As central banks around the world deplete their monetary arsenal without succeeding in reviving growth, strong consensus is building for large fiscal stimulus in the form of infrastructure investments.
Contrary to QE, widely criticized for contributing to the increase in social inequality, infrastructure investments are palatable to all parts of the political spectrum as they usually produce tangible outcomes and positive economic spillovers. Moreover, timing would now be optimal for fiscal policy taking the baton from monetary policy as QE has undoubtedly succeeded in drastically reducing governments’ financing costs, and hence improving the economic profitability of any public infrastructure project.
However, caution is needed before opening the cement floodgates as we should not forget how much politicians adore infrastructure works (punctually inaugurated before elections). I would argue that any infrastructure undertaking should pass a sort of “acid test” consisting of looking at why the project has not been developed before. It may be the case that infrastructure needs have been postponed due to negligence or misguided fiscal austerity, but I am afraid that in many cases you will find that the supply of funding creates infrastructure demand and not the other way around – think of the EU Structural Funds – with the associated risk of either developing uneconomical projects or unnecessarily subsidizing them by “crowding-out” the private sector.
Similarly to what happens with stock valuations, the profitability of any project depends on a number of critical variables (usage rate, operating costs, depreciation, obsolescence, etc.) and relatively small changes to any of them may render very different results. Moreover, public works are usually fertile soil for budgeting sloppiness, ancillary spending, and plain corruption, which translate into cost overruns.
These risks are worth taking when potential gains are large, as in the sort of “catch-up infrastructure” built in developing countries; but in developed ones, where the bulk of infrastructure is already in place, the gains of constructing one more road or bridge may be just marginal. An alternative could be to aim for “frontier infrastructure” programs, like E. Musk’s Hyperloop. However, infrastructure ventures are path-dependent, and there is a high risk of ending with “legacy infrastructure”, as for every Internet there is a Minitel, and for every Panama Canal a Great Wall.
Moreover, the fruits of “moonshot” projects are to be enjoyed by future generations, and this brings us to the core of the matter. This infrastructure frenzy looks more like another attempt to keep living standards high at the expense of future generations. If we wanted to be fair to them, we should keep pharaonic ambitions at bay, reduce the huge debt overload we are leaving them, and invest in their education instead; with the latter having the potential to bring larger productivity gains in a world where intellectual capital has largely displaced physical capital.
To conclude, infrastructure planning should be a very lengthy, thorough and – forgive me those of you with an engineering passion – boring process not apt for economists. I would even argue that the task should be conducted by a politically independent body of technocrats, like is the case with central banks today. Keynes once famously said that economists should manage to get themselves thought of as humble, competent people on a level with that of dentists. Well, it seems that having failed at this, they are now having a go at the engineers!
Fernando de Frutos, MWM Chief Investment Officer
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