Does Infrastructure Spending Promote Economic Growth?

Infrastructure spending has been a central talking point in Donald Trump’s presidential debates. He has always relayed the opinion that the infrastructure in the United States is not up to the mark. He believes that the bridges, rails, roads and ports in the United States are in dilapidated condition. He believes that this poor condition of the infrastructure costs America billions of dollars in the trade deficit. He, therefore, proposed that the infrastructure in the inner cities be built at frantic speed. In his opinion, this would “Make America Great Again.”

The opinion that Donald Trump voices may have more to do with politics and less with economics. The economic arguments against the proposed $2 trillion overhaul of the infrastructure are quite convincing. In this article, we will have a closer look at these arguments.

Issue #1: Growth is Directly Proportional to Spending

Infrastructure spending leads to economic growth only because we measure growth incorrectly. The word economic growth has been obfuscated to mean spending. The gross domestic product is the sum of all expenditures that happen in a given period of time. Building infrastructure does require some expenditure. Hence, the GDP of the nation does go up during the period when infrastructure is being built. However, this growth is not sustainable. Once the spending stops, so does the GDP growth. Hence, the massive spending only achieves an illusion of growth and not sustainable growth.

The increasing numbers are utilized by politicians to claim that their program has been successful. This helps them get re-elected whereas the common people have to pay back the cost of the infrastructure along with interest for many more years to come.

Issue #2: Other Economic Activity Needs to be Cut Down

The reason why infrastructure spending is so popular is that of the visibility bias. This means that when bridges and train stations are built, people are able to see them. However, they are unable to see the things that could not get built because the money that was spent on the bridge. If the bridge hadn’t been built, the money would have been consumed on other goods and services. Hence, the gain from the bridge is offset by the loss of other goods and services. However, politicians like Donald Trump only talk about the gain while ignoring the losses. Infrastructure spending only redirects existing economic resources. However, the common man who is unaware of these details seems to vehemently support the political leaders and their infrastructure projects.

Issue #3: Political Favoritism

From the point of view of a politician, infrastructure spending is a great tool. They can exactly choose who they want to give the benefits to. For instance, if Donald Trump knows that Ohio is a crucial state for the next election, he can introduce infrastructure projects in Ohio.

Since these projects usually involve local labor, the people of Ohio will see a rise in employment during that period. Also, the economy will appear to be growing during the same period. Hence, the people of Ohio will benefit. However, this benefit will be at the expense of other people in the nation. For instance, crucial spending in Hawaii may be delayed because the President wants to score political brownie points in Ohio. The entire exercise of infrastructure spending is therefore about robbing Peter to pay Paul and ensuring that Paul votes for you in the forthcoming election!

Politicians cannot direct the benefits of other spending programs to the zip code that they want to. As a result, infrastructure spending is preferred.

Issue #4: Infrastructure Spending Promote Mal-investment

The market has a mechanism to ensure that only the best projects get selected. This is because the projects that give the maximum return are the ones that get selected first. Only if the money is left over does it go to the second and third rung of the projects. However, this is not the case when politicians select projects. As mentioned in the previous points, the priorities of politicians are not based on the economic viability of the projects.

The free market would not have chosen projects like the Olympic stadiums in Greece. Greece spent huge sums of money on these projects which are providing no economic benefits as of today. It is, therefore, necessary that spending on infrastructure remains in private hands. The projects built will be self-sustainable and economically viable. There are many countries all over the world that are losing money thanks to such showcase projects. India is spending tens of billions of dollars that it does not have on building a bullet train. America is also planning to do the impossible and build a wall that will be thousands of miles long, will cost them billions and provide almost no benefits.

Issue #5: Infrastructure Spending Can be Easily Siphoned Off

Lastly, politicians prefer infrastructure projects because funds can be easily embezzled from these projects. Most of the government projects are given to private contractors. These contractors are usually relatives of eminent politicians. Hence, the politicians that make the decision to build these projects receive kickbacks from the firms that win the subcontracting projects. Needless to say that the projects are overpriced and the firms themselves make a killing even after paying kickbacks to the politicians.

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Political Science