As if the U.S. needed more evidence that investing in its crumbling infrastructure was a good idea, the International Monetary Fund recently released a detailed study indicating that under current economic conditions, debt-financed public works projects will actually pay for themselves — reducing the ratio of public debt to gross domestic product by spurring economic growth.
The study, written by a team of researchers led by Abdul Abiad, a deputy division chief in the IMF's research division, found that debt-funded infrastructure projects in advanced economies are particularly cost-effective.
"For economies with clearly identified infrastructure needs and efficient public investment processes and where there is economic slack and monetary accommodation, there is a strong case for increasing public infrastructure investment," they write. "Moreover, evidence from advanced economies suggests that an increase in public investment that is debt financed could have larger output effects than one that is budget neutral, with both options delivering similar declines in the public-debt-to-GDP ratio."
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They warn that their findings "should not, however, be interpreted as a blanket recommendation for a debt-financed public investment increase in all advanced economies," pointing out that in countries where the returns to investment are unclear, or where lenders might punish increased debt with higher interest rates, the benefits might not be as clear.
So far, neither of those caveats apply to the U.S., where the government is still able to borrow at rock-bottom rates, and where detailed studies, such as this one from the Brookings Institution, have documented that the returns to infrastructure investment — particularly in the area of job creation — are manifold.
Robert Puentes, a senior fellow in the Brookings Institution's Metropolitan Policy Program and one of the authors of the study, said that the IMF study was a welcome addition to the literature, but that it is telling the same story that economists in the U.S. have been pushing for a long time.
"The international comparisons are helpful, but we've done a pretty good job in this country of making the case for the need to invest in infrastructure," he said.
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In the U.S. though, he said, broad conversations about infrastructure have remained too vague to be useful.
We need to get much more specific in this country," he said. "The discussion is too abstract. We have very specific investments that need to be made in certain places, and we need to start talking about infrastructure in those terms — an international bridge crossing in Michigan, a clean energy transfer station in the southeast. In order to get something done, we've got to get more specific. And we have to understand who's responsible for doing what."
Puentes also warns against overestimating the federal government's role in infrastructure improvement.
"We overemphasize the federal role in this, when cities, states, and metropolitan areas make many of the decisions about infrastructure spending," he said. "What moves things in Washington these days is tough to understand. But the federal government is not the whole pie. The federal share matters, but I don't want to overemphasize what it would really do."
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