Larry Summers, former secretary of the Treasury for President Clinton and the director of the National Economic Council for President Obama, has written a great article arguing for a substantial expansion of public infrastructure investment across the US in a bid to boost the economy:
The American economy is not performing to the satisfaction of the American people…
The single most important step the US government can take to reverse these discouraging trends is to mount a concerted, large-scale program directed at renewing our national infrastructure. At a time of unprecedented low interest rates and long-term unemployment, such a program is good economics but, more fundamentally, it is common sense.
Few Americans are impervious to the crumbling infrastructure in their everyday lives.
The country that brought the world the Internet and continues to lead the globe in information technology has an air traffic control system that relies on vacuum tubes and where sticky pieces of paper are moved around on bulletin boards to track flights. Even leaving aside the safety risks, the costs in extra fuel consumption and unneeded delays are measured well into the tens of billions of dollars. Can it possibly make sense to wait until every repair person capable of working with vacuum tubes has died off to complete the renovation of this antiquated system?
I travel constantly. Calls to my office on my iPhone are less likely to drop driving from Beijing to its airport or from Almaty in Kazakhstan to its airport than driving from the airport into Boston, New York, or Washington. I know I’m not alone in experiencing such problems. Surely, at a time when US companies are holding close to $2 trillion in cash, earning next to nothing for balance sheets, we should be investing in improving this frustrating deficiency…
There are many more examples. But beyond the power of examples, there is the reality that a substantial step-up in infrastructure investment would serve all of our major economic objectives. It is as close to a free lunch as economics will ever produce…
As an economic strategy, infrastructure investment also promotes fairness. The group in our society that has suffered most heavily from all of the structural change of the last generation is men with limited education. These men disproportionately work in construction, the core of infrastructure… Moreover, it is the majority of Americans, not the super-fortunate minority, who primarily benefit from improving public schools or airports or reducing potholes…
Finally, infrastructure investment is important for generational fairness… Infrastructure investments, even if not immediately paid for with new revenue sources, can easily contribute to reductions in long-term debt-to-income ratios because they spur economic growth, raise long-run capacity, and reduce the obligations of future generations. It is an accounting convention, not an economic reality, that borrowing money shows up as a debt, but deferring maintenance that will inevitably have to be done at some point does not. When maintenance or necessary investment is deferred, the bills climb much more quickly than the cost of federal borrowing at an average interest rate below 2 percent.
Summers’ arguments could just as easily extend to Australia, where the state of infrastructure is also poor, degraded by decades of underinvestment and pushing-up against strong population growth, especially since the mid-2000s.
Nation building was once a key feature of Australian government. However, the more recent addiction to running surpluses combined with the short political cycle has precluded such longer-termed investment, with most governments happy to take the sugar hit to growth from a growing population without concern for the negative longer-term consequences on infrastructure capacity, living standards, or productivity.
Just like in America, well targeted infrastructure investment offers the double dividend of supporting growth and jobs as the mining investment boom fades, whilst also expanding Australia’s longer-term productive base and improving living standards.
Going into debt to fund expenditure is not a problem provided that expenditure expands the productive potential of the economy, allowing the debt to be self-liquidating.
With the Australian economy facing a shock to both incomes and employment as the twin commodity price and mining investment booms unwind, policy makers will need to find ways to support the economy without worsening imbalances and stealing from the future. Well targeted, productivity enhancing infrastructure, is one solution.
Obviously, in order to be effective, such infrastructure investment would need to pass rigorous cost-benefit analysis, to ensure that it delivers the biggest returns to society, rather than being politically motivated. Otherwise, Australia will be left carrying the burden of expensive white elephants that offer only limited productivity/social value, and whose investment could have delivered much bigger returns elsewhere.
Moreover, as articulated this month by the New Zealand Treasury and the RBNZ, running a high immigration program in the face of such infrastructure constraints is irresponsible policy. Not only does it worsen a country’s infrastructure deficit, but it also diverts scarce resources into population-based investment (e.g. housing), pushing-up real interest rates and the exchange rate in the process, and crowding-out investment in the productive economy.
In short, the Government needs to come up with a nationwide strategy for improving our infrastructure, rather than just piling more and more people into Australia in the expectation that everything will just sort itself out.
But hey, this would require a long-term vision and nation building, which Australia’s political system abandoned long ago.
