Decoding infrastructure: A look at the basics of US infrastructure investment Behind the Numbers, May 2017

The 2016 US presidential campaign saw the question of the US economic infrastructure become a major focus of debate. As policymakers start to address the issue, it’s a good idea to establish a baseline. Just what do we mean by infrastructure? Who owns it? How big is it?

What is infrastructure?

Our modern economy commonly relies on a jumble of capital investments, goods that last over a long period of time. From heart monitors to giant generators, these capital investments are one key to the high standard of living we enjoy in the United States.

Most capital provides returns in a straightforward way. A company places a machine in a factory, and the additional capacity raises productivity and profits for the company. But some capital raises profits and productivity for many other companies. This type of capital¹ may have network effects, so that a single investment is more valuable the more it is used. Phone lines are in this category. Other capital goods create goods and services that are difficult to charge individual users for. City streets provide everybody a key transportation benefit, but it’s difficult to imagine tolls on city streets.

This is infrastructure. It’s often taken for granted. Need to move parts from one factory to another? Factory managers don’t usually worry about whether the roads are there. Starting a new restaurant? The chef assumes that he can hook up to water and sewerage lines. Having a basic, functioning infrastructure is key to the operation of a modern economy.

Keepers of infrastructure: State and local governments

Of the total $50 trillion capital stock in the United States, about $9 trillion can be classified as infrastructure. Figure 1 shows the infrastructure capital stock by type and owner. A large share of the US infrastructure is owned by state and local governments, with streets and roads accounting for over two-fifths of the total stock. The private sector owns most of the power generation infrastructure (this would include buildings for generation and the power distribution network) and most of the communications infrastructure. In the private sector, most infrastructure is owned within the utilities industry, although some (particularly railroad structures) are in transportation. The federal government owns little of the nation’s infrastructure.

Where does new investment go?

A bit more than half of new investment in infrastructure is in transportation, which is mainly done by state and local governments. About two-thirds of the transportation investment is in highways and streets. Investment in power (both generation and distribution) is the second most important type, largely carried out in the private sector. Investment in sewer and water systems is relatively smaller, and communications accounted for less than one-tenth of the total infrastructure spending of $285 billion in 2015 (figure 2).⁴

The importance of transportation (and especially highways and streets) is the reason that so much infrastructure spending takes place through state and local governments. That doesn’t mean that the investment is entirely funded by state and local governments. Federal government outlays for the Highway Trust Fund in 2015 totaled over $41 billion, which covered almost half of all state and local spending on new highways and streets (and some maintenance, which is not covered here). But even when the federal government contributes funding to highway building or local mass transportation projects, these are ultimately managed and owned by state and local governments. Costs of new transportation projects not funded through the federal government are borne by state and local taxpayers (with the costs often managed by issuing bonds, so taxpayers pay for the investment over time).

Private transportation infrastructure spending (including structures for aircraft, railroads, pipelines, and water transport) totaled just $13 billion in 2015—a small amount compared to public sector transportation spending. Many of these transportation modes are quite important for key niches of the economy. But they simply don’t account for much of the spending on transportation infrastructure.

Investment in power infrastructure, such as generation facilities and the electric grid, is largely carried out by the private sector. That’s also true for much of the communications infrastructure. These investments are often funded the same way any company would finance an investment—through the sale of stock shares or bonds. Traditionally, the steady and sure returns in these regulated industries made these financial instruments very attractive, and the companies that engaged in these activities could raise money relatively cheaply. That has become less true in recent years with increasing competition in power generation and the communications industry.

Sewer and water investment, like transportation investment, is mainly done by state and local governments. With no federal intervention, the costs are borne by taxpayers, often through sales of municipal bonds. This allows long-lived investments in sewer and water infrastructure to be paid for by taxpayers over time.

Trends in infrastructure investment

Spending on infrastructure rose substantially before the Great Recession (figure 3). The residential construction boom required considerable new infrastructure in the form of new water and sewer connections as well as streets.

Between 2005 and 2009, investment in power doubled to about $85 billion, where it has remained for the entire recovery period. That’s not likely the result of the need for new demand, since electrical power demand has been flat in the United States. It is more likely the response to falling natural gas prices from new extraction techniques such as fracking. The falling price and growing availability of natural gas are pushing many electricity generators to replace coal-burning plants with new investments in natural gas generation.⁵

Meanwhile, infrastructure investment in areas other than power has been flat or down since the recession. The slowdown in the growth of residential construction has helped to tamp down demand for infrastructure. And budget-minded state and local governments have cut back on capital spending. Communications investment dropped precipitously after the Great Recession (from $28 billion in 2007 to just $16 billion in 2012) and has not really recovered.

Infrastructure investment in context

Investment in infrastructure totaled about $260 billion in 2015,⁶ just over 7 percent of all investment (public and private) in the United States, and about 1.4 percent of GDP. A significant increase in infrastructure spending could create a substantial increase in GDP in the short run, and—if well directed—would likely increase productivity for the private sector in the longer term.