The Infrastructure Twofer: Jobs Now and Future Growth

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Two credible reports issued last week present compelling and complementary cases for infrastructure investment and should be required reading by members of Congress before their next vote on President Obama’s American Jobs Act.

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One report was from President Obama’s Council on Jobs and Competitiveness (on which I serve), a nonpartisan group of business and labor leaders, and the other from the New America Foundation, an influential Washington think tank. According to nonpartisan economic forecasters, the jobs act, which proposes about $90 billion in infrastructure spending as part of a $450 billion package of tax cuts and spending, would create about two million jobs.

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Echoing the views of many economists, the foundation report asserts: “Long-term investment in public infrastructure is the best way to simultaneously create jobs, crowd in private investment, make the economy more productive and generate a multiplier of growth in other sectors of the economy.” In less technical language, the council’s report makes the same point, arguing that infrastructure investment is a “twofer” that creates jobs in the near term and promotes competitiveness and productivity in the long term.

Both reports provide sobering evidence of the growing deficiencies of infrastructure in the United States, which millions of Americans experience every day in traffic and airport delays, crumbling and structurally unsafe schools and unreliable train and public transit systems.

These deficiencies impose significant costs on the economy. For example, the Department of Transportation estimates that freight bottlenecks cost the American economy about $200 billion a year, the equivalent of more than 1 percent of gross domestic product; the Federal Aviation Administration estimates that air traffic delays cost the economy nearly $33 billion a year.

Both reports cite a study by the American Society of Civil Engineers that documents a five-year gap of more than $1.1 trillion between the amount needed for maintenance and improvements of the nation’s public infrastructure and the amount of public funds available for such investment.

Several recent bipartisan reports, including one by the former transportation secretaries Norman Mineta and Samuel Skinner, find that the annual spending gap in transportation infrastructure alone is $200 billion.

Based on such estimates, the New America Foundation report calls for a five-year public investment program of $1.2 trillion, encompassing transportation, energy, communications and water infrastructure as well as science and technology research and human capital. (In a report I did for the New America Foundation a year ago, I proposed a five-year increase of $1 trillion for infrastructure investment.) The Jobs Council report recommends a significant increase in infrastructure investment but does not set a target.

The two reports concur that the multiplier effects of an increase in infrastructure spending are substantial, citing recent estimates by Moody’s and the Congressional Budget Office that $1 billion of infrastructure spending generates about a $1.6 billion increase in G.D.P. According to Moody’s, the multiplier for government spending on infrastructure is even larger than the multiplier for a payroll tax cut, the largest component of the president’s proposed jobs act.

And according to the C.B.O., infrastructure spending is one of the most cost-effective forms of government spending in terms of the number of jobs created per dollar of budgetary cost. The Jobs Council report cites studies indicating that each $1 billion of government infrastructure spending creates 4,000 to 18,000 jobs. Most of these jobs are relatively well paid.

Critics of infrastructure spending as a form of fiscal stimulus point out that the lags in such spending are long and variable. It often takes considerable time to initiate and complete infrastructure projects, even those deemed “shovel-ready” with engineering plans in place.

In 2009, when many economists thought (or hoped) the recession’s effects would be temporary, the conventional wisdom was that fiscal stimulus measures should be “targeted, timely and temporary.” Nearly three years later, the consensus among economists is that the United States will be mired in an anemic recovery with high unemployment for several years.

So what the country needs now is not temporary stimulus measures that increase consumer spending but sustained stimulus that increases investment spending over several years.

Yet more than just additional money is required. As the Jobs Council report highlights, an increase in funds must be coupled with reforms to select and carry out projects efficiently, based on cost-benefit analysis.

The Obama administration has urged the Congress to adopt such reforms in its reauthorization of multiyear surface-transportation legislation, because political pressures more often drive project selection than cost-benefit considerations. For example, state and local governments frequently allocate federal infrastructure funds to build roads and bridges rather than to fix existing ones, despite compelling evidence that repairs are more cost-effective. A recent study for the Hamilton Project lays out the efficiency case for a “fix it” strategy for spending on transportation infrastructure.

Road pavement tends to deteriorate slowly at first; its rate of deterioration accelerates over time. It’s often much cheaper to repair a road early on, when it’s still in fair condition, than when it falls into a condition of serious disrepair.

The foundation report makes a related argument, noting that deteriorating infrastructure is subject to “cost acceleration,” as repair and replacement costs rise over time. A project that costs $5 million to repair now may cost more than $30 million to repair two years from now. Deferred maintenance on essential infrastructure is not fiscally wise but fiscally irresponsible. That’s why many of the infrastructure investments in the American Jobs Act focus on rebuilding and repairing roads, bridges and schools.

Even when infrastructure projects are carefully selected, they often face permit and approval delays that can last for months, even years — though, recently, far less than the C.B.O. had anticipated. Eighty percent of the highway funds in the American Recovery and Reinvestment Act were deployed between February 2009, when the act was passed, and the end of fiscal year 2011 (far exceeding the C.B.O.’s prediction of 55 percent).

The Jobs Council report includes numerous recommendations to reduce permitting and approval delays, calling on local, state and federal agencies to develop coordinated one-stop shops to eliminate duplication and harmonize project approval standards and practices.

As a first step, President Obama has identified 14 high-priority infrastructure projects for expedited review and permitting by the relevant federal agencies and has announced the creation of a “Projects Dashboard,” to track the projects as they move through the expedited process.

Members of Congress who argue that the federal government cannot afford the infrastructure investments in the American Jobs Act are wrong — the government’s borrowing costs are at a historic low. Borrowing now to fund efficient infrastructure projects will reap returns that exceed these costs and will reduce future deficits through job creation and higher growth.

An investment of $10 billion by the federal government to establish a national infrastructure bank, as proposed in the jobs act, would also unleash additional private funds for infrastructure by fostering public-private partnerships. Many other developed countries have similar institutions and have successfully used them to tap private funds for infrastructure. Both of the new reports recommend the establishment of a national infrastructure bank, and bipartisan Congressional support for the idea is growing.

As the Jobs Council warns, there is no “silver bullet” that will solve the nation’s jobs crisis. But as the mounting protests around the country warn, the federal government must take concrete steps to address the crisis. Significant, timely and targeted investments in the nation’s deteriorating infrastructure should be one of these steps.

Recovering From a Balance-Sheet Recession

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Unprecedented volatility on global capital markets and a sharp correction in global equity prices are warning signs that the United States, Europe and Japan are teetering on the brink of a double-dip recession.

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In the United States, growth in the first half of the year was far slower than predicted, and forecasts for the full year have been marked down. Even if the economy does not slip back into recession, the jobs crisis will persist, because growth will be barely enough to absorb the flow of new entrants into the labor force and certainly not enough to make a significant dent in the unemployment rate.

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To develop cures to ease the jobs crisis, its causes must be diagnosed correctly. The fundamental cause is the drastic breakdown in private-sector demand brought on by the 2008 financial crisis that burst the debt-financed housing and spending boom preceding it.

This boom displayed all of the features of a major financial crisis in the making — asset price inflation, rising leverage, a large current account deficit and slowing growth. And the recession that followed had all of the features of what Richard Koo called a “balance-sheet” recession — a sharp decline in output and employment caused by a collapse of demand resulting from vast wealth destruction and painful de-leveraging by the private sector.

The economy is now mired in an anemic balance-sheet recovery in which many consumers and businesses continue to curtail their spending relative to their income, increase their saving and reduce their debt even though interest rates are near zero. And the process of de-leveraging is only beginning.

Real per-capita net worth in the United States is back at its 1999 level. The real per-capita value of housing equity has fallen to its 1978 level, and housing prices are still slipping in many parts of the country.

Household debt has come down to about 115 percent of disposable income, largely as a result of foreclosures, 15 percentage points below its peak of 130 percent in 2007 but significantly higher than its 1970-2000 average of 75 percent. Household saving has risen to about 5 percent of disposable income, far above the 2005 low of 1.2 percent but far short of the 1970-2000 average of 8 percent.

Consumption is the major driver of aggregate demand in the United States economy, and since early 2008 it has grown at an average rate of 0.5 percent in real terms. Not since before World War II has consumption growth been this weak for such an extended period.

Despite misleading claims by Republican members of Congress and by Republican candidates on the presidential campaign trail that the size of government, regulation and excessive taxation have caused the jobs problem, business surveys repeatedly have identified weak demand as the primary constraint on job creation.

As one small-business owner told The Los Angeles Times, “If you don’t have the demand, you don’t hire the people.” And the majority of economists agree on this diagnosis. They also agree that the recovery from a balance-sheet recession can be agonizingly long, with significantly slower growth and a significantly higher unemployment rate for at least a decade.

Recent data indicate that the United States is on such a course, and many economists are now drawing comparisons between it and Japan during the two “lost decades” following Japan’s 1989-90 financial crisis and ensuing balance-sheet recession.

A recent study by the economist Robert Gordon confirmed that the shortfall in private-sector demand, especially the demand for consumer services, residential and commercial construction, and consumer durables, is the primary cause of shortfalls in production and jobs.

He also found that strong net exports, in response to growing aggregate demand abroad, has reduced the jobs gap by about one million jobs, but these gains have been offset by cutbacks in domestic spending, including spending by state and local governments.

In other recoveries during the last 50 years, public-sector employment increased. This time it is falling: during the last year the private sector added 1.8 million jobs while the public sector cut 550,000.

What should policy makers do to combat the large and lingering job losses that result from a financial crisis and balance-sheet recession? Mr. Koo, whose book on Japan’s experience should be required reading for members of Congress, showed that when the private sector is curtailing spending, fiscal stimulus to increase growth and reduce unemployment is the most effective way to reduce the private-sector debt overhang choking private spending.

When the Japanese government tried fiscal consolidation to slow the growth of government debt in response to International Monetary Fund advice in 1997, the results were economic contraction and an increase in the government deficit. In contrast, when the Japanese government increased government spending, the pace of recovery strengthened and the deficit as a share of gross domestic product declined.

The credit rating agencies gave Japan a lower credit rating than Botswana, but this had no impact on the yield on Japanese government bonds. Contrary to the rating “experts,” investors were worried about a prolonged stagnation, not about the ability of Japan’s government to roll over its debt — and they were willing to buy this debt with their growing savings surplus. (Richard Koo, “U.S. Credit Rating Finally Downgraded,” Nomura Equity Research Report, Aug. 9, 2011)

Investors have had a similar response to the downgrade of United States government debt by Standard & Poor’s. To investors, the downgrade signaled the possibility of premature austerity and heightened the risk of a double-dip recession, and this drove the yield on 10-year government debt to levels not seen since the 1950s.

The market understands that the most important driver of the fiscal deficit in the short to medium run is weak tax revenues, reflecting slow growth and high unemployment, and that additional fiscal measures to put people back to work are the most effective way to reduce the deficit.

Every one percentage point of growth adds about $2.5 trillion in government revenue. An extra percentage point of growth over the next five years would do more to reduce the deficit during that period than any of the spending cuts currently under discussion. And faster growth would make it easier for the private sector to reduce its debt burden.

But what about the growth of public-sector debt that would result from more fiscal stimulus? Some economists worry that the growing government debt will itself become a constraint on growth. But that certainly is not the case now — with weak private-sector demand and a huge output gap, spending and borrowing by the government are not crowding out spending and borrowing by the private sector.

What about the fact that by some estimates the debt-to-gross domestic product ratio is approaching the 90 percent threshold identified by Carmen Reinhart and Kenneth Rogoff as likely to reduce growth by a percentage point a year? As Robert Shiller has pointed out, the causality between this ratio and growth runs in reverse when the economy has lots of slack as it has now.

Under these conditions, slow growth leads to a higher debt ratio, not vice versa.

The United States government can currently borrow funds and repay less than it borrows in constant dollars. Surely there are many job-creating investment projects in education, research and infrastructure that would earn a higher rate of return. I argued in favor of more government spending on such projects and the introduction of a capital budget in my previous Economix post.

Even Professor Rogoff acknowledged in a recent interview that he would support more government spending on infrastructure, and there is widespread bipartisan support for infrastructure investment in the Congress and in the business and labor communities.

Unfortunately, the current extension of the highway trust fund and surface transportation bill expires on Sept. 30, as does the authorization of the federal gasoline tax and highway user fees to finance them. Now there are signs that Republicans in Congress, egged on by Tea Party attacks on the size of government, may block both measures, precipitating more than 100,000 job losses a month.

In a balance-sheet recession caused by too much private-sector debt, the government should also use its resources to catalyze debt workouts and debt reductions.

In the United States, where mortgages account for most of the private debt overhang, the federal government should enact stronger measures to reduce principal balances on troubled mortgages and to make refinancing easier. These measures would help stabilize the housing market, would prevent future defaults and would free money for borrowers to use to pay down their debt or increase their spending.

This would translate into stronger private-sector demand and more jobs. Many economists, including me, warned in 2008 that the economy would not recover until the housing market recovered, and the housing market won’t recover until the debt overhang from the housing bubble is reduced through programs that shift some of the burden to creditors from debtors.

Increases in public spending along with housing relief and expansionary monetary policy helped the economy recover from the Great Depression in the 1930s. The same combination of policies can help the United States recover from the Great Recession now.

At the end of World War II, the federal debt-to-G.D.P. ratio was 109 percent, one and a half times what it is today. Yet after the war the economy thrived, and no one questioned the government’s ability to pay its debt over time.

We should now be fighting a war against unemployment and the waste of resources, poverty, inequality and the hopelessness it causes.

Government debt may rise as a result of this war effort, but no one will question the government’s ability to pay its debt provided Congress and the president commit now to a balanced multiyear plan to reduce the long-run deficit once the war against unemployment has been won and Americans are back at work.

Jobs Deficit, Investment Deficit, Fiscal Deficit

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Like many economists, I believe that the immediate crisis facing the United States economy is the jobs deficit, not the budget deficit. The magnitude of the jobs crisis is clearly illustrated by the jobs gap – currently around 12.3 million jobs.

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That is how many jobs the economy must add to return to its peak employment level before the 2008-9 recession and to absorb the 125,000 people who enter the labor force each month. At the current pace of recovery, the gap will be not closed until 2020 or later.

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History suggests that recovery from a debt-fueled asset bubble and ensuing balance-sheet recession is long and painful, with significantly slower growth in gross domestic product and significantly higher unemployment for a least a decade. Right now it looks as though the United States is following this pattern.

The jobs gap is primarily the result of the dramatic collapse in aggregate demand that began with the financial crisis of 2008. Even with unprecedented amounts of monetary and fiscal stimulus, the recovery that began in June 2009 has remained anemic, because consumers, the major driver of private demand, have curbed their spending, increased their saving and started to deleverage and reduce their debt — and they still have a long way to go.

As I asserted in my last post (and many other economists, including Lawrence Summers, Alan Blinder, Christina Romer, Peter Orzsag and Robert Shiller, have made this point, too), the jobs gap warrants additional fiscal measures to increase private-sector demand and promote job creation.

Sadly, current signals from Washington indicate that such measures will not be taken.

Instead, the risk grows that large, premature cuts in government spending will reduce aggregate demand, will tip the economy back into recession and drive the unemployment rate back into double digits.

Even if no budget deal is reached and no major spending cuts are made in the near future, there is now a serious risk that the rating agencies will downgrade government debt because of the political stalemate over a long-run deficit reduction plan. That would almost surely produce higher interest rates that could sink the economy into recession again.

Although the jobs gap and the high unemployment rate are the immediate problems in the American labor market, they are not the only ones. And there is no sign that the budget negotiations in Washington are going to address these other problems, either.

Even before the onslaught of the Great Recession, the labor market was in serious trouble. Job growth between 2000 and 2007 was only half what it had been in the preceding three decades.

Productivity growth was strong, but far outpaced compensation growth. Between 2002 and 2007, productivity grew by 11 percent, but the hourly compensation of both the median high-school-educated worker and the median college-educated worker fell.

During the same period, the real median income for working-age households declined by more than $2,000. The 2002-7 recovery was the only American recovery on record during which the income of the typical working family dropped.

And despite the recovery, job opportunities continued to polarize. Employment grew in high-education, high-wage professional technical and managerial occupations and in low-education, low-wage food-service, personal-care and protective-service occupations; employment fell in middle-skill, white-collar and blue-collar occupations. The drop in middle-income manufacturing jobs was especially precipitous.

To fashion the appropriate policy responses to these long-term structural problems in the labor market, it is first necessary to understand their causes. The key contributors are three:

1. Skill-biased technological change that has automated routine work while increasing the demand for highly educated workers with at least a college education, preferably in science, engineering or math.

2. Globalization or the integration of labor markets through trade and more recently through outsourcing.

3. The declining competitiveness of the United States as a place to do business.

Recent studies by Michael Spence and Sandile Hlatschwayo (discussed last week in Economix by Uwe Reinhardt) and by David Autor describe how technological change and globalization are hollowing out job opportunities and depressing wage growth in the middle of the skill and occupational distributions.

A widely cited commentary by Andrew Grove, former chief executive of Intel, and a prize-winning article by Gary Pisano and Willy Shih make similar arguments.

Many of the workers and jobs adversely affected by technological change and globalization are in the tradable goods sector, primarily in manufacturing. Nor is the United States labor market the only one to be affected by these forces: the polarization of employment opportunities is also occurring in the other advanced industrial countries.

Many of them, like Germany, are doing something about it. The United States is not. According to a recent McKinsey study, the United States is becoming a less attractive place to locate production and employment compared with many other countries.

A newly published study by the Information Technology and Innovation Foundation reaches a similar conclusion. The United States is underinvesting in three major areas that help a country create and retain high-wage jobs: skills and training of the work force, infrastructure, and research and development.

Spending in these areas currently accounts for less than 10 percent of all federal government spending, and this share has been declining over time. And that’s despite the fact that the borrowing costs of the federal government have been near historic lows and much lower than the returns on economically justifiable investments in these areas.

Such investments fall into the “non-security discretionary spending” category of the federal budget, the category in line to be cut to historic lows to reduce the government deficit over the next decade.

In my previous Economix post, I said a budget deal should pair fiscal measures aimed at job creation now with a credible plan to reduce the deficit gradually and that both should be passed at once as a package. I also urged that the plan include an unemployment rate target that would postpone serious deficit-reduction measures until the target had been achieved.

I also think the plan should include a separate capital budget that distinguishes government spending on education, infrastructure and research as investments with committed revenues over several years. A capital budget would close the investment deficit in those areas that strengthen American competitiveness and promote high-wage job creation. None of the budget plans currently under debate include a separate capital budget.

The labor market is suffering from two problems: an immediate jobs gap, primarily the result of inadequate demand, and a long-term shortfall in rewarding employment opportunities for American workers, primarily the result of structural forces.

As a result of these forces, even when demand has recovered, many of the good jobs lost during the last decade will not be replaced by new good jobs without significant public investments to strengthen the attractiveness of the United States as a production location.

So far, the deficit-reduction proposals attracting attention do not address the labor market’s dual problems and leave many American workers and their families to face another lost decade.