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After Congress passed its $2 trillion COVID relief and stimulus package, it is turning its sights to an infrastructure package, with President Biden calling for $3 trillion in federal spending in two packages: the first focused on physical infrastructure and the second on social spending, including free community college, universal prekindergarten and a national paid leave program.
Many argue that spending on physical infrastructure (roads, bridges, water systems, etc.) drives long-term economic growth. The World Economic Forum writes, “infrastructure creates economic growth.” Paul Krugman argues that “if the investment is productive, it will expand the economy’s productive capacity in the long run. This is obviously true for physical infrastructure.” Investment manager Steve Rattner, writes, “An infrastructure initiative would not provide quick relief, but it would support stronger growth in the future.”
But is this really true, especially when compared to other kinds of public investments? To be sure, spending money on pretty much anything will spur growth in a recession if it is debt-financed. As Keynes famously said, putting Treasury notes in old wine bottles and burying them in abandoned mines would create jobs as people dug up the bottles.
But assuming that the “shovel readiness” of investments are the same, policymakers are better off investing in areas that actually boost long-term economic growth.
It has been an article of faith that traditional physical infrastructure—concrete and steel—boosts long-term growth. But evidence suggests that the growth benefits are limited when compared to other areas, especially 21st century digital infrastructure.
Any infrastructure package is likely to invest heavily in roads and bridges. A widely cited 1989 paper found that increasing traditional infrastructure investments in projects such as roads, transmission lines, and bridges by 1 percent increases productivity by 0.23 percent. But as the U.S. interstate system has become built out, the efficiency of these investments have declined. One study found that U.S. highway investments generated annual total economic returns of 18 percent in the 1970s, 5 percent in the 1980s, and just 1 percent in the 1990s. Moreover, because of the opposition to cars and highways by many liberal Democrats, a big portion of the spending on roads will be repairs, rather than expansion, which will do even less to spur productivity growth or competitiveness.
In contrast, investments in digital infrastructure are likely to generate significantly greater overall economic returns. These include both dedicated digital infrastructure (infrastructure that is innately digital, such as wired and wireless broadband) and hybrid infrastructure (adding digital components to traditional infrastructure, such as smart meters, smart grid, smart cities, smart water systems). For example, researchers estimate that if the rest of the European Union built out its digital infrastructure to the level Norway achieved in 2011, it would increase GDP by $315 billion.
At the municipal level, digital infrastructure will form the foundation of smart cities, allowing services to be provided more broadly and cheaply. Equipping garbage cans with sensors backed by machine learning improved fuel efficiency by 46 percent and collection time by 18 percent. Smart lighting can reduce power consumption of streetlights by 38 to 60 percent.
This does not imply that physical infrastructure should be ignored. There are potential projects that can have big payoffs, but any infrastructure bill should carefully look at what kinds of investments pay the most in long-term economic dividends.
So, as Congress considers an infrastructure investment package, here are several ideas that warrant attention on the digital front:
- Fund a one-time, large-scale injection of capital for broadband infrastructure in areas of the country where it is too costly for private providers to serve, and attempt to transition away from recurring annual support.
- Provide a tax credit for all capital expenditures related to 5G investment between now and the end of 2023.
- Expand the FCC’s Lifeline program to expand and improve subsidized broadband options, including tablets and computers, for low-income users.
- Fund a nationwide smart cities program to help cities and towns use digital technologies to improve operations and improve quality of life.
- Fund a major upgrade of our nation’s electric grid, including technologies to make the grid “smart.”
- Provide grants to states to operate programs to support the installation of smart meters for electricity and water.
For more ideas like this, see ITIF’s recent report “Digital Policy for Physical Distancing: 28 Stimulus Proposals That Will Pay Long-Term Dividends.”