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News from EPI Public investment outside of “core” infrastructure would benefit the economy in the long and short run

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For Immediate Release: Thursday, November 1, 2012
Contact: Phoebe Silag or Donte Donald, news@epi.org 202-775-8810

Public investment outside of “core” infrastructure would benefit the economy in the long and short run

Increased public investments – even investments made outside of “core” infrastructure – would substantially benefit the economy, a new Economic Policy Institute report finds. In More extraordinary returns: Public investments outside of “core” infrastructure, EPI Research and Policy Director Josh Bivens explains that investment by federal, state and local governments in education, health and “green” initiatives would increase the economy’s potential output in the next several decades.

Furthermore, because the U.S. economy is currently operating so far under potential, these investments could also result in a direct benefit to the economy in the short term by increasing GDP and creating jobs. If deficit-financed, the “multiplier effect” of these investments throughout the still-weak U.S. economy would be particularly large.

More extraordinary returns builds on Bivens’ April 2012 report Public investment: The next “new thing” for powering economic growth with additional new findings. Both papers show that there are hundreds of billions of dollars of high-value public investments that could be undertaken as near-term fiscal support to the economy that could also aid long-run economic growth. Bivens’ new analysis finds:

  • Investments in both educational facilities and in providing high-quality pre-kindergarten education would yield extraordinary returns. Each $1 spent improving marginal educational facilities leads to $1.50 in economic value. Even more striking, investments in universal high-quality pre-kindergarten can carry eventual benefit-to-cost ratios as high as 8-to-1.
  • Expanding public financing of health care would lead to a reduction in the rate of health-care cost growth. If private-sector insurers had been able to match Medicare’s (still-insufficient) success in controlling per-enrollee costs since 1970, the average employer-sponsored family health insurance policy in 2010 would have cost $10,000 instead of $15,000.  Over the long-run, this would lead to higher wages for workers.
  • All serious policy proposals to stop global climate change contain calls for very large investments in both energy efficiency and renewable energy sources. A widely circulated report by McKinsey (2009) argues that investments in energy efficiency have benefit-to-cost ratios as large as 2-to-1, but are often blocked by market failures. Thus, public financing and policy changes are key to fully exploiting these gains.

“Some critics of expanded public investment have suggested that too much public spending is opportunistically labeled ‘investment’ by advocates, and that only ‘core’ infrastructure investments have been rigorously shown to boost long-term growth,” Bivens said. “Actually, it’s the other way around. Current accounting conventions actually fail to classify enough public spending as investment, even when it will lead to faster, long-run growth.”

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