Infrastructure bill's boost to economy is likely to be limited

The bipartisan infrastructure bill is unlikely to have a big impact on growth in the next few years, economists say. Longer term, though, investments in highways, ports and broadband could make the economy more efficient and productive.

The short-term boost to growth will be relatively limited for two reasons, economists say. For one, the bill represents just $550 billion in new spending—compared with nearly $6 trillion that Congress has approved in the past year-and-a-half to battle the Covid-19 pandemic and its economic fallout.

Second, the infrastructure spending will take place over five to 10 years starting in 2022, a longer timeline than pandemic-era initiatives like stimulus checks, extra unemployment benefits and small-business support programs. That will make its direct effects on employment and demand less noticeable.

Alec Phillips, chief political economist for Goldman Sachs Research, said the infrastructure bill could add around 0.2 percentage point to gross domestic product growth next year, and 0.3 percentage point in 2023.

By comparison, President Biden’s $1.9 trillion American Rescue Plan, passed by Congress in March, is projected to lift government outlays by the equivalent of 4.9% of GDP in the current fiscal year, according to the Congressional Budget Office.

To be sure, the impact of that and other more-immediate stimulus is starting to fade as pandemic-relief programs expire, such as a $300 increase to weekly unemployment payments set to expire in September. Extra spending on infrastructure could lighten the drag as overall government spending declines.

The CBO expects economic growth to slow from 7.4% in 2021, a year of rapid post-Covid recovery, to 3.1% in 2022 and 1.1% in 2023, as measured from the end of the fourth quarter to the same period the year before. The projections don’t include possible effects of the infrastructure bill.

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Unlike the pandemic-relief programs enacted over the past year-and-a-half, the infrastructure deal’s main objective is to raise the economy’s long-term growth potential by making firms and workers more productive. Better roads, for example, speed delivery of goods and cut down on time wasted in traffic jams.

Mark Zandi, chief economist at Moody’s Analytics, estimates the infrastructure package will raise the economy’s productive capacity by about 0.04 percentage point. So rather than the 1.9% rate at which the U.S. economy can sustainably grow, according to  CBO estimates, output could expand 1.94%.

"It’s not the next Interstate highway system, but I think it’s meaningful," he said.

Mr. Zandi said the deal’s boost to employment should peak in late 2025, when he expects it to add 660,000 jobs. Some context: Employment growth averaged 188,000 a month in the decade before the pandemic.

Citing outside studies, White House deputy press secretary Andrew Bates said the infrastructure deal is expected to create almost a half-million new manufacturing jobs over the next four years. He said the bill will "create jobs and grow our economy for the long haul."

Economists struggle to model the long-term benefits of such spending, because past periods of heavy infrastructure investment coincided with myriad other structural changes in the economy: a booming population, the Vietnam War, expansions in the social safety net and technological innovation.

"We just don’t have a lot of good data," says Karen Dynan, an economics professor at Harvard University, who served as chief economist at the Treasury Department from 2014 to 2017. "These things tend to get built slowly over time. They’re big projects that have effects on lots of different parts of the economy, and so it’s just very hard to quantify."

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The CBO estimated in a 2016 paper that for every dollar of capital investment by the federal government, private-sector output rises about 5 cents. That is about half the agency’s estimate of the return rate on private investments.

But the rate of return depends on a number of things.

Investments that are paid for tend to lift long-term economic output more than those that add to the budget deficit, the CBO said in a report Friday, because more government borrowing crowds out private-sector investment. On Thursday, the agency reported that the infrastructure package would widen the federal deficit by $256 billion over 10 years.

The quality and cost of projects undertaken are also factors.

Research suggests the development of the interstate highway system between the 1950s and 1970s—currently 47,000 miles of multilane highways stretching coast to coast—has made the U.S. economy much more productive. But that doesn’t mean building a second such system would yield similar returns, experts caution. 

"We want to avoid the bridges to nowhere," said James Poterba, an economist at the Massachusetts Institute of Technology who has studied infrastructure. Noting that infrastructure in the U.S. already tends to be far more expensive than in other countries, he added that requirements such as employing unionized workers or using U.S.-made steel and other inputs can also inflate costs.

"We should be looking at the ways in which we can do the spending so that we are getting the most bang for the buck," he said.

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The benefits can also be reduced if federal infrastructure investment merely displaces spending by state and local governments, rather than generating projects that wouldn’t have otherwise have been built. The CBO projected Friday that state and local governments would reduce their spending by 15 cents for each dollar of federal spending.

To read more from The Wall Street Journal, click here.