How Increasing Infrastructure Spending Provides A Major Boost To Our Economy

The United States has a massive infrastructure deficit, with independent analysts finding that the country could need as much as $2 trillion in immediate investments just to bring its infrastructure up to date. With the economy recovering slowly and our nation’s roads and bridges crumbling, a new paper from the San Francisco Federal Reserve found that making investments into infrastructure has substantial short- and medium-term benefits for the economy.

Each dollar invested into infrastructure boosts state economies by at least two dollars, the paper found:

Federal highway grants to states appear to boost economic activity in the short and medium term. The short-term effects appear to be due largely to increases in aggregate demand. Medium-term effects apparently reflect the increased productive capacity brought by improved roads. Overall, each dollar of federal highway grants received by a state raises that state’s annual economic output by at least two dollars, a relatively large multiplier. […]

In other words, for each dollar of federal highway grants received by a state, that state’s GSP rises by at least two dollars.

The initial impact of increased highway spending, the study finds, is due to an increase in aggregate demand. That is, it increases money held by workers who build the highway, who can then spend that money in other parts of the economy. The medium-term impact of infrastructure spending comes from increases in productivity and economic capacity offered by new infrastructure. During economic downturns, though, the effects are even larger. When the authors analyzed the 2009 American Recovery and Reinvestment Act (the stimulus), they found that the effects of infrastructure funds spent in 2009 and 2010 were roughly four times larger than normal.

After the success of his first stimulus, President Obama pushed for another investment into infrastructure in 2011. The American Jobs Act, independent analysts found, would have created as many as 2.6 million jobs and boosted the economy by as much as two percentage points, but Republicans blocked it. Instead, House Republicans chose to disinvest in the economy, pushing for $871 billion in cuts to investment spending — much of it in infrastructure — in their latest budget. But while the GOP has argued in favor of tax cuts for the wealthy to boost the economy, the San Francisco Fed paper proves that the “failed stimulus” they often decry actually provides major benefits to the economy, especially during downturns and slow recoveries.