The False Promise Of Infrastructure Spending

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

Building bridges to nowhere isn't just a waste of money in the present; it saddles the economy with productivity-draining costs for decades to come.

If there is anything the political left, right and center can agree upon, it's the lasting benefits of spending more (borrowed) money on infrastructure: roadways, rail lines, airports, seaports, pipelines, dams, electrical lines and so on: the physical networks of advanced civilization.

That Roman roadways constructed 2,000 years ago are still visible illustrates the longstanding value of reliable infrastructure: Roman political control and trade depended on roadways and sea transport to tie the sprawling empire together.

This is the basic assumption behind the notion that virtually any and all infrastructure spending will create value far into the future.

But is this really true? Does rebuilding and/or adding infrastructure create economic value?

To answer, we need to look at two issues: productivity and cost-benefit.

Infrastructure creates new value when it boosts productivity, generally by lowering costs of moving goods, energy, etc.

The value created by increased productivity must far outweigh the cost.

Consider the classic "bridge to nowhere" infrastructure project: a bridge is constructed between a sparsely populated island and the mainland. The payoff is a handful of residents are spared the time and inconvenience required to ship their vehicles between the island and mainland on a ferry.

Does this time savings translate into increased productivity, or merely extra leisure? And what was the cost to gain this very modest increase in leisure/productivity? Spending tens of millions of dollars on the bridge actually reduces the productivity of the entire economy due to the opportunity cost: the millions of dollars could have been more productively invested elsewhere, and spending the money on a low-value-creating bridge deprived the economy of the capital, labor etc. that could have been better invested in productivity-generating projects.

As correspondent Bart D. explains, opportunities to boost productivity via new infrastructure are scarce:

Why anyone believes that building 'infrastructure' somehow promotes economic growth in this day and age (as though it were 1950’s) is delusional. The reason 'infrastructure' worked back then to build economic activity was simply because it lagged behind the burgeoning private industry. These days there is no ‘hard industry’ left to 'lag behind.' Building a bigger road between the suburbs and the Mall won’t create prosperity for anyone except the owners of the road building company. Unlike a 1950’s road linking a steelworks to a port or a Beef farm to a meatworks."

In other words, when commerce already exists but is cumbersome, infrastructure that smooths the flow yields enormous productivity gains.

One example of this from history is the construction of the first stone bridge across the Seine River in Paris. This single structure changed commerce, tourism and social relations in the city, as it enabled two carts to pass side by side and enable pedestrians to cross the river safely.

For more on this impact of a single durable, commerce-enabling bridge in Paris, read this book: How Paris Became Paris: The Invention of the Modern City.

Replacing existing infrastructure is also problematic. It may well be necessary, but since it won't boost regional productivity (since it's merely replacing existing structures), it acts as a tax on the regional economy: if the replacement costs $1 billion and generates no real gains in productivity, it is in essence a tax that bleeds capital from the economy that could have been productively invested elsewhere.

Rebuilding a bridge generates higher spending on materials and wages, but if it doesn't generate additional productive capacity equal to its cost, this additional spending (in our world, always paid for with borrowed money that accrues interest for decades to come) runs out once the project is complete, but the costs of paying for the replacement continue on for decades.

As a rule of thumb, if a replacement bridge costs $1 billion, it will cost users and taxpayers $3 billion over the life of the loan/bond that funded the project.

Borrowing immense sums to spend on infrastructure that doesn't boost productivity actually cripples an economy by channeling scarce capital and tax revenues into projects that only boost spending for a few years at best, while the costs of borrowing the money pile up for decades to come.

In other words, building bridges to nowhere isn't just a waste of money in the present; it saddles the economy with productivity-draining costs for decades to come.

This high future cost for no-productivity gain infrastructure effectively bleeds the economy of income and capital for decades, for the temporary sugar-high of infrastucture spending today.

A rigorous cost-benefit analysis might conclude that some aging, marginal infrastructure should be torn down rather than replaced. If self-driving vehicles will reduce vehicles on the roads significantly-- and some estimates range as high as an 80% reduction in traffic--perhaps we should wait for this technology to mature before spending trillions of dollars on infrastructure that is about to be under-utilized.

We should instead ask: where are the big gains in productivity going to come from going forward? The answers to that question should guide our public and private investment decisions.

In the meantime, we should question whether proposed infrastructure spending is actually an "investment in our future" or just another bureaucratic boondoggle designed to enrich crony-cartels and justify rising bureaucratic budgets:

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wisehiney's picture

Hey Charlie, the jackasses in d.c. are finally catching on that there is nothing that they can do that will not make matters worse. I

It scares hell out of them.

We could build some gallows that I believe would come in handy soon.

SafelyGraze's picture

"building bridges to nowhere isn't just a waste of money in the present; it saddles the economy with productivity-draining costs for decades to come"

totally not true

the money is not wasted

it pays the architects and the builders and the supply chain

it pays the risk-taking bondholders who underwrite the important task of building infrastructure

and the costs in the future are ameliorated by the benefit of future projects that inject yet more money into the economy

it all works out really well as long as people keep moving the money around in a virtuous cycle

hugs n touches,
john m keynes 

Stuck on Zero's picture

Agree. Charles Hugh Smith is an idiot. Every great civilization builds great infrastructure and every decaying state wastes the money on welfare instead.  Many economists have shown that if tax rates are not too high every dime spent on infrastructure comes back to the state in taxes. The benefit being jobs, skills, less social stress, and the resultant infrastructure.  Look at China, Singapore, Japan, and the USA. They built miracle economies based upon infrastructure spending. Now the US has traded welfare for infrastructure and you see the mess were in. CHS take your stupid ideas and disappear.

Paul Kersey's picture

With Trump, it's just one betrayal after another.

Joseph Otting, a former lieutenant of George Soros' and Treasury Secretary Steven Mnuchin’s at OneWest Bank, has been tapped to lead a U.S. regulator that oversees more than 1,000 lenders—including Wall Street giants.

President Donald Trump plans to nominate Otting to run the Office of the Comptroller of the Currency, the White House said in a statement Monday evening. If confirmed by the Senate, he will play a central role in trying to ease financial rules that the administration blames for stunting economic growth. The appointment would mark a reversal in roles for Otting, as the OCC regulated OneWest when he was the bank’s chief executive officer..

Centerist's picture

Infrastructure pays off when it expands productivity.  Infrastructure projects are great when there is no infrastructure, but we are at the point where there is not much new infrastructure to build that will actually improve our productivity.

Instead of discussing this on a national level, states and municipalities are the more appropriate levels.  Locals know which stretches of highways turn into stop-and-go nightmares because populations have grown faster than road networks.  The only infrastructure projects that need initiated are ones that address real needs that local residents identify to their city councils and state legislatures.

Carrying infrastructure projects out just to spend money is wasteful and guarantees that debt-based capital will expand the red on our balance sheets and get the least value from that debt.

iampreparedru's picture

And self driving cars will make the existing infrastructure so much more efficient that it wont be fully utilized and in fact will then have to be torn back down. Think no red lights in 30 yrs. 

Centerist's picture

I will only accept self-driving cars if they keep a fully packed freeway moving at a minimum of 80 MPH.  And they have to have mechanical cutoff switches that make them operable by humans.

If they don't, then I want nothing to do with a self-driving car.  

But you are right about the efficiency.  Much of the road congestion is a result of driver ineptitude, and cars that read proximities and react instantly would certainly make for smoother traffic within existing roadways.

Centerist's picture

In other words, paying people to dig holes and fill them back in...

You are right that Keynes was a moron.

roddy6667's picture

While we are on the subject, why don't we all go outside right now with a bseball bat and break one of our neighbor's windows? The resulting jobs created by this will boost the economy. Right?

Centerist's picture

Or I could pay my neighbor to mow my lawn, and he can pay me to mow his...

Cordeezy's picture

China's belt and road initiave seems promising if they are able to pull it off. 

 

www.escapeamazon.com

 

 

CosmicSauce's picture

More efficient to let shit break, then fix it. That's the American way. Humans love gridlock.

Automobiles are built tougher to take the abuse of crappy roadways. Modern automobiles get people into the zombie zone quicker these days to not give two fuks about infrastructure anymore. 

Don't worry about it. Keep giving all the money to Obamacare  insurance doctors charging whatever they want. Sooner we break the system, the sooner we'll put all the doctors and insurance company CEOs in jail, right next to the bankers.

Break it!

sinbad2's picture

The US is full of wasted infrastructure, the Golden Gate Bridge, the Brooklyn Bridge, Hoover dam, all wasted money, the US would be much better without them, yeah sure.

yarpos's picture

Building one exreme of an argument and then saying how silly it is (bridge to nowhere) really isnt an argument about infrastructure spending ,  its a discussion about project selection.   Pork barelling and mistakes will always happen.   Those Roman roads the article mentioned tha are still visible?  rebuilt many time with infrastructure spending.

bloofer's picture

Replacing aging water and sewer systems is probably a good idea. Plus I understand that the electrical grid is pretty fucked up.

roddy6667's picture

America's electrical grid is old and creaky. Brownouts are a regular occurrence in hot weather with the A/C load. Where I lived in CT before I retired I was on the main road, a 2-lane state highway across town. We had a power outage caused by an ice storm and we were out for 8 days. Side roads were without power for longer. 

Electric vehicles will make no inroads in a America until the grid is upgraded.

I live in China now, and I have never even seen the lights flicker. In CT they went out all the time.

NoWayJose's picture

The problem comes when the government views these things as 'jobs programs' - rather than as something useful and efficient.

Last of the Middle Class's picture

Infrastructure is nothing but massive QE in another form. The money will be spent, someone will get very wealthy, and the job most probably will not get done. It is the mantra of Big government.

frank further's picture

Yeah, it's a shame Eisenhower buit all those stupid interstate highways.  Coulda bought more bombs instead.

SRV's picture

Lemme guess, government should invest in more financialization schemes... yeah, that's the ticket.

Anyone landing in the US from, lets say Tokyo, can see how 3rd world like the US is with a single glance out the window. Even the ground crew who look like they just crawled out of bed and threw on whatever was lying on the floor!

Mr Global has been busy directing all America's wealth into the corporate abyss and they will resist any and all calls to redirect a single dollar with all kinds of pretty charts and dire warnings... Meh

Let it Go's picture

To the many who see government spending on infrastructure as a job creator and a silver bullet for the economy I would like to raise a word of caution, things are not that simple. History shows much of the money flowing into these programs is often poorly allocated and spent.

When looking at the facts, the jobs created from infrastructure spending are often short lived and not a fix for the structural and employment problems plaguing America. More on why infrastructure in not a silver bullet for our ailing economy in the article below.

http://brucewilds.blogspot.com/2017/03/infrastructure-spending-feeds-myth-of.html

CPJindex's picture

I recall every few years in the 1990's the Japanese were announcing a new "stimulus program" of infrastructure building of some hundreds of billion dollars each time.

I can also recall that none of these (at the time) massive stimulus programs seemed to help Japans economy throughout the 1990's!

I chuckled at the thought back just after 2008 when our Australian government pissed money up the wall in a "stimulus" program to save our economy from the GFC as I thought to myself "does anybody else remember all those "stimulis programs in Japan back in the 90's?" cause I sure as hell did.

We ended up paying for school buildings nobody wanted at a rate of 5 x the cost that the private Catholic schools got their buildings built for - wow great value stupid government!

Oh and they also had another "stimulus" package that had an actual death toll - the "roof insulation" scam where so many shonky insulation companies tried to get as many guaranteed contracts to insulated houses as possible, they were hiring kids with no experience and at least 4 of them got electrocuted through lack of training - also ended up with some roofs where the contractors had just thrown the unpacked bails of insulating batts into the roof space and left them there without installing them.

I suppose in it's defense the program did provide an indirect stimulis to the funeral industry (via the deaths) in addition to the building industry, but if that were worthy of note, we might as well line up all the violent criminals, pedo's, goat-fuckers and "watermelons" (the greens) and create a far reaching "funeral industry stimulus" that would bring benefits to us all by lowering the cost of policing & the prison system, and also give the supply-side effect of lower costs of crime and crazy left-wing over-reach!

Now THAT is a stimulis I could get behind!

DaveA's picture

I see the logic that a high-traffic viaduct built sixty years ago is crumbling and needs to be replaced. But if you need to borrow money just to maintain your current level of productivity, you must admit that you have a serious fiscal problem.