By James Pethokoukis

Infrastructure spending by government can boost long-run economic growth by making an economy more productive, in part by improving connectivity — both physical and digital. That’s a primary goal of President Biden’s American Jobs Plan. “The Biden administration’s $1.9 trillion Covid-19 relief package enacted last month aimed to get the economy back on track fast,” writes reporter Kate Davidson in the Wall Street Journal. “Now, officials are set on increasing the speed limit for the long term.”

It’s happened before. A bit of history: During the 1920s, there was a huge expansion in car and truck production, but America had lousy roads. Subsequent street improvements and highway construction — from the back half of the 1920s through the 1970s — played a key role in productivity gains through that period. As economist Alexander Field writes in A Great Leap Forward: “The growth of public infrastructure resulted in large productivity gains in distribution and in transportation, where a striking complementarity developed between the rail system and the growing trucking industry.”

Of course, the early 1970s was when American productivity growth saw a famous downshift which has continued through the present, other than an upward blip from the mid-1990s through the mid-2000s. Perhaps it’s no coincidence that the American transportation network was pretty much built out by that point. Again, Field:

The causes of the slowdown in productivity growth during the “dark ages” (1973 through 1989 or 1995) remain an enigma. … The decrease in nondefense research and development spending probably played a role. Another influence was the conclusion of the buildout of the surface road infrastructure marked by the completion of the Interstate Highway System. Continued road construction would not necessarily have avoided retardation; by the early 1970s, the low-hanging fruit had largely been harvested. Nevertheless, exhaustion of potential gains from such infrastructural investments does help us understand why productivity growth slowed after 1973.

The point here is that there can be diminishing returns from spending. And we shouldn’t overestimate the impact of infrastructure investment in an advanced, built-out economy like America’s. As economist Edward Glaeser has written, “While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit.” Indeed, we have an example of a rich country that decided to spend a ton of dough on infrastructure with poor results. Again, Glaeser:

After decades of strong economic expansion, Japan experienced a massive asset bubble in the late 1980s, with the Nikkei 225 reaching 38,500 in December 1989. … To help fight this economic sluggishness, Japan has invested enormously in infrastructure, building scores of bridges, tunnels, highways, and trains, as well as new airports—some barely used. The New York Times reported that, between 1991 and late 2008, the country spent $6.3 trillion on “construction-related public investment”—a staggering sum. This vast outlay has undoubtedly produced engineering marvels: in 1998, for instance, Japan completed the Akashi Kaiky¯o Bridge, the longest suspension bridge in the world; just this year, the country began providing bullet-train service between Tokyo and the northern island of Hokkaido. The World Competitiveness Report ranks Japan’s infrastructure as seventh-best in the world and its train infrastructure as the best. But while these trillions in spending may have kept some people working, no one can look at the Japanese numbers and conclude that the money has ramped up the growth rate. Moreover, the largesse is part of the reason that the nation now labors under a crushing public debt, worth 230 percent of GDP. Japan is less, not more, dynamic after its infrastructure bonanza.

Of course, if you’re looking at infrastructure spending as (a) jobs stimulus and (b) not constrained by fiscal concerns, then maybe the above examples are less relevant. But I view infrastructure investment primarily as a way of boosting the economy’s speed limit. Government should focus on high-value projects. What are those? It’s worth checking out a Manhattan Institute proposal from analyst Nicole Gelinas who outlines a targeted $200 billion plan that would, among other things, build a new train tunnel under the Hudson River between New Jersey and New York, help local governments do basic road and utilities maintenance and repair, and fix the nation’s struggling subways and commuter rails. Now maybe the US needs more than $200 billion, maybe a lot more, but paying attention to the worthiness of projects is a helpful exercise.

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