Infrastructure’s Medium-Term Destination

It seems everyone is talking infrastructure these days. It wasn’t always that way; traditionally, its four syllables confined the word to the halls of academia, policy-making and poky economic development offices. Popularized by modern-day programs, an increasingly interested and engaged private sector, and more recently by grand post-recession stimulus programs, the word now seems to be everywhere. Is infrastructure a vogue that will vanish, or vital to medium-term economic vocabulary?

Word usage aside, infrastructure has long since proven its place in a well-functioning economy. From ancient cultures to now, superior infrastructure has been a great economic differentiator. In the Western world, the post-World War II peace dividend led to substantial rebuilding of infrastructure, and in America’s case the building of an interstate highway system and new health, education and other facilities to accommodate the baby boom that was underway. Other economies, including Canada’s, followed suit, and we have since become accustomed to the great benefits of modern infrastructure on a grand scale.

This got us into trouble. Spending crept ahead of income, and public debts began to swell. Infrastructure wasn’t the only culprit, but it sure was an easy target when it came to program cuts. Why? Well, delayed or deferred infrastructure spending helps the bottom line instantly, but it doesn’t hurt right away. Yet as we know all too well, infrastructure ages: roads get bumpy, bridges get wobbly or even collapse, water treatment systems go into disrepair, and so on. Austerity has given rise to huge infrastructure deficits in developed countries that badly need to be filled. At the same time, fast-growing emerging markets have had to run hard just to keep up with their economies’ needs.

The Great Recession reignited infrastructure. Near-collapse of the economy led to the creation of vast stimulus funds, many earmarked for infrastructure, and especially the ‘shovel-ready’ variety. The ultimate failure of this activity to re-ignite the broader economy might well have dimmed the average voter’s view of public infrastructure. Is that so?

On the contrary, it seems as popular as ever. It was a key part of President Trump’s electoral platform, and is still very much a part of the ‘Make America Great Again’ chatter. Recent estimates put the US infrastructure deficit at $3.3 trillion. Although America currently spends over $450 billion annually on infrastructure, status quo spending plans would leave the deficit largely unfilled over the next decade. In response, the Trump Administration has proposed a $1 trillion spending program, with a list of high-priority projects totalling $137 billion. If successful, this would lead to very sizeable increases in total infrastructure outlays.

Getting the whole package through Congress is a long shot. However, even a partial plan would create huge opportunities. Can Canadians expect to benefit? Perhaps, but first and foremost, in every country construction is a very domestically sensitive industry. US firms would expect to get first dibs at key projects. Americans would expect to get most or all of the jobs. And the public in general would like to see the stars and stripes donning that shiny new bridge. However, a second and sizable consideration is capacity. Campaign rhetoric aside, the US is dealing with an industrial capacity crunch. Many industries are producing at full tilt, and finding it difficult to build new capacity. Labour – particularly the skilled stuff – is in short supply. Foreign capacity could be a great help. Third, financing is a challenge. US public debt is running at about 105 per cent of GDP, severely limiting the fiscal room for big-spend programs. A large part of the current plan is to tap into private capital, which, in light of the dependable long-run returns on infrastructure, is likely to be all too willing to participate. Canada has some of the world’s hefty pools of available capital, and could well play a key role in US projects – opening the door for other forms of Canadian participation.

The bottom line?

Infrastructure is not losing its shine. In fact, new programs are buffing it up in a big way. America will be a great source of medium-term activity, and a good opportunity. So will fast-growing markets, which could be eclipsed by the US buzz.

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