AASHTO Journal, 5 June 2015
As Congress considers what to do about the Highway Trust Fund before its July 31 expiration, senior officials from the Federal Reserve Board and International Monetary Fund say the economy is still struggling to shake off the Great Recession, while investing in U.S. infrastructure now could have both short- and long-term economic benefits.
In a June 1 speech to an International Monetary Conference in Toronto, Fed Vice Chairman Stanley Fischer said one of the five major lessons from decades of economic crises is that an active fiscal or budgetary stimulus policy works “perhaps especially well” when interest rates are very low.
Fischer said the United States along with Japan and Europe “are still struggling to return to sustained growth … and thus to leave behind the imprint of the Great Recession.” He linked that to “another important fiscal policy discussion [that] is currently taking place in the United States. Infrastructure in the United States has been deteriorating, and government borrowing costs are exceptionally low.”
On June 4, the International Monetary Fund pointedly advised the Federal Reserve to wait until 2016 to begin any hike in interest rates, unless inflation that has remained below target levels begins to suddenly shift higher.
The IMF also said U.S. fiscal policy needs attention, as the inability of Congress and the president to agree on budgets and appropriations bills “creates a level of fiscal uncertainty that is damaging to the U.S. economy.” The IMF singled out infrastructure spending for action: “Creating a stable funding solution for the Highway Trust Fund that will prevent the need for continued stop-gap patches is an immediate priority.”
That prodding came days after the Fitch Ratings service said congressional inaction on the Highway Trust Fund is hampering states as they make infrastructure spending decisions. “Highway and transit projects are likely to slow or halt despite the two-month extension of the current funding program,” Fitch said.
Fischer in his speech said many economists currently “argue that this is a time at which fiscal policy can be made more expansionary at low real cost, by borrowing to finance a program to strengthen the physical infrastructure of the American economy.”
While he said such a course “would mean a temporary increase in the budget deficit while the spending takes place,” Fischer emphasized the upside. “That spending would have positive benefits – both an increase in aggregate demand as the infrastructure is built,” he said, “and later an increase in aggregate supply as the positive impact of the increase in the capital stock due to the investment in infrastructure comes into effect – that under current circumstances would outweigh the costs of its financing.”
On June 2, Fed Governor Lael Brainard did not mention infrastructure investment, but painted a cloudy picture of U.S. economic trends so far this year.
She told the Center for Strategic and International Studies that even if economists dismiss the first-quarter economic slump this year as tied to statistical and temporary factors, including West Coast port disruptions and severe winter weather, “the limited data in hand pertaining to the second quarter do not suggest a significant bounce back in aggregate spending.”
She said previous assumptions that households would spend much of the savings they got from lower fuel prices in the past year have not panned out. “Consumers appear to be disinclined to spend much of the gains from cheaper prices at the pump, preferring, it seems, to strengthen household balance sheets instead,” Brainard said. Instead, “consumer spending so far this year has been undeniably weak, especially given a backdrop of improving labor market prospects, solid consumer sentiment, and improving credit availability.”
She said housing starts have also remained “far below the trend levels implied by population growth,” and that “government spending has contributed very little, on average,” to economic growth in recent quarters.
Job market gains have slowed but continued, she said. However, Brainard added “the negative effects from the substantial decline in the price of oil and appreciation of the exchange rate on business investment, manufacturing, and exports seem to have been greater than expected.”
U.S. drilling fell an nearly a 50 percent annual rate in the first quarter, she said, while shrinking net exports cut into economic growth in both fourth-quarter 2014 and first-quarter 2015. Indicators of business investment have also been weak, she said.