An infrastructure push does not lead to a boost to GDP

Adam Smith Institute


By: Tim Worstall
Date: 16 August 2014

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An infrastructure push does not lead to a boost to GDP 

We’ve heard much these past few years about how now id just the time to have an infrastructure surge. It’s said often enough that a recession is just when we should be building all those roads, railways, council houses and the rest. Obama even tried to find those $800 billion worth of shovel ready projects just raring to do. With no great success it should be said.
Sadly, this just doesn’t seem to work. From the IMF:

This paper has examined whether major public investment drives in the past have served to promote or accelerate national economic growth. It is not about whether in theory public investment drives could accelerate growth, but rather whether in practice, with real governments deciding how to spend the funds and implementing investments, they have in fact accelerated growth.

The answer appears to be “probably very little”. This conclusion pertains to the drives – the big increases in public capital spending – not necessarily to routine levels of public investment. And furthermore the evidence here is not about whether public capital can promote growth by averting the emergence of bottlenecks. Major public investment campaigns continue to be advocated in several countries as a major trigger for economic growth, and on this issue, whether they have in fact triggered growth, the evidence for a positive effect of public capital on GDP or GDP growth is weak. … It is difficult to find a clear-cut example that fits the oft-repeated narrative of a public investment boom followed by acceleration in GDP growth. If anything the cases of clear-cut booms illustrate the opposite – major drives in the past have been followed by slumps rather than booms.

In theory it should work, in practice it doesn’t, which is a bit of a conundrum. The practical answer to which puzzle is that government is probably even worse at doing things than we generally think. Thus we’d probably be better off limiting it to that very small set of things that both must be done and that only government can do. Something which is a very small overlap indeed.