Consultants Forum Advertise
Subscribe
Close

  • Free for qualified executives and consultants to industry

  • Receive quarterly issues of Area Development Magazine and special market report and directory issues

Subscribe Now
Renew

Area Development - Site Selection, Facility Planning and Workforce Development

Infrastructure Investment as an Economic Stimulus Tool

Investing in the nation’s infrastructure can provide an immediate economic boost and create jobs, but its greatest value lies in supporting economic competitiveness over the long term.

Q3 2020
In times of economic struggle — such as the recession that abruptly arrived with the COVID-19 pandemic — analysts and advocates promote an array of options as effective tools for stimulating the economy. One of the most frequently suggested options is infrastructure spending. Proponents of infrastructure spending during dire economic times view it as a productive job creator and essential foundation for a long-term recovery and return to sustained prosperity.

Brian Raff, director of Communications and Public Affairs for the American Institute of Steel Construction (AISC), cites a 2015 study by the Duke Center on Globalization, Governance, and Competitiveness to demonstrate infrastructure investment’s potential as an economic stimulus.According to the study, expanding federal funding in alignment with the U.S. Department of Transportation’s request to improve conditions and performance of transportation infrastructure ($114.2 billion per year) would lead to more than 2.47 million jobs (58 percent more jobs than at current funding levels) and more than $404 billion in total economic impact.

Similarly, a 2020 McKinsey & Company report, Reimagining Infrastructure in the United States: How to Build Better, notes the Congressional Budget Office has estimated that every dollar spent on infrastructure produced an economic benefit of up to $2.20, and the U.S. Council of Economic Advisers has calculated that $1 billion of transportation infrastructure investment supports 13,000 jobs for a year.

No matter the climate — whether in good times or in bad — infrastructure investment is a crucial component to a successful economy, says Brian Oakley, executive vice president, JLL Public Institutions. On a foundational level, infrastructure spending is necessary for the supply chain to operate effectively and for people to travel to and from work. Maintenance of existing transportation infrastructure, including from simple wear and tear, is needed to move products and people affordably and efficiently. Similarly, environmental infrastructure, such as water and wastewater systems, and energy infrastructure are “fundamental to any economic activity,” Oakley says. “If you don’t have advanced infrastructure, you’re just not going to have a well-functioning economy,” he explains.

In the U.S., infrastructure spending continues to lag behind the need for it, making infrastructure investment a particularly pressing option for policymakers during economic crisis. In its most recent report card, in 2017, the American Society of Civil Engineers gave the country’s infrastructure system a D+, covering a range of categories from roads (D) and aviation (D) to transit (D-) and wastewater (D+). In 2016, the organization estimated that the United States had an unfunded infrastructure gap of more than $2 trillion — a gap that has only grown larger in the subsequent four years, according to McKinsey & Company.

Short-Term Impact
According to a July 2020 paper from the Brookings Institution on infrastructure spending to address the latest economic doldrums, recessions can actually offer a valuable opportunity to improve infrastructure and expand economic opportunity, particularly in the current climate.

A long-term, robustly funded infrastructure package is one of the best ways to stimulate the economy. Brian Raff, Director of Communications and Public Affairs, American Institute of Steel Construction “Lower interest rates make borrowing cheaper compared to recent years, reducing the upfront costs of generational projects,” according to the paper. “Infrastructure spending can also create immediate professional opportunities across a mix of design, construction, and operational jobs. The mix of short-term employment and long-term investment makes infrastructure an attractive area for federal stimulus.”

The short-term boost of infrastructure spending in an economic slowdown is that it can produce jobs. “These are large public works projects generally, so obviously there’s a big labor component and it puts people to work,” Oakley says.

McKinsey & Company’s report points to two strategic approaches to infrastructure projects that can yield more immediate benefits. One is funding state-of-good-repair investments that target maintenance and upgrade projects. “With large maintenance backlogs prevalent throughout the United States, reinvesting in existing assets to ensure that they operate at peak performance is one of the quickest strategies for generating economic impact,” according to the report. The other is prioritizing investments that reduce the cost of existing operations, such as automating workflows, replacing high-maintenance assets, investing in contactless service operations, and upgrading energy efficiency.

Oakley says infrastructure investment during dire economic periods can help ensure needed projects that were already planned do not get delayed or set aside. Otherwise, localities and states that have seen their tax revenues plummet because of reduced economic activity will be forced to delay the projects as a way of cutting costs. With communities in the United States facing so much uncertainty in a crisis, it’s a simple decision for many of them to put off projects and that can exacerbate existing challenges, says Oakley, deepening the hole of needed infrastructure projects and producing a negative drag on the economy. An infrastructure bill that helps those projects continue without delay can improve the economic climate.

“A recovery plan that addresses that would help keep projects on track,” Oakley explains. “That’s probably the area where targeted relief under the heading of infrastructure makes some particular sense…The way I look at it is if there was an infrastructure plan targeted at recovery, the effect of it would be to keep projects that are under way moving forward and maybe close some financing gaps and funding gaps.”

The Challenges
However, Oakley realizes the short-term stimulus of infrastructure investment can be limited because of the nature of infrastructure projects and the difficulty of getting new projects under way quickly.

“What we saw in the Great Recession was a lot of programs geared toward infrastructure and energy, and there was this expectation that with the Recovery Act funding, you would have immediate jobs that would happen, and it would take off. But it took a long time for those jobs to develop because when you’re talking about infrastructure, particularly a new project, you have to go through all sorts of planning, design, and permitting.”

Those new projects tagged with infrastructure spending come online in the future, but do not provide a benefit in the first couple of years. Money can’t necessarily accelerate the process either, Oakley says. “The biggest misconception is that if we passed a trillion-dollar infrastructure bill next week, there’s going to be immediate relief in the economy. And I think that that’s probably the biggest challenge to overcome because it takes time to do good projects. There are all sorts of different ways of getting the projects done, but they generally have to follow a certain process, and putting together financing for a project takes some time. It’s not an overnight kind of solution.”

Transformational spending often emphasizes large-scale projects that take years to develop and complete. Raff notes a key characteristic of infrastructure spending being a successful economic stimulus is that it adheres to “Buy American” principles, even if financing comes from private sources, so that American companies benefit — such as those in the U.S. steel industry, which accounts for more than 180,000 workers throughout its supply chain.

“While current ‘Buy American’ requirements apply only to projects that receive federal funding, the underlying principles should apply to all public infrastructure projects, regardless of how specific project financing may be arranged,” Raff says. “AISC does not take a position on whether or what types of nontraditional infrastructure options should ultimately be adopted, but urges that whatever policy is adopted explicitly requires that ‘Buy American’ requirements be incorporated in the enabling legislation.”

Sustained Recovery
According to McKinsey & Company’s 2020 report, “To get the most out of federal stimulus dollars, agencies should consider balancing projects that provide an immediate economic boost with ones that have transformational impact.”

In keeping with that notion, Oakley believes that infrastructure spending’s greatest value to the economy is less about short-term relief and more about sustained growth and long-term competitiveness — the transformational side. This transformational spending often emphasizes large-scale projects that take years to develop and complete.

As an example of infrastructure investment paying off in the long term, Oakley points to the investment that has been made in green energy sources, particularly on the West Coast in solar energy, and the transformation that has sparked in energy markets. He says that government investment in solar power’s infrastructure can be viewed as a success story of funding that was issued as a recovery measure and led to sector growth: “It had the desired effect. It sort of leveraged government investment and that market took off.”

Government can support infrastructure spending with grants, loans, and incentives. During the last recession, tax-oriented incentives proved particularly impactful. “They were very much embraced by the markets and adapted to mobilize investment,” Oakley says. “Most of this you saw in the energy space in particular, where solar, wind, those areas garnered significant investment and transformation.”

Ultimately, Oakley believes infrastructure investment as a stimulus is about patience, foresight, and long-term thinking. “Infrastructure spending is one means to a more sustained recovery over time,” he says. “We should operate on the premise that we need to invest in our infrastructure to support our economic competitiveness and economic activity.”

Exclusive Research