Why Infrastructure Might Save the US Economy

Today, I’m writing a brief post analyzing Larry Fink’s (the CEO of Blackstone) words on infrastructure in the US. He claims that infrastructure in America is falling apart. From roads to power grids, many of this country’s organ systems are failing. As Fink notes:

A lot of time when we’re stuck in traffic or our internet is running slowly, it feels like a nuisance.  But it’s actually something much more serious: an obstacle to economic growth.  Last year, the American Society of Civil Engineers estimated that by 2020, ‘aging and unreliable’ infrastructure will cost American businesses $1.2 trillion.

Infrastructure investments are lagging

As I’ve previously mentioned, short-termism is an awful way to go about decisions. Infrastructure is a long-term investment with a high upfront cost. Rebuilding bridges and railroads takes huge amounts of labor, financial capital, and time, the latter two of which are resources in high demand these days. However, the costs of the alternative are far worse: imagine a world where reliable power and water are hard to come by, where transportation is next to impossible, and where the invisible systems foundational to our lives come to a halt.

Investing in infrastructure will provide both long and short-term benefits for the economy. Right now, low-skilled laborers displaced by the economic mechanisms of recession and the relentless advance technology don’t have many prospects. However, the creation of large scale infrastructure initiatives creates productive jobs for those people. Furthermore, over a longer time scale, infrastructure provides a wide range of sector-agnostic benefits. Product manufacturers will be able to produce and distribute goods more effectively and cheaply. Tech firms will pay a lower price to power its server farms and data centers. Schools will be able to use water more efficiently, conserving the environment and saving money. Commuters won’t lose a day’s wages at the gas pump.

Without this type of investment, our economy will falter inevitably.

This is one of the tactics that FDR used to pull the US out of the Great Depression. His New Deal created the Public Works Administration which, in conjunction with other federal agencies, created huge infrastructure projects to get the unemployed back into the labor force. However, the government refuses to dedicate resources to such a project and the private sector won’t go down that road without politicians’ guidance. Indeed, as Fink concludes:

Investors should push Washington to do more.  An infrastructure bank, which would use a core federal investment of perhaps $50 billion, would be able to leverage several hundred billion more in private investment.  It’s a bipartisan idea that has sadly withered in today’s Washington atmosphere.  But we can’t let it die.  It’s this sort of big and bold initiative—and act of confidence by the government—that investors want and need, and which can help unleash the power of private dollars to help propel our economy for the next hundred years.

If something isn’t done, we will experience a coordination failure, which occurs when various parties could achieve a more desirable equilibrium but fail to because they do not coordinate their decision-making. Without government and business working together to rebuild American infrastructure, the work simply won’t be done.

Also published on Medium.

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