Infrastructure is the set of background conditions needed for a society to promote human wellbeing and economic growth. It includes physical, institutional, and human components. When production was mostly for home consumption in the Middle Ages, little physical infrastructure was needed. As commerce grew, however, roads and ports became economically important so that people could move goods for sale. This is physical infrastructure.
Technological progress requires increased investments in infrastructure. If other countries move cargo by rail, donkey transport becomes too slow for successful competition. Automotive transport supplements trains but requires more roads and bridges. Inexpensive and widely available electricity is now a necessary component of a commercially competitive society, making the generation and transmission of electricity essential infrastructure.
Institutional infrastructure is needed as well. Commercial success requires relatively secure property rights so entrepreneurs can feel confident that when they make an investment, their products won’t be stolen and the contracts that they make won’t be violated. Such assurance requires uncorrupted police and politically independent courts. Failure to meet these institutional conditions currently hinders commercial investment in Russia and slows their economic growth.
Finally, commercial success requires development of human infrastructure. Two hundred years ago, few jobs in America required literacy. Today, an illiterate worker is difficult to employ. As technology advances, increasing knowledge is needed in mathematics and computer literacy. Knowledge of biology is needed in health care. Social skills are needed in service employment, sales, marketing, management, and in all jobs requiring teamwork. Because innovation continues, most people need a trained mind that enables them to learn new skills as adults. Educational institutions are part of our infrastructure.
Many items of infrastructure are public goods. These are goods that can’t be created for the enjoyment of anyone unless many others enjoy them as well. National defense is the classic example. If some people are protected from foreign invasion, others in the country are protected as well. This means that no private individual has a financial incentive to pay for national defense, because she can’t own it as private property. So, the state must provide it. Courts are also part of the infrastructure that states must provide. Private individuals can’t create courts to protect their property rights and resolve disputes because other parties to disputes won’t readily accept the judgments of privately-owned courts.
Some goods are both public and private. The social and intellectual skills provided by education benefit people individually through greater choice in employment and generally higher salaries. But these skills are also public goods and part of the nation’s human infrastructure because the products and services offered in our society would hardly be competitive if employers had to teach employees how to read, write, add, subtract, work in teams, etc. The state must therefore contribute to education to ensure an educated workforce. It must for the same reason contribute to health care because business is impaired when workers are ill, and many employers can’t meet all of their workers’ health care needs and remain competitive.
The same applies to much of our physical infrastructure. The electricity grid can be owned publicly, or it can be regulated by the government; it can’t just be left in private hands, because that wouldn’t assure the creation and maintenance of vital infrastructure. The case is the same with harbors, roads, bridges, internet connectivity, and pipes for natural gas and potable water. Physical infrastructure also affects people’s health through environmental impacts. The state must ensure the maintenance of clean air and water while reducing exposure to toxins. Less money is needed to maintain health in a cleaner environment.
Like investments made in the private sector, government infrastructure spending is necessary to compete successfully and reap long-term profits. For every dollar spent on preschool education, costs for remedial education and behavior control in the K-12 years are reduced by more than a dollar. Subsequently, the state saves money because rates of single parenthood and incarceration are lower among preschool-educated children. The reduction of public support for higher education moved the percentage of Americans aged 25 to 34 with college degrees from third to sixteenth among the 38 members of the Organization for Economic Cooperation and Development (OECD).
The Congressional Budget Office (CBO) estimated in 2014 that every dollar spent on physical infrastructure resulted in $2.20 in economic benefits. Between 1950 and 1979 the American economy grew at an annual rate of 4.1% when spending on physical infrastructure was 4% of GDP; economic growth averaged only 2.9% a year from 1980 to 2007 when infrastructure spending fell to 2.3% of GDP.
Like companies that fail to invest in new technology, our country will lose out if we retain inefficient systems of health care, energy, and transportation and underfunded systems of education. But how should we fund needed government investments? See the next blog.
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