Commentary: Rational infrastructure investment

Closing the transportation infrastructure spending gap with a focus on facilitating exports not only supports job creation, but also tethers the U.S. economic outlook to the growing global middle class.    Economists often speak about the “twin deficits.” This is a reference to the government budget deficit and balance of trade deficit that first became an issue in the 1980s.
   However, those economists are missing two other deficits that have become quite acute in the last 10 years. First, there are gaps in current funding for many state pension plans and looming for Social Security and Medicare systems within about 10 to 15 years. And lastly, there is the deficit in infrastructure spending.
   According to a Congressional Budget Office report, public spending on transportation and water infrastructure as a share of GDP has declined from 2.75 percent during the time period from 1956 to 1980 to 2.5 percent from 1980 through 2014. Although this may sound grim, there is a straightforward path to reversing these deficits without resorting to extreme measures, provided action is taken now.
   While an economy of 330 million people with a GDP of about $18 trillion needs a lot of infrastructure, it is not clear that all the infrastructure that is built is needed. In fact, estimates vary widely on necessary investment to return all U.S. transportation infrastructure to a state of good repair. Many of these estimates come from surveying the engineering societies and all the states’ departments of transportation regarding the funds they need to repair and upgrade their existing infrastructure. But it might be a better approach to ask each of them how much infrastructure can they live without, and then see what it takes to repair and upgrade the remainder.
   In other words, focus first on “critical” infrastructure that is needed for economic activity to be sustained and increase.
   If this “core” infrastructure is functioning well, it may not be necessary to spend as much as the enormous estimates one often sees reported. Focusing on major roadways, navigation channels, port gateways and airports could reduce the amount that needs to be spent on less critical infrastructure.
   Perhaps more importantly, policy makers should be prioritizing infrastructure that can help reduce the trade deficit.

…Policy makers should be prioritizing infrastructure that can help reduce the trade deficit.

   Until very recently, a company that wanted to grow had to sell its product in the U.S. because it was the largest single market in which everyone spoke the same language and there were no barriers to freight movement. This was true for companies in Europe, Asia, and Latin America, as well as those headquartered in the U.S.
   It comes as no surprise then that U.S. freight transportation infrastructure has been oriented towards serving domestic consumption centers. Foreign suppliers could tap into this network by sending their goods to major U.S. ports, which are well connected to the national freight transportation grid of interstate highways and Class I railroads. To some extent, investment in freight transportation infrastructure may have helped the trade deficit reach the $500 billion per year level seen for the last several years.
   The kind of infrastructure needed to support exports is different than that needed to support imports. And although the value (measured in dollars) of the U.S. trade balance is substantially negative, in terms of volume (measured in tons) trade is much more balanced.
   This indicates that imported goods have a higher value per ton and do not weigh as much as exported goods. This is mostly due to the fact that U.S. imports tend to be manufactured consumer goods and inputs for manufacturing, while exports tend to be raw materials like agricultural bulk, dry and liquid energy/refined products, and heavy machinery such as construction, agricultural production and transportation equipment.
   Exports require heavy freight movement corridors like highways with high weight limits, waterways since barges are the cheapest way to move heavy cargo and are often the best alternative, and deep water ports. Ships loaded with imported goods do not draft as much as ships loaded with export goods.
   Given that OECD estimated that the global middle class was 1.9 billion people and forecasts that it will increase to 3.25 billion people by 2020, it makes sense to focus on exports. This will allow the U.S. to benefit from the growth of the global middle class that in many ways it helped to create by running a continuous trade deficit since the fourth quarter of 1980.
   While the types of goods the U.S. exports do not directly require a lot of employment to produce, these industries do require a lot of supporting services and inputs. These services and inputs come from the transportation, technology, finance and life sciences sectors, which provide relatively well paying jobs, which in turn means higher tax revenues and more contributions to social income and medical care services funds.
   It is also important to remember that the production of goods is characterized by global supply chains. It’s not just consumer goods that are imported, but inputs used for manufacturing as well, including goods that are manufactured for export. While it is important to focus on export-oriented infrastructure, it is also important not to neglect import-oriented infrastructure.
   Closing the transportation infrastructure spending gap with a focus on facilitating exports not only supports job creation, but also tethers the U.S. economic outlook to the growing global middle class. Consumer spending accounts for 60 percent to 70 percent of global GDP, and targeting the global middle class could help U.S. GDP growth break out of the 1.5 percent to 2.5 percent range it has been stuck in since the end of the last recession. Higher economic growth and employment will reduce public sector funding deficits, especially if the infrastructure spending is laser-focused on the most critical projects, as well as those that support exports.

   Kemmsies is managing director, economist and chief strategist for JLL Ports, Airports and Global Infrastructure. He can be reached by email at walter.kemmsies@am.jll.com.