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U.S. state and local governments view infrastructure spending as a luxury, which leads to reduced spending in that area in economic downturns, but no comparable increase in spending during recoveries.
That’s the conclusion of a paper presented Wednesday at a conference hosted by the Brookings Institution. “Teachers or Roads: How Fluctuations in Public Finances Erode Public Infrastructure” by Troup Howard and Adair Morse shows patterns behind government spending, in good times and bad, while also offering some background on how the state of U.S. infrastructure got to be so grim.
Read: This chart shows why we need ‘infrastructure week’ so badly
“The decline in U.S. infrastructure is well documented and not new,” the authors note: it is a result of public choices by governments. “At stake from a welfare perspective are current goods such as education, public safety, healthcare, and income support for pensioners and those disadvantaged. Competing against these current expenditures are the choices to spend on capital allocations for critical infrastructure supporting future economic growth.”
Howard and Morse use data from the most recent economic cycles to demonstrate their theories. Comparing budget allocations in 2007 to those in 2012, after the Great Recession of 2008 had ended but while municipal budgets were still severely strained, they show that governments prioritize spending on education (both K12 and higher education) and on public safety. Governments continue to fund “necessary goods” by re-allocating money from what may be seen as “luxury areas:” transportation spending and long-term capital expenditures.
They also used early estimates of the shock from the COVID recession, which by and large turned out to be too pessimistic, to model a severe financial shock.
Related: In one chart, how U.S. state and local revenues got thumped by the pandemic — and recovered
That exercise shows a rebalancing away of $72 billion, or 20% of the total reduction in budgets. Of that amount, $45 billion is from transportation spending, and $10 billion is shifted away from capex in other areas, mainly K12. As expected, the exercise shows that those dollars are used to preserve spending on current education services and public safety, as well as financial commitments like debt service and retirement systems.
“Teachers or Roads: How Fluctuations in Public Finances Erode Public Infrastructure” by Troup Howard and Adair Morse
Using the period after the dot-com crash in 2000 and before the Great Recession, they find that governments allocate recovering revenues to necessities and luxuries equally at a drastically lower level than they reduced spending.
Whereas $45 billion was rebalanced away from budgets in a contraction, an economic expansion of equal magnitude brought replenished spending of only $3.5 billion, they find.
“Teachers or Roads: How Fluctuations in Public Finances Erode Public Infrastructure” by Troup Howard and Adair Morse
“This suggests that there is no catch-up period: infrastructure spending is compressed when budgets shrink, but then is barely restored (in relative terms) when budgets expand,” Howard and Morse write. “As public budgets fluctuate in response either to the business cycle or from idiosyncratic drivers, this will lead to long-term pattern of disinvestment in public infrastructure.”
It is worth noting that while the lack of investment in infrastructure is well-known, the scale of the disinvestment and the prioritization that the authors describe in this paper is not necessarily intuitive.
In an extended interview with MarketWatch, David Eager, the executive director of the Kentucky state pension system, noted that politicians often find it easy to defer pension payments when times are lean. “You have to fix a crumbling bridge this year, but you don’t have to fix a crumbling pension immediately, it can be next year,” Eager said.
