There’s no economic justification for unprecedented levels of spending right now, even in a hardline Keynesian framework.
Let’s say I’m hungry and I make a sandwich. Once I eat that sandwich, I’ll feel much better than I did before doing so. My stomach will stop grumbling and I’ll no longer feel quite as hungry. If I then make and eat another sandwich, I won’t feel nearly as good as I did after the first.
If you understood that, you’ve understood one of the most basic principles of economics: diminishing marginal utility. Each additional unit of something provides less utility than does the unit before.
Diminishing marginal utility isn’t just useful when talking about sandwiches. It’s also useful when talking about infrastructure. Going from zero interstate highway systems to one Interstate Highway System had huge economic benefits. Going from one Interstate Highway System to two, however, would have way fewer economic benefits.
This is the problem that advocates of huge infrastructure bills run into. They point to the benefits of building highway networks in the first place and essentially promise to repeat those benefits if the government spends that much money again. But that’s not how it works.
A recent article in the Wall Street Journal documents many empirical findings from the economics literature that back up the validity of diminishing marginal utility as it relates to infrastructure.
The article quotes John Fernald, an economist with the Federal Reserve Bank of San Francisco who has researched the economic benefits of the Interstate System: “Building the interstate highway system was enormously productive. . . . That does not imply that building a second one would be equally productive.”
The piece references other research as well:
Charles Hulten, an economist at the University of Maryland, found that infrastructure investment in developing countries like India resulted in increased productivity and higher growth rates. In developed countries with vast road networks, such as the U.S., new investment resulted in no change in overall productivity and growth.
A group of economists in Spain studying that country’s infrastructure spending between 1964 and 1991 concluded that the investment earlier in the period produced greater economic gains than investments later, when much of the infrastructure was already in place.
Researchers have also found that in developed countries, whatever local benefits come from highway improvements come at the expense of other locations. In other words, road spending reallocates the pie but doesn’t make it bigger.
Mr. Duranton and two co-authors, Geetika Nagpal and Matthew Turner, both of Brown University, suggested in a paper last year that new investments “lead to a displacement of economic activity while net growth effects are limited.”
These results are exactly what you’d expect if all you knew was diminishing marginal utility. One of the purposes of economics research is to demonstrate that the general laws of economics hold in specific instances. But, to paraphrase Thomas Sowell, one of the purposes of political rhetoric is to try and make you forget about the laws of economics when it’s convenient.
Another bit of research specific to roads referenced in the Journal piece is important:
In a 2012 paper, San Francisco Fed economists Sylvain Leduc and Daniel Wilson found that new spending on roads can boost an area’s economy at two specific times: immediately after the new spending has been announced, and six to eight years later, when construction is under way. Beyond 10 years, there were no economic benefits to infrastructure spending, they found.
Moreover, the immediate effect applies only during recessions, they wrote. It’s unclear whether the U.S. would see that short-term boost now that the economy is expanding rapidly.
Unclear, indeed. Our economy is not in need of stimulus right now. Unemployment is around 6 percent (could be a point or two lower, but certainly not an emergency). There’s no economic justification for unprecedented levels of spending right now, even in a hardline Keynesian framework.
Our highways are marvelous things. Insofar as there are specific places that need new highways, state governments should point them out. If the people of those states want to spend money to build them, they should do so. But there isn’t a case that we need a national plan to build more highways. The economic benefits would be small at best, and we already have the largest highway network in the world.
You can’t build the Interstate Highway System twice. Promising another “generational investment” like the one that funded the Interstate System, as President Biden has often done, would not have the same results as it did the first time around. The most likely result is that a lot of people will be scratching their heads in about ten years wondering where all the money went as we drive on the same highways we did before.