A study published recently by the International Monetary Fund, “Public Investment as an Engine of Growth,” examines the impact of accelerated infrastructure investment on growth and productivity in “126 lower- and middle-income countries.” It finds “no robust evidence that the investment booms exerted a long-term positive impact on the level of GDP.” It does find some evidence, that spending increases GDP at the time of expenditure, albeit “probably very little,” but the increases weren’t statistically significant. With less infrastructure investment per dollar of GDP, one might expect additional investment to have more impact on growth in lesser-developed economies than more advanced economies like the United States. Japan, for example, increased infrastructure spending in the 1990s; it also had no discernible impact on its economy. These findings are consistent with arguments I made in Foreign Affairs that increased U.S. infrastructure spending was unlikely to deliver the exaggerated results forecasted by its advocates.
The study begins by reminding readers: “This paper … is not about whether in theory public investment drives could accelerate growth [or] … whether public capital can promote growth by averting the emergence of bottlenecks … but rather whether in practice, with real governments deciding how to spend the funds and implementing investments, they have in fact accelerated growth.”
It concludes: “Overall, it is difficult to find a clear-cut example that fits the oft-repeated narrative of a public investment boom followed by acceleration in GDP growth. … There is no robust evidence that the investment booms exerted a long-term positive impact on the level of GDP. … If anything … major drives in the past have been followed by slumps rather than booms. … Booms are associated with lower private investment expenditures as a percent of GDP… even after four years.”
The paper cautions: “Popular impressions of the productivity of infrastructure are influenced by what are arguably special cases. Examples include major investments that resolved bottlenecks – the Erie Canal, the Hoover Dam, Post-war reconstruction in Europe. High returns are plausible for such investments, but the unanswered question is what fraction of actual public investment really addresses genuine bottlenecks rather than routine investments?”
In examining five case studies, the paper reveals: “There is no evidence that rational selection of public investments according to sound economic criteria was ever seriously followed. … Predictions about prices, costs, and impacts were always too optimistic. … With the benefit of hindsight, it is clear that the returns on investments and the impacts were very low, probably negative. [Nevertheless,] expenditure plans were rarely curtailed. … Once started, there appears to have been considerable inertia.”
Proponents of U.S. infrastructure investment will likely discount this damning evidence, perhaps claiming that evidence drawn from lesser-developed economies is not instructive to the United States despite Japan’s near-identical experience and a steady stream of similar evidence from the United States. The New York Times, for example, reports, “High-speed rail was supposed to be President Obama’s signature transportation project, but despite the administration spending nearly $11 billion since 2009 to develop faster passenger trains, the projects have gone mostly nowhere.” The Economist concludes federal subsidies encourage investments for streetcars despite “abysmal economics” compared to buses. Larry Summers justifies infrastructure spending with little more than a complaint that New York’s Kennedy Airport is an embarrassment that is in obvious need of repair. Clearly, he hasn’t been there in a while. Delta, American, Jet Blue, and the Port Authority recently invested a combined $3.5 billion to build their new terminals. Nearly $2 billion was invested in the airport’s AirTran and billions more were invested to upgrade the rest of the facilities.
The paper ends by asking: “To those that advocate major increases in public investment … on what empirical grounds do they base the expectation that the drive will work?”