Aerial View of Freeways
Markets and Economy

The Economic Impact of Infrastructure Spending

Support for infrastructure spending has its critics in Washington. But no matter which side of the aisle you’re on, it’s important to focus on the potential benefits to the US economy.
Jim Glassman, Head Economist, Commercial Banking
March 22, 2017

Infrastructure spending is often debated as a political issue, but the underlying economic case for investing in new roads shouldn’t be controversial. Thanks to traffic, American commuters spend an extra 6.9 billion hours in their cars every year, burning 3.1 billion gallons of gasoline as they idle. More importantly, 40,000 drivers die on highways annually, a toll that could be reduced through safer design. Thus, as investing in infrastructure could make the US safer and more productive, the need for new highways shouldn’t be a partisan issue.

Improving to Meet Growing Demands

The last major infrastructure spending bill, the American Recovery and Reinvestment Act of 2009, was a stimulus measure designed to spur aggregate demand for labor and materials. Now that the economy has nearly recovered from the Great Recession, there isn’t as great a need for legislation to prop up the labor market. Instead, the next infrastructure bill should focus on increasing the supply of labor and goods available to businesses and consumers.

Improving the country’s transportation grid will likely increase the economy’s potential for future growth. When workers can’t commute rapidly from the suburbs into dense city centers, the nation’s most dynamic labor markets begin to stagnate. Similarly, if finished goods can’t be transported quickly to customers, shipping bottlenecks will impose drags on manufacturers.

With more people driving to work than ever before, the carrying capacity of the nation’s roads is increasingly coming under strain. Faster commutes will increase the supply of available labor—the less time people spend stuck in traffic, the more hours they’ll have available to work. The total cost of US highway congestion is estimated to top $160 billion annually, which will rise further as the population grows. Considering that the combined state and federal highway budget totals only $280 billion, there appears to be substantial potential returns on aggressive infrastructure investment.

Politics vs. Economics

While the economics of infrastructure investment are clear, the politics are more complicated. Since the beneficiaries of transportation projects are often far removed from the actual construction, almost all new highway investment is funded at the federal level. For example, relatively few people might visit west Texas, but all American consumers benefit from the goods that flow across the continent on the federally funded Interstate 10. Regional transit improvements provide the same diffuse impact—a Manhattanite may never cross the George Washington Bridge, but will still benefit from living in a labor market that draws talent across state lines.

Using the revenues from federal fuel taxes to fund new construction allows states to share the cost of projects that benefit the entire economy. However, it also makes highway funding vulnerable to the political gridlock that inevitably afflicts all federal spending measures. The Highway Trust Fund has been depleted, and today’s insufficient outlays for construction already exceed revenues by $10 billion annually. Increased spending will require either raising fuel taxes or adding to the deficit, neither of which will likely be popular on Capitol Hill.

Supply-side economics may have fallen out of favor, but it’s still applicable for infrastructure spending. Borrowing to fund projects today that will increase the economy’s growth rate for decades to come makes sense. Deficit spending on infrastructure should be expected to pay for itself by increasing the tax base over time.

Technology’s Role

Technology promises to improve the efficiency of our existing transportation infrastructure, even if federal funding never materializes. “Smart” technology could improve the carrying capacity of our highways by coordinating signals to keep traffic flowing. Optimization algorithms for public transit could deploy buses and trains more efficiently during rush hour, and improving communications technology is making telecommuting an option for more workers, reducing the number of commuters on the road. And unlike building physical infrastructure, technological projects will likely be adapted as public-private partnerships, financed by municipal or corporate bonds. As a result, gridlock in Washington may inspire creative solutions on the local level.

View our economic commentary disclaimer.

SUBSCRIBE TO OUR ECONOMIC NEWSLETTER

Weekly insights on the economic issues that matter most to your business.

Subscribe

How We Can Help

Our Services

Rely on our world-class products and services to help take your business to the next level.

Learn more about Our Services

Our Expertise

Benefit from industry experts who specialize in serving the specific needs of your business.

Learn more about Our Expertise

GET IN TOUCH

Find out how we can help your business.

Contact Us

 

Copyright © 2018 JPMorgan Chase & Co. All rights reserved.