America's Builder-in-Chief Should Beware
Can government investment in infrastructure fuel the sort of dynamism that propels an economy forward? Today, that’s virtually an unquestioned truth. Infrastructure spending is constantly cited as the way forward for a stagnating euro zone; in the U.S., both candidates for president promised billions of it. When Donald J. Trump takes office on Jan. 20, that’s the one aspect of his economic agenda that, it appears, Democrats will be able to get behind.
Yet caution is warranted. Some in the West have perhaps forgotten two aspects of public investment in infrastructure. First, it takes ages to have real effects. And second, it creates interest groups that warp public spending for decades thereafter.
For evidence of that first point, look no further than India -- still, according to the most recent growth data, the world’s fastest-growing large economy. Over the past couple of years, the Indian government has sharply increased the money it spends on infrastructure; the last federal budget increased the amount of public investment in roads, rail and so on by 22.5 percent. The argument is simple and familiar: India’s short of infrastructure and increased public spending should energize the private sector -- which should then invest more, too.
But that’s not exactly how it's worked out. In fact, private investment has slowed for several quarters. This year, according to the most recent GDP estimates, the total amount spent on fixed capital in India will actually fall. It turns out that companies care more about a stable investment environment and favorable regulations than government backing for a few new roads and bridges.
That doesn't bode well. Better infrastructure might yet transform the Indian economy. But that’s far in the future and it depends crucially on getting the spending right. And getting spending right is something that’s much easier for companies to do than governments, even those that aren't burdened by conflict-of-interest problems.
Which leads us to that second point, about viewing public infrastructure spending as economic magic. Consider the People’s Republic of China. The country that famously poured more concrete in a few years this century than the U.S. did in the entire century that preceded it is now burdened by excess -- perhaps useless -- capacity and poor returns on its investment. In fact, it’s possible that over half of China’s massive buildout has destroyed rather than created wealth.
If the numbers don’t grab you, the photos will -- stunning shots of silent apartment blocks and vast, empty airports in small towns. The pictures don’t lie: Last year, as I drove through one of the most famous “ghost cities” in Chinese Mongolia, I couldn’t help thinking it looked like some sort of odd post-apocalyptic museum. Beijing’s policy makers know they need to shift the balance of spending. But infrastructure spending, like entitlement spending, is addictive; once an economy gets hooked on the jolt it provides, it’s very hard to go cold turkey. Too many powerful people are upset, and nobody wants the GDP numbers to suddenly take a turn for the worse.
My point is not that publicly-financed infrastructure is bad. It’s just that governments should only invest in infrastructure when and where it's really needed -- where that money will clearly enhance the productive capacity of the economy. And yes, infrastructure in the U.S. is the oldest now that it's been for decades. There are bound to be places where the government can invest and generate good returns for everyone over the long-term. But if you look at public infrastructure spending as a quick and easy way to boost growth and jobs, then you’re asking for trouble. If Trump wants to spend federal money to reward the Rust Belt voters who propelled his victory, there are other and better ways to do so.
Washington will love infrastructure spending, of course; every legislator will hope that his or her district or state will get a serving of pork. But taxpayers should worry. While stories about “bridges to nowhere” have vanished from the papers, the lesson from India and China is that if Trump opens the taps indiscriminately, they’ll soon be back.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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