Fed’s Evans Says Infrastructure Spending Can Boost Income

Federal Reserve Bank of Chicago President Charles Evans said the best time for infrastructure investment is when borrowing costs are low and unemployment high and that economists agree such spending can boost incomes.

“In addition to providing much needed public services at relatively low costs, infrastructure projects may be able to play a role in buffering the economy during an economic downturn,” Evans said today in a speech in Chicago. “A period of low interest rates and widely available unemployed and underemployed labor is an advantageous time to build or improve infrastructure because the costs to do so are lower.”

Yields on 10-year Treasuries have averaged 2.58 percent this year, compared with 5.6 percent over the past three decades. The jobless rate in September was 5.9 percent, compared with a post-recession peak of 10 percent and the 5.2 percent to 5.5 percent that most Fed policy makers view as full employment.

Evans cited a University of Chicago Booth School of Business survey in which 82 percent of 44 economists agreed with a statement saying the federal government has an opportunity to increase average incomes by spending more on roads, railways, bridges and airports. The rest of the respondents were uncertain or had no opinion.

U.S. lawmakers, divided on how much to spend on public works, almost allowed the Highway Trust Fund that allocates gas tax revenue for roads to fall into deficit this year. President Barack Obama and his former top economics adviser, Harvard University’s Lawrence Summers, have frequently argued the world’s largest economy doesn’t spend enough on infrastructure.

Positive Returns

“Studies suggest that there are positive economic returns that accrue from investments in public infrastructure,” Evans said today, citing research produced over the past 25 years. “These returns range from modest to quite large.”

Evans cited an American Society of Civil Engineers 2013 report saying that roads, bridges, water systems, mass transit, schools, and energy grids “may soon fail to meet society’s needs.”

The regional Fed bank president also pointed to data from the Texas A&M Transportation Institute showing highway congestion adds $27 billion in costs per year to the shipping industry. He said this has led some large companies to create “just-in-case warehouses” on the edge of congested cities to ensured deliveries can be made.

Evans said while economists agree projects can help the economy, there are still concerns about “bridge to nowhere outcomes” if projects don’t get adequate scrutiny.

Evans, who votes on monetary policy next year, spoke at a Chicago Fed conference titled “Infrastructure and Economic Growth: Measuring the Impact of Funding Models Conference.”

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