Can the presidential candidates agree on anything? Most would say no, but actually they can and have. Hillary Clinton and Donald Trump have each endorsed a program that is needed, would boost economic growth and would generate thousands of jobs.
What is this magic idea? It’s a program to invest in the nation’s infrastructure, including roads, bridges, ports, airports, water and sewer facilities, and power grids. A recent McKinsey Global Institute analysis estimated that the U.S. faces a shortfall of infrastructure spending of $700 billion over the next 15 years. The American Society of Civil Engineers puts the gap even higher – at a jaw-dropping $5.2 trillion through 2040.
As was seen with outdated water and sewer facilities in Gary, Indiana, and the bridge collapses in California, Ohio, Pennsylvania and Virginia last year, lack of modern and adequate infrastructure can be a matter of life and death.
So proper infrastructure is a safety issue. But it is also an economic issue. Traffic backups, long lines in airports and power interruptions impose economic costs and impede growth. One report put the annual cost of traffic congestion in terms of lost productivity at $124 billion, with an expected rise to $186 billion in 2030. Likewise, airport waits cost travelers $4 billion a year in down-time, and the President’s Council of Economic Advisers cited the economic costs of power outages at between $28 billion and $169 billion annually.
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Infrastructure investment will therefore improve economic growth by facilitating the movement of people and products and guaranteeing safe water, waste disposal and power. Studies put the annual rate of return from infrastructure investment in the range of 10 percent to 20 percent.
But there’s more. Infrastructure investment will also provide jobs. For every $1 billion invested in infrastructure, between 10,000 and 16,000 direct, supply-chain and consumer spending-induced jobs are created.
Infrastructure investment is also crucial to improving the lives of the 60 million people living in rural areas, many of whom have not recovered from the recession. Over 90 percent of work commuters use our roads, and almost 60 percent of finished products move on them. So taking quality highways to remote areas is still a key economic development tool.
Improving safety and convenience, elevating economic growth and adding jobs are the trifecta of benefits from infrastructure investment. But there’s one more amazing benefit: Infrastructure investment can easily pay for itself. Using an average annual rate of return of 15 percent from infrastructure projects and a 20 percent average federal tax rate on economic growth, the yearly increase in federal revenues of 3 percent (20 percent of 15 percent) exceeds the 2.6 percent rate paid on long-term federal borrowing.
However, even for fiscal hawks who require an immediate payment plan for infrastructure spending, there are simple, low-cost ways of accomplishing this. An 8-cent hike in the federal gasoline tax – which has dropped 40 percent in inflation-adjusted terms since the early 90s – would raise $14 billion annually. Likewise, an 8 percent federal fee on airline passenger revenue would generate $16 billion a year, and a 5-cent federal charge for every thousand kilowatt hours of electricity used would produce $18 billion annually.
Hence, these three revenue sources combined would provide $48 billion annually to fund a national infrastructure investment program. This is enough to finance both the interest and principal repayment costs of a $1 trillion infrastructure package.
Public infrastructure has always been an important engine to economic growth in the country, from the canal construction programs of the 1840s to the development of interstate highways after World War II. Now is the perfect time for a new infrastructure commitment. The payoffs are big, the financing is cheap and the need is great. And – surprisingly – we might have political agreement on its merit.
Now, the question is, who could best deliver?
Michael Walden is a Reynolds Distinguished Professor at N.C. State University.