The Infrastructure Spending Challenge

CAMBRIDGE – 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?

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. (China, which is at a very different stage of development, is of course another story entirely.) The United States, for example, spent only 2.3% of GDP ($441 billion) on transportation and water infrastructure in 2017, a lower share than at any time since the mid-1950s.

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 ($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 ($133 billion) infrastructure initiative, including the establishment of a new national infrastructure bank.