Economists endorse boosting infrastructure spending—if tax policy supports it

Michael Maiello | Jun 09, 2017

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This week, US President Donald Trump’s administration organized a series of events around what has been dubbed “infrastructure week,” designed to promote Trump’s plan for $1 trillion in infrastructure investment between the federal government and private investors. Though opinions vary on Trump’s plan, many lawmakers support the broad notion of upgrading America’s infrastructure, which collectively earns a D+ grade from the American Society of Civil Engineers (ASCE).

Chicago Booth’s Initiative on Global Markets asked its Economic Experts Panel about infrastructure spending and found that a majority of respondents agreed that the United States should do more of it—but not while simultaneously cutting tax revenue.

The policy implications of infrastructure spending are markedly different than they were a decade ago, when the financial crisis of 2007–10 sent the government searching for "shovel ready" projects that could be used to put Americans to work.  Now, with unemployment just over 4 percent and the US Federal Reserve looking to tighten monetary policy, the Keynesian arguments for stimulus no longer resonate.

“The need to improve infrastructure in the US is independent of Keynesian stimulus reasons,” says Markus Brunnermeier of Princeton.

One condition that has persisted since the financial crisis is easy financing.  The 10-year Treasury yield recently sank to 2.14 percent, and the 30-year rate is just 2.81 percent. "The need is there, and the interest rates are low," says Stanford’s Kenneth Judd.

Absent a recession, though, the panel does not see justification for infrastructure spending coupled with tax cuts, as Trump has proposed.

Christopher Udry, Yale
“The trick, of course, is to choose high-return projects. There is a well-documented set of infrastructure projects that meet this test."
Response: Agree

Steve Kaplan, Chicago Booth
“I am sure there are very useful projects. I am not sure those are the ones that would get funded."
Response: Uncertain

Abhijit Banerjee, MIT
“Long-term investments should be timed strategically, when the economy is slowing—not at 4.3% unemployment."
Response: Disagree

Kenneth Judd, Stanford
“Substantial loss of revenues will require cuts in spending. Where? Defense? Medical research? Infrastructure? All will be at risk.”
Response: Uncertain

Oliver Hart, Harvard
“The budget deficit and national debt matter, and so I would accompany infrastructure spending with higher taxes, particularly on the rich.”
Response: Disagree

William Nordhaus, Yale
“What happened to budget constraint? US needs public investment, but not irrespective of fiscal conditions."
Response: Uncertain