Conventional economic wisdom says that physical infrastructure (roads, bridges, hospitals) is essential for a society to flourish and grow. The prevailing sentiment today seems to be that significant spending on physical infrastructure will kill two birds with one stone. The objective is to put money in people’s hands (which will hopefully stimulate the economy), while simultaneously building more infrastructure to support the longer term growth of our economy. On the surface this seems quite smart, but in an increasingly digital and services-based economy, is building physical infrastructure really an efficient way to accomplish either objective?
In the 1930s, ’40s, and ’50s, when the government implemented significant infrastructure programs, most people were physical laborers: assembling parts in a factory, delivering goods, building roads. Today, most people work in offices, use a computer, and provide services.
The question is, what impact does physical infrastructure spending have in this type of world? No doubt we still need roads, bridges, and public services. And by many accounts, our infrastructure is in a state of disrepair. But in a world where resources are very limited (given our enormous and rapidly growing national debt), is this really the optimal way to resolve the problems in our information based economy?
On a practical level, intellectual innovation is what drives our economy forward. Creating new technologies and services that allow us to do more with less, is what creates exponential economic growth. On a relative basis, will building a new bridge or a new road, really be the most efficient way to help innovative biotechnology startups, marketing services companies, or electric car companies grow and flourish?
While President Elect Obama believes spending on physical infrastructure will create two million new jobs, the reality is that injecting money into any sector will likely create new jobs. But in order for these jobs to last, they must provide real growth to the economy long term. While I’m not convinced the government can ever efficiently determine where dollars are optimally invested, if it plans to invest tax dollars into a specific sector, the objective should at least be to get a maximum total economic return on those dollars. In other words, the objective should be try to increase efficiency, and create more new businesses and jobs in the future.
Physical infrastructure is not likely to be that key growth engine for our information economy moving forward. And in fact, these types of projects are largely done by unionized labor, which in general is neither the most efficient, nor the most innovative multiplier of capital.
And so we arrive back at the question: why physical infrastructure spending? The answer might be that our roads and bridges are in such disprepair that without the spending our economy will suffer even more than it has. The other answer might be that its a politically tasteful way to attempt to address the problems at hand, although it may be one based on an outdated vision of our economy.
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