Infrastructure Programs as a Countercyclical Tool.

• Author: Wu, Yonghong
• Position: INFRASTRUCTURE INVESTMENT

The pressures brought about by the COVID-19 pandemic have created an environment conducive to innovative approaches to government finance and new ways to build the capacity necessary to help states and localities ride through difficult times. Governments at all levels are expected to play a stabilizing role during economic downturns. According to orthodox macroeconomic theory, the federal government has the primary responsibility for stabilizing macroeconomic conditions using its unique fiscal and monetary policy instruments, like the recently passed Infrastructure Investment and Jobs Act--but the extraordinary situation we find ourselves in still calls for state governments to play a more important role in stabilizing regional economies.

Although state governments do not possess monetary policy instruments, they do have fiscal policy authority under state constitutions regarding public infrastructure investments. The unprecedented economic challenges states and localities have dealt with recently and will continue to face require creative ideas beyond conventional or mainstream thinking about what states can do to promote growth and development.

One of these is the notion of funding infrastructure projects. States have the capacity to incorporate economic stabilization into their capital planning as an important policy goal. The countercyclical capital budget can direct more capital spending during recessionary periods and less capital spending during expansionary periods.

State and local governments own and manage most of the nondefense public capital stock in the United States. In 2018, for instance, out of a total of $522 billion in total nondefense capital spending, about three-quarters was invested by state and local governments, according to Andrew Haughwout, senior vice president at the Federal Reserve Bank of New York. (1) Furthermore, wrote Haughwout, out of an April 2021 total of $107 billion in 2016 highway capital investment, state and local governments spent $78 billion and $28 billion, respectively, much of which comes from funds provided by the federal government. The federal government's direct expenditure, however, was a mere $500 million.

Why use infrastructure spending as an economic stabilizer?

The potential benefits of investments in capital are substantial. According to one study, infrastructure spending in the United States would create 18,000 total jobs for every $1 billion in new infrastructure spending. One...