which is often overlooked when determining a project's return on investment. The productivity boost will give potential real growth a lift over the next 10 years, to an average 2.2% from 1.7% in the "no infrastructure" scenario. Significant spending on large projects can enhance efficiency and allow goods and services to reach their destinations more quickly and at lower costs--a longer-term reward. Solid investments in soft infrastructure, such as public health care, improves not only the health of citizens but also their productivity, and, in turn, the health of the U.S. economy as well.
Why And Where It's Needed
From roads to telecommunications to the electrical grid, many different kinds of infrastructure help us in our daily lives.
Most think of infrastructure as transportation, since almost every day (when not in quarantine) we are driving to and from work on roads, taking flights, or riding the subway. Public health doesn't come to mind when considering infrastructure.
But, according to the U.S. Office of Disease Prevention and Health Promotion, public health infrastructure provides the U.S. the capability to "prevent disease, promote health, and prepare for and respond to both acute (emergency) threats and chronic (ongoing) challenges to health." It highlights three vital components--capable and coordinated public health agencies (such as the Centers for Disease Control and Prevention, or CDC, the U.S. Public Health Service, or the Food and Drug Administration), a skilled public health workforce, and updated data and information systems (10). These three factors combined reportedly create a strong and effective public health infrastructure.
This kind of infrastructure, referred to as the "nerve center" of the public health system, allows public health professionals to prepare for and respond to emergency health threats, including events such as natural disasters and disease outbreaks, or support the implementation of public health programs and policies (11). This safety net means that people will take fewer sick days from either work or school. The U.S. economy benefits from their productivity. According to an Oxford Health Alliance report, "Chronic disease: an economic perspective," a five-year increase in life expectancy will boost a country's annual GDP growth rate 0.3%–0.5% in later years (Barro 1996), a result that could, in principle, suggest a relationship between chronic disease mortality and growth (12).
According to a recent World Health Organization (WHO) report, expanding health care can have a positive effect. The report notes that expanding universal health care over the next five years could see to a 40% return on investment globally (13). We need to recognize variation across economies. Indeed, low productivity in the health sector has been widely documented in high-income country settings, increasing health care costs (Baumol's cost disease), with health systems in the U.S. often viewed as a drag on productivity (14).
Now, U.S. public health infrastructure is faced with an unprecedented crisis as it struggles with its own chronic ills. Already, over one million Americans are infected with COVID-19 as of April 28, more than 30% of infections globally. Over 57,000 U.S. patients have died, and many more are projected to die, even if mitigation measures are closely followed.
In recent days, the U.S. government has taken some steps to fight the outbreak as well as created initiatives to stabilize the economy's own health. Recent U.S. public health care policy initiatives--at long last addressing the lack of testing for the virus and the inadequate supply of masks--are trying to "flatten the curve" of the coronavirus pandemic by reducing the number of new COVID-19 cases over time (15). This helps prevent health care systems from becoming overwhelmed and ultimately prevent deaths.
While these improvements are having an impact, the challenges U.S. public health infrastructure has faced in recent years likely presented a large hurdle to attempts to flatten the curve (see chart 9). Some U.S. health officials have recognized that the U.S. fell behind the curve, only recently seeing signs that it has started to flatten.
Earlier actions to reduce the size of government have, over time, hampered agencies integral to responding to the coronavirus. The Trump White House cut the global disease-fighting operational budgets of the CDC, the National Security Council (NSC), and the Departments of Homeland Security and Health and Human Services (HHS) in 2018. On Feb. 10, President Trump's 2021 budget proposal called for a 9% reduction in funding for the CDC, almost three weeks after the first U.S. COVID-19 case was diagnosed.
But U.S. public health care infrastructure had already suffered major setbacks over the last decade. For example, the CDC budget, in real terms, fell by 10% over 2010 to 2019, according to Trust for American Health (16). Because much of the CDC's budget is distributed to states and localities, the impact of budget cuts is felt directly at the state and local level, ostensibly the front line in terms of fighting the war against COVID-19. This left the U.S. health care system ill prepared to respond to the coronavirus outbreak.
The recent $484 billion COVID-19 interim stimulus package signed into law on April 24 reportedly included $1 billion for the CDC and $1.8 billion for the National Institutes of Health, with up to $1 billion to cover testing for the uninsured. This package has helped resolve some of the strains, with CDC money available to increase staffing, for example. While this measure is a good start, more will likely be needed to offset years of underfunding.
Reports from the Government Accountability Office (GAO) revealed these significant problems (17). The 2018 GAO report said that limited federal grants are distributed to local officials using a flawed process which may not effectively build the "surge capacity" that state and local health agencies need during an infectious-disease threat. The February 2020 GAO report further identified years-old challenges with federal agencies (some predating the Trump Administration) collecting and sharing data with nongovernmental groups that affects "public health situational awareness."
Government exercises indicated that the U.S. was not ready for a pandemic like the coronavirus. Internal government reports as far back as 2016 emphasized that reduced investment over the years had left U.S. public health care infrastructure incapacitated to combat a pandemic (18). Right before COVID-19 made its appearance, findings from an internal HHS simulated pandemic study, dated October 2019, of a respiratory illness originating in China, found that the federal government was "underfunded, underprepared and uncoordinated." And, as early as 2016, the "NCS Lessons Learned Study on Ebola" wrote "…the odds are increasing that the United States will be called upon again in the not too distant future to respond to another health crisis that threatens global security."
Climate change is another area in which increased infrastructure spending would show economic benefits beyond the near-term boost to jobs, productivity, and aggregate demand--in particular the "resilience benefit" of protection against extreme weather damage.
No one can say definitively that climate change has directly caused a particular event. But given the wealth of data in certain areas, the scientific community has a higher level of confidence about the effects of such things as extreme temperatures and precipitation rates. There's now no doubt that the U.S. (and the world) will need to adapt to increased heat and water stresses, more severe droughts, floods, storms, and wildfires.
Extreme weather events can have the immediate effect of disrupting economic activity, with businesses forced to close until damage is cleared or power sources come back on line and can also result in higher operating costs if, for example, businesses need to rely on generators for electricity. But the economic disruption could extend much further. Losses from the interruption of business--often at companies far away from the event itself--can be as high as 25% of total insured losses, according to CPA Journal estimates.
Much of the recent effort to address these risks have come in the area of adaptation--i.e., adjusting to the effects of climate change, rather than trying to prevent them. Along with the economic benefits, increased infrastructure spending could provide a "resilience benefit"--cost-effective protection against extreme weather damage.
For example, if the levees designed to protect New Orleans had worked as intended, the deadly flooding and subsequent property damage caused by Hurricane Katrina in 2005 could have been largely avoided--or at least mitigated. The Category 5 storm destroyed or left uninhabitable roughly 300,000 homes, with costs running to $125 billion--and insurance covering only about $80 billion of the losses--according to estimates from Zurich-based Swiss Re.
While the pandemic has revealed the extreme need to invest in public health infrastructure, many other areas, from roads to bridges to the electric grid, have been grossly neglected over the years.
The American Society of Civil Engineers trade group has given U.S. infrastructure a grade of D+ since 2013. Supporting that claim, the Department of Transportation said in 2018 that 64% of the country's highways were in less-than-good condition, and 25% of bridges were in need of significant repair.
Right now, COVID-19 has created an urgency to invest in much-needed public health infrastructure. We hope policymakers heed the call and reverse the trend. But, if they don't, another crisis will make the headlines, either a second wave or another disaster, manmade or otherwise. We hope the U.S. doesn't need more devastation to know what needs to be done.
Carpe Diem … And Benefit Tomorrow
The debate about infrastructure investment almost invariably focuses on cost--a reasonable starting point, given that figures in the hundreds of billions of dollars are hard to ignore. But, while the initial layout may be significant, the completion of large projects can enhance efficiency, allowing goods and services to be transported more quickly and at lower costs. The economy's productive capacity and output would also likely increase once the infrastructure is built and absorbed into the economy. So, a project could add to growth and yet more jobs long after completion.
It's clear that the proverbial "bridge to nowhere" would result in little benefit. But numerous studies show that if an infrastructure project is done wisely, economic gains from productivity enhancement would boost GDP for many years. Effectiveness depends on a number of factors, including how much slack is in the economy, how high interest rates are, and how investments are financed--all of which makes it difficult to determine the long-term effects of such projects on overall economic activity. Still, experience allows us to draw certain inferences.
When determining a project's return on investment, the short-term benefits to jobs and aggregate demand are easy to see, while longer-term gains are often overlooked. Prudent projects have the potential to add to growth and even more jobs long after completion--a view supported by studies from the Economic Development Research Group and the San Francisco Fed and earlier economic academic research, which found significant rates of return to public capital. These investments can essentially complement private-sector activity. In a paper published in 2017, Josh Bivens of the Economic Policy Institute found that a 10% increase in the public capital stock boosts private-sector output by 1.5%-2%--or a rate of return of 30%-40% for the period 1949-2015 (19). The Council of Economic Advisors seems to agree that infrastructure investment would be a net gain to economic growth. In a February 2018 report titled "Infrastructure Investment to Boost Productivity and Growth," they estimated that the U.S economy would gain between 0.1 and 0.2 percentage point per year, from a 10-year, $1.5 trillion investment initiative.
Lower For Longer Blues
This crisis hit while the U.S. has been struggling with slowing growth rates. Today, the Fed's long-term growth forecast is 1.9%. Five years ago, it was around 2.15%, well below the respectable 2.5% to 2.8% annual pace anticipated over 10 years ago. Their reasons for lowering expectations for long-term growth have been similar to concerns that the International Monetary Fund (IMF) and CBO raised, including the effects of an aging population on the economy and more modest prospects for productivity growth. The CBO also noted that, in addition to the retirement of the Baby Boom generation, the declining birth rates and leveling off of increases in women's participation in the work force also helped slow the growth of the labor force.
In this light, former Secretary of the Treasury Lawrence Summers has said that the U.S. may be mired in a period of slow growth, marked by only marginal increases in the size of the workforce and small gains in productivity--what he called "secular stagnation" (20). This refers to an economic era of persistently insufficient economic demand relative to the aggregate saving of households and corporations. The U.S. may be stuck in a long-run equilibrium, where real interest rates need to be negative to generate adequate demand. Without that, the U.S. slides into economic stagnation. While specific causes of secular stagnation are still uncertain, possible reasons include slower population growth, an aging population, globalization, and technological changes. An increasingly unequal distribution of income and wealth is also cited as a contributing factor.
On possible way to reverse the trend is infrastructure. Larry Summers wrote in 2016 that the core problem of secular stagnation is that the neutral interest rate is too long and cannot be increased through monetary policy. He says that the cure, then, rests with fiscal policy, particularly public investment. Indeed, a low real interest rate environment with low materials prices and high unemployment is the ideal moment for a large public investment program in infrastructure.
Spending Must Be Prudent
To be sure, time and place are key to how many jobs a project actually creates. During recessions or weak recoveries, private construction activity is soft, and unemployment in related job markets is high. Therefore, many of the jobs that an infrastructure project creates and supports would be in those areas. Alternatively, as the economy strengthens, workers become harder to find and costs climb higher.
Still, the bump in employment comes from the creation of direct jobs (in construction and supporting sectors) and indirect jobs, following stronger demand and enhanced competitiveness in the area. Nonetheless, because the effectiveness of infrastructure investment on productivity and economic activity depends on a number of factors, it's worth considering a cautionary tale.
Just as China was spending significantly on infrastructure in 1990s and 2000s, so, too, was Japan. But, because the latter's economy was already highly developed, the benefits were far lower. In fact, Japan spent $6.3 trillion, or an annual 4.7% of GDP, on roads, bridges, and other infrastructure projects in that time, according to Brookings, but GDP growth was just 0.5% a year. (Granted, Japan's economy had already seen a number of ups and downs during what was a long declining trend leading up to the aforementioned "lost decade.")
The COVID pandemic has created new urgency for this smart spending. The next hurricane will only add to these cries to bolster our defenses. The U.S. may have missed that opportunity back in 2009, but it now has a second chance. Americans need jobs and public health infrastructure--fast. A boost in this type of spending would meet those two goals.
And lawmakers on Capitol Hill are interested. After last year's infrastructure spending package stalled, House Democrats re-introduced the idea as part of the next wave of COVID-19 relief, mentioning, especially, the need for increased broadband given Americans' new reliance on telemedicine and virtual education. President Trump has expressed his support as well.
Perhaps the pandemic will provide the urgency lawmakers need.
Writer: Joseph Maguire
Appendix: Private Infrastructure Communications
(1) The Council of Economic Advisors and Treasury Department's March 2012 study estimated that 61% of the jobs directly created by investing in infrastructure would be in the construction sector, 12% would be in manufacturing, and 7% would be in the retail and wholesale trade sectors. Almost nine out of 10 of those jobs would be defined as middle-class, or those paying between the 25th and 75th percentile of the distribution of wages. See S&P Global's 2014 report "U.S. Infrastructure Investment: A Chance To Reap More Than We Sow."
(2) Thomas, Vinod, "Will more infrastructure spending increase U.S. growth?" Dec. 13, 2016, The Brookings Institution.
(3) Using historical state and local overall investment and infrastructure investment spending, we estimate future infrastructure spending as a share of GDP. Our forecast is developed using the partial equilibrium analysis of the Oxford Economics Global Economics Workstation.
(4) "Infrastructure Investment As An Elixir For Productivity Growth," Beth Ann Bovino, October 2019. https://www.spglobal.com/en/research-insights/featured/infrastructure-investment-as-an-elixir-for-ailing-u-s-productivity-growth
(5) Various studies on multipliers include: Bivens, Josh, EPI Briefing Paper #374, "The Short- And Long-Term Impact of Infrastructure Investments on Employment and Economic Activity in the U.S. Economy," July 2014; CBO, "Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from April 2011 Through June 2011," 2011; Council of Economic Advisers (CEA), "The Economic Impact of the American Recovery and Reinvestment Act, 2009 Seventh Quarterly Report. Washington, D.C.: Executive Office of the President"; CBO, "Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from October 2011 Through December 2011," February 2012.
(6) Leduc, Sylvain, Wilson, Daniel, "Highway Grants: Roads to Prosperity", FRBSF Economic Letter 2012-35.
(7) A series of papers by economist David Aschauer in the late 1980s and early 1990s, supported by research by Alicia Munnell at the Federal Reserve Bank of Boston in 1989 and 1990, found that the rate of return to public capital was significant. Later research by James Heintz in 2010 addressed the simultaneity problem using a vector error correlation model, and also found that solving the simultaneity problem this way would also solve the causality problem. Please see Boccanfuso, et. al, Working Paper 15-10 Groupe de Recherche en Economie et Development International (GREDI) for a history of analysis on the subject.
(8) Isaksson, Anders, Working paper 15/2009, "Public Capital, Infrastructure and Industrial Development," Research and Statistics Branch Programme Coordination and Field Operations Division, UNIDO.
(9) "Special Report on Coronavirus and Small Business" by Met Life & the U.S. Chamber of Commerce on April 3, 2020.
(10) U.S. Office of Disease Prevention and Health Promotion. Also see the CDC report "Public Health Infrastructure," chapter 23.
(11) B.J. Trunock, "Public Health—What It is and How It Works," second edition, Gaithersburg, Md. Aspen Publishers, 2001.
(12) Oxford Health Alliance report, "Chronic disease: an economic perspective," 2006.
(13) WHO, "A Healthier Humanity. The WHO Investment Case for 2019-2023," 2018; WHO, "Health Employment and Economic Growth," 2017.
(14) Marino A., James C., Morgan D., and Lorenzoni L., OECD Health Working Paper #95, June 21, 2017.
(15) The U.S. has been administering more than 100,000 tests a day as of April 4, 2020, according to The COVID Tracking Project (see "Testing struggles emerge as key hurdle to reopening country," April 3, 2020. The Hill.) In an interview with STAT reports on March 24, 2020, Chris Kirchhoff, author of the Ebola "lessons learned" report for Obama, said, "It's hard to express in words how our inability to test early and to contact trace has set us back." As of April 2, 2020, over 200 million Americans are under shelter-in-place orders or are urged to stay at home in a concerted effort to contain the spread of the new coronavirus. Congress also passed three stimulus packages designed to help families during the crisis and provide economic stimulus to businesses and displaced workers, while the president declared a national emergency. The Fed once again brought rates down to the lower bound, relaunched quantitative easing, and opened its alphabet soup of facilities to stave off chances of an even deeper recession.
(16) The Trust for American Health, "The Impact of Chronic Underfunding on America's Public Health System: Trends, Risks, and Recommendations," 2016 through 2020.
(17) Government Accountability Office (GAO) 2018 report. The report noted that in some cases--during the response to the Ebola virus outbreak in 2018, for example--funds took too long to arrive, prompting the CDC to develop a preapproval system to speed up the process. The February 2020 GAO report also found that "there are no clear processes, roles, or responsibilities for joint decision making."
(18) David E. Sanger, Eric Lipton, Eileen Sullivan and Michael Crowley; "Before Virus Outbreak, a Cascade of Warnings Went Unheeded," The New York Times, March 22, 2020.
(19) In a paper published in 2017, Josh Bivens of the Economic Policy Institute found that a 10% increase in the public capital stock boosts private-sector output by 1.5%-2%--or a rate of return of 30%-40% for the period 1949-2015. Bivens replicated Heintz's analysis for the period 1949-2015.
(20) Summers, Larry, "The Age of Secular Stagnation," Feb. 15, 2016.
The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
|U.S. Chief Economist:||Beth Ann Bovino, New York (1) 212-438-1652;|
|Research Contributor:||Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
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