Friday, June 14, 2024

The State of U.S. Infrastructure

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Introduction

The $25 trillion U.S. economy relies on a vast network of infrastructure to keep it afloat. But the systems currently in place, including roads, railways, electrical grids, and internet providers, were built decades ago and are struggling to keep pace. Economists say that delays and rising maintenance costs are holding economic performance back, and civil engineers warn that structurally deficient bridges and antiquated water infrastructure pose safety risks. Meanwhile, the United States lags behind other advanced economies in infrastructure quality and spending.

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In the wake of the COVID-19 pandemic’s shock to the U.S. economy, President Joe Biden rolled out a sweeping plan to overhaul the nation’s infrastructure. In November 2021, Congress approved a bipartisan infrastructure law, marking the largest federal infrastructure investment in decades. Proponents of the legislation argue that increased public spending is necessary to meet the country’s growing needs. Skeptics of federal spending push for new models of private sector involvement, which they say are more efficient and cost-effective.

How important is infrastructure to the U.S. economy?

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Economists argue that robust investment in infrastructure in the twentieth century set the foundation for the nation’s strong growth in the aftermath of World War II. But its crucial role also means that poor infrastructure can impose large costs on the U.S. economy. In addition to the threat to human safety of catastrophic failures such as bridge collapses or dam breaches, inadequately maintained roads, trains, and waterways cost billions of dollars in lost economic productivity.

A 2018 study by transportation analytics firm Inrix found that delays caused by traffic congestion alone cost the economy over $87 billion that year. Airports are another linchpin: U.S. civil aviation directly supports 2.5 million U.S. jobs, and international tourism brings in up to $180 billion dollars in annual tax revenue. However, flight delays cost the U.S. economy billions of dollars each year, including $33 billion [PDF] in 2019, according to the Federal Aviation Administration.

Many analysts say that investing in both new infrastructure and current maintenance would stimulate the economy. By increasing efficiency and reliability and lowering transportation costs, it would boost long-term U.S. competitiveness, insulate the economy from shocks, and create jobs. Economists generally see infrastructure spending as having a significant “multiplier effect,” meaning that the economic gains are greater than the amount spent. A 2022 analysis by the World Bank found that every public dollar invested in infrastructure led to $1.50 in resulting economic activity, with a bigger effect during a recession.

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What is the overall state of the nation’s infrastructure?

The U.S. population has almost doubled since the 1960s, when most of the country’s major infrastructure systems were designed. Many are reaching the end of their lifespan and are dangerously overstretched, experts say.

In its 2021 report card [PDF], the American Society of Civil Engineers (ASCE), an industry group, gave the nation’s infrastructure a “C-,” up from a “D+” in 2017—the highest grade in twenty years. Still, the group estimated that there is an “infrastructure investment gap” of nearly $2.6 trillion this decade that, if unaddressed, could cost the United States $10 trillion in lost gross domestic product (GDP) by 2039.

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Transport. Transportation will require the largest chunk of funding needs. One in three bridges needs to be repaired or replaced, according to the American Road and Transportation Builders Association, and 7 percent are structurally deficient. (However, the number of bridges in need of repair has steadily decreased over the past decade). While the United States’ airports carry the most passengers in the world, U.S. aviation infrastructure is also overburdened, with some 20 percent of all arrivals and departures delayed in 2022, according to the Department of Transportation’s Bureau of Transportation Statistics. Delays have worsened post-pandemic amid pilot and air traffic controller shortages.

The country’s rail systems are a mixed bag. U.S. commercial rail, a large portion of which is owned by the private freight industry, is among the most developed in the world, accounting for about 28 percent of the nation’s freight movement by ton-miles. At the same time, the focus on freight rail has relegated passenger rail to a lower priority. Amtrak, the United States’ main provider of intercity passenger rail, has an estimated repair backlog of more than $45 billion, according to the ASCE.

Water and Electricity. The Environmental Protection Agency estimates that drinking water and wastewater systems will require at least $744 billion in additional investment over the next decade. Ports and waterways, which are critical links in the country’s freight transport network, face mounting delays. The operators of the U.S. electrical grid are struggling to make the necessary investments, and increasing power outages are costing the economy billions of dollars.

Internet. Experts warn of the “broadband gap,” in which rural and low-income communities suffer from a lack of infrastructure to deliver reliable, fast internet, referred to as broadband. A 2021 Federal Communications Commission report [PDF] finds that more than fourteen million Americans, the majority of whom live in rural areas, lack access to any broadband network. Other estimates suggest that almost three times as many people lack access. Governors from both major parties identify internet access as a priority in their states, and thirty-four states and territories have signed on to a federal initiative which will invest $45 billion in U.S. broadband by 2030.

How does that compare internationally?

The United States generally lags behind its peers in the developed world. Some analysis shows the quality of U.S. infrastructure compared to its peers steadily declining [PDF] over the past two decades. U.S. infrastructure spending also ranks toward the bottom among Group of Twenty (G20) countries.

U.S. infrastructure performance suffers from its comparatively low quality, with consequences for businesses, workers, and travelers. U.S. passenger trains average just half the speed of Europe’s high-speed rails. Airport rankings published by aviation research firm Skytrax put only five U.S. airports in the top fifty worldwide, with the highest ranking, Seattle-Tacoma, coming in at number eighteen.

When it comes to internet access, the United States ranks sixteenth among countries in the Organization for Economic Cooperation and Development (OECD) in fixed broadband coverage, though it reaches third in mobile coverage. At the same time, Americans pay more than their European peers. Some analysts attribute this to the lack of competition in most U.S. markets, which are often served by only one internet provider. However, others argue that U.S. broadband prices are competitive with their European counterparts after adjusting for differences in income, and that structural differences between the two markets, including higher U.S. labor and deployment costs, belie easy comparison. 

Much of the discrepancy in infrastructure quality between the United States and its peers can be traced to different funding levels. According to the OECD, the United States invests less in transportation infrastructure as a percentage of GDP than many other wealthy countries, including France, Germany, Japan, and the United Kingdom. China, meanwhile, spends ten times more than the United States by percentage of GDP. Simultaneously, China’s flagship global infrastructure project, known as the Belt and Road Initiative, has sought to increase the country’s economic influence across the world.

Australia, Canada, France, and the United Kingdom have also developed national infrastructure frameworks that allow the central government to direct and prioritize projects in a way that the United States’ more decentralized system has struggled to do. But U.S. infrastructure spending could be on the upswing. In November 2021, President Biden signed the Infrastructure Investment and Jobs Act (IIJA), unlocking $1.2 trillion in federal infrastructure investment—the largest such spending plan in decades.

How is U.S. infrastructure funded and financed?

The United States differs from most other industrialized countries in the extent to which it relies on local and state spending to meet its infrastructure needs. While most European countries have long funded the bulk of their infrastructure development at the national level, less than half of U.S. public infrastructure and transportation funding came from the federal government in 2020. However, that proportion increased by almost 10 percent between 2019 and 2020 amid increased federal attention to infrastructure during the COVID-19 pandemic. President Biden’s infrastructure spending bill could sustain that shift. 

Washington’s primary channel for funding transportation infrastructure is through direct grants to states. The largest disbursement comes from the Highway Trust Fund (HTF), a kitty created in 1956 to fund the creation of the interstate highway system. The HTF raises money through the gas tax (which is not indexed to inflation and has not increased in three decades) and other transportation-related taxes. Via a controversial formula, it spends about 80 percent of that money on roads and highways and the remainder on mass transit projects.

The federal government supports infrastructure in some indirect ways, through financing mechanisms or tax incentives. These include the 1998 Transportation Infrastructure Finance and Innovation Act (TIFIA), which provides low-interest loans and other credit assistance that local governments can use to finance their infrastructure projects. The TIFIA has provided nearly $35 billion in financing since its creation to support more than $120 billion in total infrastructure investment, according to the U.S. Department of Transportation.

The federal government also supports the municipal bond market, which is what local governments mostly rely on to finance infrastructure projects. States and other municipalities issue bonds to raise money from private investors, and Washington gives these bonds a number of tax incentives. Most significantly, the interest on municipal bonds is usually exempt from federal taxes. The Congressional Research Service estimates this tax exemption costs the federal government [PDF] some $42 billion a year in forgone revenue.

Finally, a small but growing number of infrastructure projects are being organized as joint efforts between government and private developers, known as public-private partnerships, or P3s. Under this model, private firms win a concession from the state to build infrastructure, say a highway, as well as the right to charge tolls or user fees on it in exchange for the responsibility of operating and maintaining it. P3s are much more popular in European countries partially because, experts say, the low cost of private financing via municipal bonds in the United States is often an easier and cheaper route for local governments to secure financing.

How has Biden addressed the issue?

The IIJA includes $550 billion in new spending to upgrade physical infrastructure such as roads and bridges, railways, airports, and water systems. (The remaining $650 million is funding comes from standard allotments to infrastructure projects.) The plan also invests tens of billions of dollars to modernize the U.S. electrical grid, spur the adoption of electric vehicles, and expand broadband internet access. In August 2023, The White House said that implementation of the IIJA had already provided more than $280 billion in announced financing for almost seven thousand projects, with at least $120 billion directed toward highways. 

The legislation, which passed with bipartisan support, is expected to create 1.5 million jobs annually, according to analysis by the Brookings Institution. Though much of the bill’s price tag will be covered by repurposing unused pandemic relief funds, the Congressional Budget Office has estimated that it will add $256 billion [PDF] to the federal deficit over the next ten years. 

The IIJA is not the only recent legislation aimed at improving U.S. infrastructure. The Inflation Reduction Act, passed by the Democratic Party-controlled Congress along party lines in August 2022, includes more than $150 billion in infrastructure financing, according to the nonpartisan National Governors Association. Most of that funding is directed toward transportation and clean energy projects aimed at curbing carbon dioxide emissions.

What is the debate around infrastructure investment?

Despite Biden’s watershed infrastructure spending bill, many experts argue that the United States still has to find ways to spend significantly more money to address its infrastructure deficit. Proposals to do so often break down along partisan lines, with Democrats backing more direct federal funding, whether financed by debt or higher taxes, and Republicans generally arguing that better results can be achieved at lower cost by encouraging more private sector development.

Many economists support raising revenue by increasing user fees, such as tolls. They argue that requiring users to shoulder more of the cost of the nation’s infrastructure both raises revenue and encourages more efficient use of resources. At the federal level, the most common proposal is increasing the gas tax. States could also increase the use of toll roads to raise revenue for road maintenance.

Some economists worry about expanding the federal role, given what they see as a history of politically driven and wasteful federal infrastructure spending. They argue that a steady flow of federal money gives states an incentive to build things they don’t need and that they struggle to maintain. Proponents of this view say the federal government should return public funding back to state and local governments, which are more equipped to manage local infrastructure needs, and cut red tape. Under this model, funding for local projects would be raised by hiking local taxes, issuing debt, or expanding P3s, rather than borrowing from the federal government during a time when most states are struggling to repay existing debt.

Other experts say that further localizing infrastructure management will widen the gap in quality that already exists across states, since differences in climate, weather patterns, and frequency of use—as well as taxpayer wealth—mean states’ infrastructure needs and abilities vary. They also point out that the federal government is better equipped to spend on large-scale infrastructure projects; it can run a deficit, whereas nearly all state and local governments must balance their budgets.

Some analysts say that the focus on using P3s and relying on private sector financing alone won’t address major gaps in the system, such as in maintenance, since those projects are unlikely to be profitable enough to entice private investors. And, as CFR Adjunct Senior Fellow Heidi Crebo-Rediker argues, the United States lacks a culture of private ownership of major infrastructure, which could pose enduring political barriers to efforts to privatize swaths of the transportation system and public utilities.

At various times over the past decade, most recently in January 2023, bipartisan lawmakers have sought to legislate the creation of a national infrastructure bank. Such a bank would be a government-owned corporation and, like the TIFIA program, would provide cheap, long-term financing for infrastructure projects. Supporters argue that this could overcome the fractured nature of local spending, help coordinate developments that cross state borders, and give Washington greater ability to prioritize important projects; they point to the European Union’s version of such a bank, the European Investment Bank, as evidence of this. Skeptics contend that municipal bonds already offer cheap financing, rendering national subsidization unnecessary.

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