Spending on infrastructure – “shovel-ready” projects, as President Barack Obama has called them – is, of course, a standard Keynesian solution for an economy that is caught in a downward recessionary spiral. Under normal circumstances, such spending might be a great idea.
In Europe, however, there are plenty of reasons to be sceptical. If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming. The past 30 years have seen a huge splurge in infrastructure spending, often funded by the EU. The Athens metro is excellent. The AVE fast-trains in Spain are a marvel. But this kind of spending has done very little to change the fundamental problems that now plague both Greece and Spain – in particular, youth unemployment.
Worse, in some ways, EU funding for infrastructure has created problems. In Greece, milking the EU for subsidies became an industry in itself: and political connections were a surer route to wealth than entrepreneurial flair.Story at this link.
We often hear about the productivity and economic benefits of large transportation investments. In the US the California high speed rail line is touted as a boon to employment, the environment and the economy. It's worth considering under what circumstances transport infrastructure investment will actually achieve some of these goals.
Transport investment leads directly to jobs in construction and manufacturing sectors. These are the direct employment benefits that people love. These jobs are also the direct employment costs of the project, so employment related to building infrastructure is not an unambiguous good. If the public spends money to support employment, which is common and popular policy decision, then we should try to focus investment where it is most cost effective. It's plausible that European countries are somewhat better off because of the employment infrastructure investment provided, but that's far from certain and the debt costs are now crushing.
Outside of direct employment gains, where are the expected productivity gains? All of the new rail and road (and airport) investments were not enough to avoid financial catastrophe. This is likely because the incremental gains from new investment were not sufficiently great to overcome the incremental costs. What is the economic value of shifting travelers from air or car trips to rail trips? Travel time savings are not an obvious productivity gain even though travelers may be individually happier. Since the air and road connections were already high quality the shift from air to train or car to train shifted existing economic activity rather than create much new economic activity. Some areas gained while other areas declined as new infrastructure improved or reduced accessibility. The net benefits are small.
In countries with poor or non-existent infrastructure the potential gains are huge. China, for instance, has poor quality roads and much of the country lacks reasonable access to the wealth of the eastern part of the country. In such cases high quality transport networks can unlock economic gains by lowering transportation costs. This was the case with the US Interstate system, which fostered cheap, reliable transport by truck.
When we invest in transport infrastructure to goose economic activity or realize productivity gains (I'll leave environmental issues for another time) we have to evaluate the costs and benefits based on current conditions. Transport infrastructure isn't magic, but it is critical, and money spent on glamour projects is money that can't be invested elsewhere. Supply side trickle down economics doesn't work for income taxes and doesn't work for supply side transport investment. Much transport investment redistributes economic activity rather than increases economic activity. Such investments may be net positive but is often net negative. It's important to understand clearly what happens with investment and invest wisely.
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