A Policy Dilemma: Budget Deficit vs. Infrastructure Deficit

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A Policy Dilemma:Budget Deficit vs.

Infrastructure DeficitPosted February 13, 2011

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Posted Feb. 13, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Infrastructure and the Budget Debate

As the 2011 budget season moves into full swing, infrastructure is at the center of the debate

The Obama administration wants to freeze or cut some government spending, but expand infrastructure spending in areas like high-speed rail and wireless internet

Republicans want to cut spending more aggressively, including many infrastructure programs

How can we frame our thinking about infrastructure and the budget?

Nimbus Dam on the American River in CaliforniaPhoto source: J. Smith http://commons.wikimedia.org/wiki/File:Nimbus_dam.jpg



What is Infrastructure?

The term infrastructure most often refers to the basic physical structures needed to carry on production, for example, bridges, roads, power lines, sewers, dams, and so on.

Sometimes “soft infrastructure” like education systems and courts is included

Infrastructure is typically long-lasting, but may require expensive maintenance

The benefits of infrastructure typically are spread to people who are not direct users, for example, a bridge may allow you to receive a package more quickly, even if you never cross the bridge yourself

Roebling Suspension Bridge, Cincinnati, OH, in service since 1866Photo source: http://upload.wikimedia.org/wikipedia/commons/8/85/Roebling_Suspension_Bridge_Cincinnati.jpg



What is the Role of Government in Infrastructure?

Much US infrastructure, for example, railroads and power lines, is privately owned. Other parts, like roads and water systems, are owned by government. State and local government plays a larger role than the federal government.


The Trend of Infrastructure Spending

Federal, state and local government spending on infrastructure showed an increasing trend in dollar terms until the mid-2000s, when it began to decline

The deline began much earlier when infrastructure spending is measured as a percent of GDP


Two Deficits

The budget deficit is the difference between government spending and tax revenues.

The budget deficit is filled by borrowing

When current spending is financed by borrowing, government liabilities increase faster than assets

The national balance sheet that is passed along to the next generation is weakened

The infrastructure deficit is the difference between the rate at which new infrastructure is built and the rate at which old infrastructure wears out

When depreciation exceeds investment, net infrastructure assets decrease

The national balance sheet that is passed along to the next generation is weakened, just as happens when excess current spending causes a budget deficit


Grading the Infrastructure

The American Society of Civil Engineers periodically issues a Report Card for America’s Infrastructure*

The Report Card assigns grades of "A" through "F" to various infrastructure categories

In the latest report, no area rates higher than a “C+” Roads, aviation, and transit system all declined in

score from the previous report, which was issued in 2005

Dams, schools, drinking water, and wastewater stagnated at grades of D or lower

Just one category, energy, improved, from a D to a D+.

*The full report card can be downloaded from http://www.infrastructurereportcard.org/


An Example of the Infrastructure Deficit: Dams

There are more than 85,000 dams in the United States with an average age over 50 years.

Some 4,000 dams are rated as deficient, including 1,819 high hazard dams.

As the chart shows, for every deficient high hazard potential dam repaired in recent years, two more were declared deficient.


Total 5-year Infrastructure Deficit: $2.2 Trillion

Source: ASCE, http://www.infrastructurereportcard.org /


Beware of Waste

Not all infrastructure spending reduces the infrastructure deficit

For as long as the government has been in the infrastructure business, projects have often been chosen on political, not economic grounds

US Army Corps of Engineers Road Project, 1862Photo source http://commons.wikimedia.org/wiki/File:Corps_of_Engineers_-_corduroy_road.jpg


How to Avoid Waste?

The Bipartisan Policy Center offers some guidelines for avoiding infrastructure waste

Beware of putting new borrowed money into distribution channels that do not prioritize the most urgent projects

Favor projects that are both shovel-ready and highly productive

Be skeptical of exaggerated “jobs multiplier” claims often used to justify make-work projects

US Army Corps of Engineers Road Project, 1862Photo source http://commons.wikimedia.org/wiki/File:Corps_of_Engineers_-_corduroy_road.jpg


The Bottom Line: Spend but Prioritize

It is an illusion to think that cutting essential infrastructure maintenance and essential upgrades will improve the national balance sheet

At the same time, not all infrastructure spending is equal

The most urgent need is for a policy infrastructure of budget rules that will set rational priorities

A Policy Dilemma: Budget Deficit vs. Infrastructure Deficit

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