Free Exchange : Building a Boom Economist May 1, 2021

To estimate the economic growth impact of President Joe Biden's $2.7 trillion Infrastructure plan, the Economist summarized the literature. As initially written, the proposal allocated 25 percent of the amount to water and other basic infrastructure. A number of economists have written on the effect that infrastructure spending has on a country's economic growth. 

Leland Jenks in 1944 concentrated his economic history on the impact of the railway system on American development. Having mobility through the rails at a profit, he observed, would promote "ingenuity and open closed paddocks of potential enterprise" (p. 64). Robert  Fogel, a Nobel prize winner, considered in 1964 the benefits of the railway basically flat and viewed canals as a better trigger of economic growth. Later, around the 1990s, David Aschauer of the Federal Reserve Bank of Chicago, noted the economic growth in the United States during and after World War II and attributed the post-war slowdown to the end of spending. The writer of the article mentioned the inability to prove a cause and effect relationship. 

Subsequent works by economists attempted to prove a cause and effect relationship. John Fernald of the Federal Reserve Bank of San Francisco studied the connection between spending on roads and productivity in the early 1970s. His research saw a 1 percent growth in productivity. Valerie Ramey of the University of California San Diego uncovered the same results of 1 percent. 

Can we project the impact of Biden's proposal, given this information? According to Fernald and Ramey, one unknown factor includes the state of the currently existing infrastructure and the infrastructure that will replace it. Despite the inability to accurately predict, given the decline in net investment since the 1960s, an infusion of investment seems needed. Adapting to the realities of climate change, according to the author, also necessitates spending on "electric-vehicle infrastructure and retrofitting homes and buildings" (p. 64). Although spending alone will not change the social habits of driving and the resultant congestion, other methods, such as charging drivers with tolls and fees, help pay for the consequences of climate change.