Anyone who has some international travel experience knows that airports provide visitors with the first impression of a host country, and first impressions matter.

I must have travelled to the U.S. about 10 times, but I still remember vividly the first time I flew over to New York JFK. When I got there, I was welcomed by a sense of chaos, queues, and of a place that felt generally “old”, as did the rest of the United States infrastructure. Airport runways, roads, railways were and still are far below the standards expected from a country that’s seen by many as the centre for innovation, where stuff gets “done” and when, if something does not work, it gets fixed.

The discussion about the States’ crumbling roads and bridges and inadequate airports and railways is not new, but little has been done by a stalling Congress to address the issues, as the ballooning deficit eats into the funds required to maintain, let alone improve the existing network.
It is no surprise, therefore, that the latest Report Card for America’s Infrastructure, issued by the American Society of Civil Engineers every 4 years, gives the US a disappointing D+.

Source: Financial Times; ASCE

The issues that need to be solved are several

The United States does NOT spend enough on fixed assets.

In a recent report , the McKinsey Institute calculated that the total value of infrastructure stock in most economies averages at around 70% of GDP. In order for this ratio to be kept constant through 2030, the United States would need to boost its investment in fixed assets from 2.6% of GDP to 3.6% of GDP.

Unfortunately, the trend seems to be going in the opposite direction, judging from the numbers. Using Federal Construction Spending data as a proxy for fixed assets investment, the amounts spent by Uncle Sam as a % of GDP has been going lower and lower, with Congress tied up in political sparring and the fiscal deficit ballooning. The following chart is pretty self explanatory (Data series taken from the St. Louis Fed database)

Construction Spending, in USD million, SA, Quarterly data series, * 1000
Nominal GDP, in USD billion, SA, Quarterly data series

Just throwing more money at the problem won’t solve it

If increasing spending would solve the problem, it would be just too easy. Washington is not a very wise spender. As noted by the CATO institute, a think tank, government-funded infrastructure projects often suffer from large costs overrun as accountability often gets lost in red tape. More importantly, when Washington makes a mistake, the mistake gets replicated across the nation, and does not allocate investments in the most efficient way. Think for example about large investments to build railtracks through scarcely populated areas rather than in more densely populated and industrialized areas, where it’s really needed.

Decentralize and get the private sector involved

Three solutions would help solve these issues

– giving individual States power over taxation and spending on infrastructure, so that investments can be put to good use where they are most needed.

– allow the private sector to participate in infrastructure projects, within a clear framework where both the investment returns and the risks are shared between individual States and private enterprises. With their own money at stake, both States and private investors will be keen to allocate capital efficiently and minimise inefficiencies, meeting time and budget constraints

– provide tax breaks and incentives to corporations who are currently sitting on billions of dollars of cash to push them to finance fixed asset investments. As the economic recovery is still very very slow, corporates prefer to give money back to shareholders rather than put it to work in investments where they see little returns from in the near future. The right incentive structure would help channel some of these sums towards building new roads, airports, bridges with the positive externalities that that would entail.

Would this benefit just the investors?

The benefits from public-private partnership in infrastructure investment would have meaningful effects on growth and employment, as shown by recent studies by the Fed. Each dollar spent increases output by two dollars. That’s a great bang for your buck.

At a time where monetary policy can no longer be the sole driver of employment and growth, and as the outlook for global growth is all but positive, the US cannot continue to ignore the state of its infrastructure problems any longer.