Growth From Infrastructure Can Be Elusive

See Memo to Biden: Stimulus Is Easy. Investment Is Hard by Greg Ip of The Wall Street Journal. Excerpts:

"Every dollar spent on the interstate highway system in the 1950s and 1960s generated around $2.50 worth of economic output by making private investment and workers more productive, according to Daniel Leff Yaffe, a Ph.D. graduate of the University of California, San Diego.

Mr. Biden, however, confronts diminishing returns: Contrary to popular belief, the U.S. transportation infrastructure, one study found, is not crumbling and new infrastructure is unlikely to get as much use as what already exists. Interstate highways, with 1% of the nation’s road mileage, account for 25% of distance traveled, Mr. Leff Yaffe writes in his dissertation. “A second interstate, or any other highway built today in the U.S., is likely to generate fewer productivity gains.”

The efficacy of public investment is often undermined by how it is allocated. Rural highways get more funding than urban highways despite being in better condition, according to the Congressional Budget Office. It took so many years for President Barack Obama’s stimulus to translate into actual construction that it didn’t deliver a short-term boost to employment, according to a study by Valerie Ramey, an economist at the University of California, San Diego.

Mr. Biden plans to target the roads and bridges most in need of repair and to focus on building on time and on budget. But competing priorities could work against this: He wants the materials to be made in the U.S. and the construction done by unionized labor."

"Mr. Biden aims to reduce net carbon emissions to zero in power generation by 2035 and the rest of the economy by 2050. This will require swapping out an energy and transportation infrastructure largely reliant on fossil fuels for one reliant on renewables and perhaps nuclear power.

The price tag is staggering: Net-Zero America, a Princeton University project, estimates this could require at least $2.5 trillion in capital by 2030 over and above what the existing system would require."

"Mr. Biden plans to spend even more on tax credits and subsidies, such as to buy electric vehicles or make buildings more energy efficient. Those are among the most wasteful ways to reduce emissions, studies have found.

He could accomplish more at far less cost through a carbon price that lets the market find the cheapest way to cut emissions. Or he could lighten the burden of regulation, as he did by fast-tracking offshore wind projects or plans to do so with a clean-energy standard, which could give industry flexibility in how it reduces emissions."

"the net benefits of Mr. Biden’s infrastructure plan depend not just on how he spends, but how he finances it. His proposed increase in corporate taxes could depress private investment."