LegiStorm

Summary:

Infrastructure investment has received renewed interest as of late, with both President Trump and some Members of Congress discussing the benefits of such spending. Infrastructure can be defined in a number of ways depending on the policy discussion; in general, however, the term refers to longer-lived, capital-intensive systems and facilities, such as roads, bridges, and water treatment facilities. Over the past several decades, government investment in infrastructure as a percentage of gross domestic product (GDP) has declined. Annual infrastructure investment by federal, state, and local governments peaked in the late 1930s, at about 4.2% of GDP, and since has fallen to about 1.5% of GDP in 2016. State and local governments consistently spend more on infrastructure directly than the federal government. In 2016, direct federal spending on nondefense infrastructure was less than 0.1% of GDP, whereas state and local spending was about 1.4% of GDP. However, the federal government transfers some funds each year to state and local governments for capital projects, which includes infrastructure projects, equaling about 0.4% of GDP in 2016. The United States also lags many other developed countries with respect to annual infrastructure spending. Spending on infrastructure, as a percentage of GDP, is higher in all G7 countries, except for Italy and Germany, than in the United States. Infrastructure is understood to be a critical factor in the health and wealth of a country, enabling private businesses and individuals to produce goods and services more efficiently. With respect to overall economic output, increased infrastructure spending by the government is generally expected to result in higher economic output in the short term by stimulating demand and in the long term by increasing overall productivity. The short-term impact on economic output largely depends on the type of financing (whether deficit financed or deficit neutral) and the state of the economy (whether in a recession or expansion). The long-term impact on economic output is also affected by the method of financing, due to the potential for “crowding out” of private investment when investments are deficit financed. The type of infrastructure is also expected to affect the impact on economic output. Investments in core infrastructure, defined as roads, railways, airports, and utilities, are expected to produce larger gains in economic output than investments in some broader types of infrastructure, such as hospitals, schools, and other public buildings. Changes in economic output are expected to have subsequent effects on employment; as such, infrastructure investments are likely to impact employment as well. Recent research suggests modest reductions in the unemployment rate in response to increased infrastructure investment. Again, it is expected that the method of financing and state of the economy will alter these impacts. Recent research has suggested that deficit-neutral investments are less likely to affect employment, whereas deficit-financed investments are expected to reduce unemployment in the short term. Additionally, recent economic research suggests that during an economic expansion, with a relatively strong labor market, infrastructure investments are unlikely to have any sustained impact on the unemployment rate. However, during a recession, the same investment is likely to reduce the unemployment rate to some degree, research suggests.