When President Trump took office, he promised Americans a giant infrastructure bill. When I arrived as chairman of the president’s Council of Economic Advisers, I was immediately asked to build economic models evaluating the impact of the president’s plan, and spent countless hours in the Roosevelt Room helping the team design the proposal. Much of our work was memorialized in the 2018 Economic Report of the President, which dedicated a chapter to the issue.
As we dug into the data, the extent of investment and repair required by America’s infrastructure became more and more apparent. Between 1980 and 2016, for example, we found that vehicle miles traveled had more than doubled, while the number of miles of road was flat. We estimated that the lack of road increased congestion enormously, imposing a cost of $160 billion in 2016 alone. By 2019, that cost reached nearly $200 billion.
The problem was not just roads. Inland waterways in the U.S. are so congested, we found, that the typical tanker trip requires twice as much time as it did 20 years ago. As we looked around for strains in the system, it became obvious that the country fell short when it came to airport capacity, port capacity, pipelines and many other areas of what has traditionally been defined as infrastructure — a word that in the last six months has sometimes been stretched beyond recognition by the Biden administration.
And the big problems were easily traceable to money. Spending on infrastructure had clearly been crowded out over time by entitlement spending, dropping by about half a percent relative to GDP from its peak in the 1950s. And the funds were drying up fast. Real fuel-tax revenue, the funds directly earmarked for infrastructure spending, dropped about 50 percent since the 1990s and, because of electric cars, seemed likely to head towards zero.
Fixing this would, we estimated, have a sizable effect on GDP growth. Improvements in public capital added almost a percent a year to GDP between 1947 and 1973, but added almost nothing in the 2000s. Recapturing even a little bit of our infrastructure mojo could lead to sizable economic gains.
In these partisan times, it is easy to wake up in the morning and hate whatever it is your political rivals are doing. They often give you great cause to. But this bipartisan infrastructure bill is, for the most part, likely to be a small net positive for the economy. Our modeling suggested that President Trump’s $1.5 trillion plan would add between 0.1 and 0.2 percent per year to growth over the decade. The $550 billion plan, then, should be expected to have a proportionately smaller effect.
To be sure, there are things in the bill that would never have been part of a purely Republican bill, and rightly so, especially the massive increase in spending for Amtrak. But the bill does allocate $110 billion to roads, $40 billion to bridge repair, $11 billion to improved safety, $65 billion to broadband, $17 billion to ports, and $25 billion to airports. Given the sorry state of each of these, even inefficient projects are likely to pass a reasonable cost-benefit analysis.
The bill will increase the deficit, a problem that is significant and likely to put added stress on the Treasury market (even more so, of course, if it paves the way for a second, much larger bill, as Brian Riedl discussed on Capital Matters here). But the other concern raised by opponents, that the spending will feed inflation, is simply a red herring. While inflation does appear slated to increase substantially, the infrastructure bill will not drive prices up further.
There are two reasons why this package is no big deal for inflation. First, the small growth effect cited above will partially offset growth in deficits and the monetary base. Second, infrastructure funds are spent over a relatively long time period. Just about every project will require approval from numerous government agencies that are currently run by regulation-loving Democrats. Permit delays will likely break all known world records. By the time the biggest effect of the bill kicks in, the Fed will surely have cracked down on inflation. Moody’s Mark Zandi has estimated that the peak economic effect of the bill will come in 2025. That seems a tad optimistic to me.
There may well be political reasons to object to this bill. Put bluntly, and as has been argued on NR, are those Republicans who are backing this legislation making it much easier for the president to pursue the more ruinous aspects of his agenda this Fall? Quite possibly so, for both technical reasons (it might open up the opportunity for the Democrats to maneuver around the filibuster) and as a simple matter of the momentum it creates. However, looked at solely on its economic merits, the bill, although far from perfect, is better than nothing.