One Dollar Invested in Transportation Can Return Up to Eight Dollars

Investing in transportation projects can generate one to eight times economic return. Image – NCSU Libraries.

A new report from economists contends each dollar invested in transportation projects can have a multiplier of 1.5 to 8.

The research is summarized in “Highway Grants: Roads to Prosperity,” an Economic Letter from the Federal Reserve Bank of San Francisco.  The original research is “Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment,” Sylvain Lelduc and Daniel J. Wilson, in NBER Macroeconomics Annual 2012.

The research “focuses on investment in roads and highways in part because it is the largest component of public infrastructure in the United States. Moreover, the procedures by which federal highway grants are distributed to states help us identify more precisely how transportation spending affects economic activity.”

The researchers conclude:

“We find that multipliers for federal highway spending are large. On initial impact, the multipliers range from 1.5 to 3, depending on the method for calculating the multiplier. In the medium run, the multipliers can be as high as eight. Over a 10-year horizon, our results imply an average highway grants multiplier of about two.”

What’s more, Lukas Kawa of Business Insider notes, is that

“their study showed that the multiplier increases during a downturn. Leduc and Wilson found that the multiplier in the wake of the 2009 stimulus was “roughly four times” more than average. That means infrastructure investments offer more value during busts than booms, which should encourage policymakers attempting to counteract high unemployment in the construction sector by increasing spending on highways, roads, and bridges,” (“STUDY: Every $1 Of Infrastructure Spending Boosts The Economy By $2“).

How does that dollar multiply? The researchers don’t examine that specifically, but we know. In just one example, the dollar multiplies through construction companies purchasing equipment and materials, and hiring or retaining workers who buy things they wouldn’t if unemployed. And these days, far too many construction workers private and union – are unemployed.

And this doesn’t even take into account how the completed projects help move people and goods faster, safer and cleaner.

We often write about the cost of not investing; here’s what we wrote last May:

Study after study reports that our roads are in bad shape, and it is costing people and businesses money.  Thirty-two percent of America’s major roads are in poor or mediocre condition, and twenty-four percent of America’s bridges are structurally deficient or functionally obsolete.  Those conditions are costing drivers about “$67 billion annually for increased fuel consumption, body dents, worn tires and premature wear wrought by pitted roads,” about $324 per driver (TRIP National Fact Sheet – April 2012).

It’s so bad that the company which won the NYC cab contract built a test track in Arizona “with foot-deep potholes, jagged pavement and rough cobblestones reminiscent of the rough-riding streets of the meatpacking district” of New York (“You Pay for Potholed Roads, One Way or the Other”).

Meanwhile the federal gas tax has not been raised in 19 years. Its purchasing power has been eaten away by inflation and increased vehicle fuel efficiency at the same time that the cost of materials (concrete, asphalt, steel), equipment and staffing have increased.

It makes good financial sense to fix roads before they deteriorate too much.  The American Association of State Highway and Transportation Officials reports that every $1 spent to keep a road in good condition avoids $6-14 needed later to rebuild the same road once it has deteriorated significantly (“Rough Roads Ahead: Fix Them Now or Pay for It Later,” AASHTO, 2010).

Read my recent rant, Two Half-True Arguments against a Gas Tax Increase that Drive Me Crazy for more.