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We Need to Stimulate the Economy by Investing in Infrastructure

We Need to Stimulate the Economy by Investing in Infrastructure



Suppose you run a construction company. What is it about your company’s business activities that contribute to the overall economy?


The specific kinds of construction projects, the final products, affect the future economy in specific ways, whether they involve houses, apartment buildings, commercial buildings, schools, roads, or something else. But a construction company is merely a tool for these contributions. Somebody else decides what will be built and for what purpose, and shares in the risks and rewards associated with the final product that gets built. Apart from the value of the final product, what is it about construction activity that contributes to the economy?


Construction creates income. The economy (GDP) can be measured by counting expenditures, or by counting income. This is because one person’s expenditure is somebody else’s income. For a construction project, whoever is “buying” pays the construction company. This creates income for the construction company, its employees, and its suppliers. The suppliers themselves benefit from an increase in demand, and have employees and suppliers to pay as well. The income received by the various parties becomes available in the economy. Consumers have more money to spend on goods and services throughout the economy. Various businesses unrelated to the construction business make more sales due to an increase in demand, and the prospect of more profits becomes an incentive for business investment. This investment, along with its underlying increase in demand, involves income for workers and suppliers of various types of businesses. The demand for labor increases. The economy grows and jobs are created throughout the economy. This is called the multiplier effect.


One construction project can affect the economy in this manner to some extent. But the degree of economic growth and job creation can be multiplied several times over whenever many projects by many different construction companies occur at the same time. A boon in construction is a sign of a growing economy.


Now, back up to what I said above. This multiplier effect starts when “whoever is buying [a construction project] pays the construction company”. That is what starts the ball rolling, so to speak. But the effects on the economy do not depend on the identity of the “buyer”. The same thing is going to happen whether the buyer is a private individual, company, or the government. In the United States, as well as many other countries, the government is not in the construction business. The government makes construction decisions, mostly for infrastructure building and repair, but the government contracts the work out to private companies. In terms of the multiplier effect, there is no difference between a private decision to build and a public decision to build. Whether it is the government or private industry that decides to build, the chain of events that is the multiplier effect is going to be the same. Demand created by government spending in this case is the same as demand created in the private marketplace. The initial impetus for the multiplier effect can be a government spending plan, but the actual construction and the subsequent multiplier effect occur within the private sector. The effects on the overall economy – economic growth and job creation – are going to be the same regardless of who made the initial decision to order a construction project.


The only difference between private and public construction decisions is the incentive for the construction projects in the first place. Private construction decisions in the macro economy depend on the current performance of the economy. When the economy is thriving, more construction will occur in the private markets. When the economy is in recession, there is much less demand for construction. Construction can help to jump-start the economy during these down times, due to the multiplier effect. But in a recession, not enough demand exists in the private sector for doing so. Public construction decisions made by the government, however, don’t require such demand to be already present. The government instead can choose to “buy” construction projects at a time when the economy isn’t producing its own demand, thereby jump-starting the economy and creating the multiplier effect at a time when the economy needs growth and jobs the most.


I mentioned at the beginning that in terms of construction, each type of final product affects the future economy in its own ways. Building and repairing the nation’s infrastructure creates an additional multiplier effect on economic and job growth. Investment in infrastructure creates many public benefits for the private-sector economy. For example: faster, more reliable, and cheaper transportation of goods; better communication of job orders and product availability; better customer access to businesses; a better process for matching jobs with potential employees; and better training and education for future workers, managers, and entrepreneurs.


Recessions and slow economic growth periods are the best times for the government to invest in the nation’s infrastructure. Such investment can help to reduce the effects of a recession, increase employment in the private sector, and smooth out the business cycle.


You might have noticed that with infrastructure, jobs and economic growth are created IN the private sector THROUGH government decisions. The government is not in the construction business, or in any of the businesses that benefit from the multiplier effect. But the government can initiate the multiplier effect that in turn leads to more jobs and more economic growth, often at times when the private sector is not able to do so. The often-repeated rhetorical line that “the government doesn’t create jobs” is not consistent with this truth.


Author: 
Jerry Wyant
Date: 
2014-08-06
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