CAMBRIDGE, Massachusetts: Encouraging news about more effective anti-viral treatments and promising vaccines is fueling cautious optimism that rich countries, at least, could tame the COVID-19 pandemic by the end of 2021.
For now, though, as a brutal second wave cascades around the world, broad and robust relief remains essential. Governments should allow public debt to rise further to mitigate the catastrophe, even if there are longer-term costs.
But where will new growth, already tepid in advanced economies before the pandemic, come from?
THE BIG INFRASTRUCTURE SPEND
Macroeconomists of all stripes broadly agree that productive infrastructure spending is welcome after a deep recession. I have long shared that view, at least for genuinely productive projects.
Yet, infrastructure spending in advanced economies has been declining intermittently for decades.
The United States, for example, spent only 2.3 per cent of GDP (US$441 billion) on transportation and water infrastructure in 2017, a lower share than at any time since the mid-1950s.
(China, which is at a very different stage of development, is of course another story entirely.)
Perhaps this reluctance to embrace infrastructure investment is about to fade. US President-elect Joe Biden has pledged to make it a priority, with a strong emphasis on sustainability and combating climate change.
The European Union’s proposed €1.8 trillion (US$2.2 trillion) stimulus package – comprising the new €1.15 trillion seven-year budget and the €750 billion Next Generation EU recovery fund – has a major infrastructure component, particularly benefiting the economically weaker southern member states.
And the United Kingdom’s chancellor of the exchequer, Rishi Sunak, has set out an ambitious £100 billion (US$133 billion) infrastructure initiative, including the establishment of a new national infrastructure bank.
BUT PROJECTIONS SHOULD BE CIRCUMSPECT
Given many countries’ decaying infrastructure and record-low borrowing costs, all this seems very promising.
But, after the 2008 financial crisis, macroeconomists universally regarded the case for infrastructure spending as particularly compelling, too, and the experience then counsels caution about assuming a significant boost to long-term growth this time around. Microeconomists, who look at infrastructure costs and benefits on a project-by-project basis, have long been more circumspect.
For one thing, as the late economist and former US Federal Reserve Board governor Edward Gramlich noted a quarter-century ago, most developed countries have already built the high-return infrastructure projects, from interstate roads and bridges to sewer systems.
Although I don’t find this argument entirely convincing – there seems to be vast unrealised potential to improve the electricity grid, provide universal Internet access, decarbonise the economy, and bring education into the twenty-first century – macroeconomists should not be so quick to dismiss it.
Gramlich’s argument has strong parallels to economist Robert J Gordon’s thesis that the burst of productive new ideas that spawned massive growth in the nineteenth and twentieth centuries has been running out of steam since the 1970s.
Some leading macroeconomists, including the public-finance expert Valerie Ramey, think it is far from obvious that the US has a sub-optimal level of public capital.
True, the American Society of Civil Engineers in 2017 awarded US infrastructure an overall D+ grade. But to the extent that this unfavorable assessment reflects reality, it probably stems more from underinvestment in maintenance and repair – particularly of bridges – than from a failure to build, say, a high-speed rail link between Los Angeles and San Francisco.
In fact, public-finance specialists largely agree that, in advanced economies, maintenance and repair offers the highest return from infrastructure investment.
(This is far from the case in emerging-market economies, where a burgeoning middle class devotes a substantial share of its income to transportation.)
Even beyond technological feasibility and desirability, perhaps the biggest obstacle to improving infrastructure in advanced economies is that any new project typically requires navigating difficult right-of-way issues, environmental concerns, and objections from apprehensive citizens representing a variety of interests.
The “Big Dig” highway project in my hometown of Boston, Massachusetts was famously one of the most expensive infrastructure projects in US history.
The scheme was originally projected to cost YS$2.6 billion, but the final tab swelled to more than US$15 billion, by some estimates, over the 16 years of construction.
This was less the result of corruption than of underestimating various interest groups’ bargaining power. Police required substantial overtime payments, affected neighborhoods demanded soundproofing and side payments, and pressure to create jobs led to overstaffing.
The construction of New York City’s Second Avenue Subway was a similar experience, albeit on a slightly smaller scale. In Germany, the new Berlin Brandenburg Airport recently opened nine years behind schedule and at three times the initial estimated cost.
All of these projects may still be good value, but the pattern of cost overruns they highlight should temper the view that any infrastructure project must be a winner in an era of very low rates.
Moreover, an ill-considered infrastructure investment might create longer-term costs, from environmental damage to excessive maintenance requirements.
The case for increasing infrastructure spending in today’s low interest-rate environment is still compelling, but considerable technocratic expertise will be needed to help compare projects and give realistic cost assessments.
Creating a UK-style national infrastructure bank (an idea former US President Barack Obama had proposed) is one sensible approach.
Absent that, the recent burst in infrastructure enthusiasm is likely to be a missed opportunity.
Kenneth Rogoff, a former chief economist of the International Monetary Fund, is Professor of Economics and Public Policy at Harvard University.