The SEIA Report Q4

By Gene Balas, CFA®
Investment Strategist

What the Infrastructure Bill Means for the Economy: Now vs. the Future

Congress’ newly passed $1.2 trillion infrastructure bill will improve the nation’s productive capacity—dedicating $500 billion to highways, $39 billion to urban transit, $65 billion to broadband projects and $73 billion to electrical grids. These are all projects that may generate dividends well into the future. But this infrastructure investment program (as currently designed) may not generate as much immediate economic activity as one might assume.

Before exploring the benefits, let’s first address some important caveats. The infrastructure bill is not intended to be ‘stimulus’ in the traditional sense of the term. Instead, the bill will focus on designing projects to be developed in the future as much or more so as those to be implemented today. The authors of the bill are keenly aware of the current levels of inflation, difficulty in sourcing materials and workers, and the stresses that a sudden jolt of spending might potentially place on the economy. Costs for steel products, for example, are up by 142% over the last 12 months according to the New York Times.

Therefore, funds from the $1.2 trillion program will gradually flow into the $23.2 trillion U.S. economy over a period of five or more years.^[1] Most of the spending under the plan has been previously authorized. But the law does include $550 billion of new money to be spent in as little as five years.

In 2019, before the pandemic hit, federal, state, and local agencies were already putting $270 billion a year to work in authorized spending. Increasing that amount by an additional $110 billion annually, as envisioned, represents a 41% jump. And industry analysts have serious questions as to whether that will be possible to achieve.^[2]

“It is a very big bump,” notes Ken Simonson, chief economist at Associated General Contractors of America, which represents major infrastructure builders. “My guess is that we are not going to see $550 billion spent in the first five years.”

Bent Flyvbjerg, a professor at the University of Oxford who has studied many infrastructure projects globally, has determined that 92% of those projects overran their original cost and schedule estimates—often by large margins. “A lot of projects are not delivering what they promised to deliver,” he cautions.

Some construction projects take longer than anticipated (or promoted) because of the amount of time federal agencies spend reviewing environmental reports and issuing records of decision, according to Diana Furchtgott-Roth, who formerly oversaw research and technology for the U.S. Department of Transportation. She points out that in many cases, projects are put on hold for years, as agencies conduct these detailed and lengthy examinations.

“Implementing a historic bill like this will test all of our management facilities,” advises Adie Tomer, who leads infrastructure work at Brookings’ Metropolitan Policy Program. The challenges, he notes, include “hiring federal, state, and local officials to direct programming; finding enough skilled tradespeople to execute the work; and securing equipment and materials during a major supply chain crunch.”

These caveats aside, the long-term boost to our economic growth could be substantial—though not necessarily directly from the funds the government spends on these projects themselves. Rather, the benefits may come through productivity enhancements: shortening transit delays of merchandise by improving roadways and ports; augmenting students’ learning potential and enabling more people to benefit from the internet through broadband investments; and reinforcing our electrical grid to better withstand the future challenges it may face (whether stemming from environmental factors or population growth).

However, what’s missing from many of the arguments stressing the productivity-enhancing benefits of the infrastructure program is an explanation as to how productivity gains affect the economic growth potential of the country. Put simply, the potential growth rate of the entire economy—as measured by GDP—is the growth of the labor force (how many more people are working) plus productivity gains (how much more per hour each of those workers produce).

It’s that latter factor, productivity gains, which allows our economy to grow and generate a higher standard of living for all. As our population ages, we have a growing proportion of the population who are retired, with relatively fewer people entering the labor force. Those who are working must therefore generate a proportionally greater amount of economic activity to compensate for these demographic trends. That additional growth must come from productivity gains—where significant increases are often driven by investments in technology and infrastructure.

Yes, it will take time for the funds from this infrastructure package to be spent. And there certainly will be delays and cost overruns along the way. But reaping the rewards well into the future from these investments in infrastructure will be well worth the caveats noted above. It just may be the best hope our economy has of meeting the long-term demographic and international competition challenges that likely lie ahead.

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[1] Source: U.S. Bureau of Economic Analysis
[2] “Years of Delays, Billions in Overruns: The Dismal History of Big Infrastructure,” New York Times, November 28, 2021

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