Source: Beth Ann Bovino, Standard & Poor’s, Ratings Direct, May 5, 2014
In the debate about infrastructure investment in the U.S., the focus is invariably on cost–which is no surprise, given that there are dollar figures in the trillions at stake. Less discussed–but no less important, in Standard & Poor’s view–are the returns that infrastructure investment affords. And not just for lenders, who enjoy lower default rates and higher yields than they might get from investments in similarly rated corporate debt. We’re talking about the multiplier effect that such investments have on an economy: Specifically, how each dollar of infrastructure spending, if allocated wisely, translates into much more than that in terms of economic growth. Most think government spending on infrastructure gives short-term benefits to jobs and aggregate demand. However, investment in infrastructure yields long-term benefits as well, which is often overlooked when determining a project’s benefits (R.O.I.). In addition to the short-term benefit of job creation, significant investments in large projects can enhance efficiency and allow goods and services to be transported more quickly and at lower costs–a longer-term reward.
• A $1.3 billion investment in real terms in 2015 would likely add 29,000 jobs to the construction sector and will add even more jobs to other infrastructure-related industries.
• That investment would also likely add $2.0 billion to real economic growth and reduce the federal deficit by $200 million (constant dollars) for that year.
• After an initial increase in aggregate demand, the economy’s productive capacity and output typically increase once the infrastructure is built and absorbed into the economy. That means increased growth and more job gains long after the project ended.
We found that a $1.3 billion investment (constant dollars) added 29,000 jobs to the construction sector, and even more to the economy when we count jobs added to infrastructure-related industries. This is in line with the Federal Highway Administration (FHWA), which found that a $1.25 billion investment supports 34,779 jobs related to the project. In our analysis, the associated multiplier effect resulted in an additional $2 billion to real GDP in 2015. However, the economy’s productive capacity and output also likely increase once the infrastructure is built and absorbed into the economy. So the investment will likely add more jobs to the economy long after the project ended, supported by studies from the Economic Development Research Group (EDRG) and the San Francisco Fed, which found long-term gains and job growth from investment in infrastructure. … In the U.S., the most telling example is the U.S. Interstate Highway System, championed by President Dwight Eisenhower, who signed the Federal Aid Highway Act of 1956. While the direct economic benefits of the system are difficult to quantify, it’s a safe bet that the world’s second-longest highway system, with an inflation-adjusted price tag of $400 billion to $500 billion, has added more to U.S. GDP in the past half-century than has been spent on it. Given that an estimated one-quarter of all vehicle miles driven in the U.S. are on the interstate system, the efficiencies it provides are self-evident. …