A new paper by EPI Research Director Josh Bivens finds that public investment in infrastructure could contribute significantly to solving two pressing macroeconomic problems facing the U.S. economy. First, it could solve the chronic shortfall of aggregate demand caused by a lack of spending by households, business, and governments—a chronic shortfall sometimes referred to as “secular stagnation.” Second, it could help boost productivity growth, which has decelerated rapidly and reached historically slow growth rates in recent years.
Although unemployment in 2016 was roughly on par with its pre-Great Recession level, policymakers should still be concerned about macroeconomic stabilization and maintenance of aggregate demand. This demand shortfall has kept growth in both jobs and wages too slow. Growing fears of secular stagnation seem to be justified, evidenced particularly by the unusually slow growth of nominal wages this deep into a recovery. A renewed push to increase infrastructure investment could move fiscal policy from being a drag on growth to being a boost to growth in the coming years. If policymakers funded a fiscal boost in infrastructure, each $100 billion in infrastructure spending would create roughly one million full-time jobs, which would quickly erase any remaining demand slack in the American economy.
Greater public investment in infrastructure could also provide a significant boost to productivity growth in the long run. By taking up the last of any remaining slack in the labor market, an increase in infrastructure investment could have an immediate effect on restoring productivity growth to more normal levels. But even in a full employment economy infrastructure investment could boost productivity growth by boosting the nation’s capital stock (or publicly owned infrastructure investment).
A preponderance of research indicates that the potential rate of return to infrastructure investment is large. A review of dozens of estimates find that each $100 spent on infrastructure boosts private-sector output by $13 (median) and $17 (average) in the long run. The estimated rates of return on infrastructure investment have actually steadily climbed over time, with more recent and methodologically rigorous studies finding higher rates of return.
“The problems of secular stagnation and slowing productivity growth are both deeply worrying,” said Bivens. “The one significant policy lever we have that has the potential to address both is a significant increase in infrastructure investment.”