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Getting A Bigger Bang For The Infrastructure Buck

Infrastructure investment can deliver significant economic benefits if policy makers target the right initiatives

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"We're at the point where our infrastructure is becoming an impediment to productivity and to long-term economic growth." —Joe Quinlan, head of market and thematic strategy at U.S. Trust

IF THERE IS ONE POINT ON WHICH Republicans and Democrats can agree it is that the United States cannot generate strong, sustainable economic growth unless it modernizes its infrastructure. The Obama administration lobbied for a massive infrastructure program to heal the U.S. economy post-financial crisis, and the Trump administration has made a $1 trillion investment in infrastructure upgrades a key element of his plan to accelerate economic growth in the U.S.

Of course, agreeing on the value of infrastructure modernization is one thing, funding it is another. The American Society of Civil Engineers, which recently assigned U.S. infrastructure a grade of D+, estimates that over the next 10 years, it will take more than $4.5 trillion to upgrade infrastructure ranging from roads and mass transit to waste water treatment plants and the electrical grid.1 Funding even basic fixes to roads, bridges and rail lines — essentially raising the nation's infrastructure grade to a gentleman's C — will be a heavy lift in the current fiscal environment.

Expensive as it may be to remedy decades of underinvestment in infrastructure, failing to do so could be even more costly. Not only does the cost of repairs escalate over time, productivity losses associated with substandard infrastructure make it difficult for the U.S. to compete with nations that can move data, electricity, freight and people more efficiently.

"We're at the point where our infrastructure is becoming an impediment to productivity and to long-term economic growth," says Joseph Quinlan, head of market and thematic strategy at U.S. Trust. "Our ability to innovate is a tremendous competitive advantage for us, but if we can't fully harness the power of new technologies because of infrastructure constraints, it's going to be very difficult for us create jobs and increase incomes."

Given the limited dollars available to fund infrastructure modernization, policy makers will need to weigh the costs against the benefits of different initiatives. Clearly, ensuring public safety by addressing hazardous road conditions or replacing deteriorated bridges is the first priority. A close second, in our view, is maximizing the return on infrastructure investment by identifying projects that are best able to deliver the productivity gains that fuel economic growth over the long term. Below we highlight three initiatives we believe could significantly increase U.S. economic growth over the long term.

Amping up the Flow of Electricity

Image of solar panel

Electricity generated by solar, wind and hydropower accounts for about 15% of U.S. electricity generation, but in several Midwestern and Western states, wind power alone makes up between 20% and 40% of their total generation. Depending on weather conditions and local demand for power, the supply of renewable energy in those states can outstrip demand, forcing operators to curtail production. Ideally, utilities in states with excess renewable power would ship that clean, low-cost electricity to large population centers, where demand for it is higher. That is not happening — at least to the degree it could — because the current network of high-voltage transmission lines lacks the capacity to efficiently deliver that power where it is needed. One solution: a network of high-voltage direct current (HVDC) transmission lines.

HVDC lines can transmit larger volumes of electricity over longer distances with fewer electricity losses than high voltage alternating current lines, which presently constitute the vast majority of the U.S.'s high-voltage power transmission network. This makes them the ideal conduit for transporting bulk renewable power to far-off demand centers. Recognizing the financial opportunities presented by better aligning renewable power supply and demand, private companies are building new HVDC lines to carry renewable power to the coasts and industrial Midwest.

Investing in HVDC lines yields both immediate and long-term economic benefits. In the short run, building a large network of HVDC lines could generate thousands of construction jobs and bolster demand for steel and other raw materials. (A single HVDC transmission tower requires between 30,000 and 40,000 pounds of steel, depending on the design). More importantly, increased transmission of renewable power could dramatically reduce electricity costs for consumers. One study determined that a regional transmission network covering the Midwest and Southeast could cut electricity costs for the 65 million people in its coverage area by $6.9 billion a year by 2026, that is if it could double the supply of wind power from 2012 levels.3

The potential cost savings from increased transmission of renewable power could help U.S. manufacturers better compete with companies overseas. Greater transmission capacity might also trigger new investment in clean energy generation, which itself would stimulate additional economic activity. Efficient connections between renewable power generators and urban areas would expand the market for clean power, driving up demand and potentially unleashing a wave of new investment in wind and solar power production. That could translate into more jobs to build and operate the facilities; new orders for wind turbines and solar panels; additional lease income for landowners; and higher tax revenues for rural municipalities.

Satellite Communications for Pilots, not Just Passengers

Image of an aeroplane on runway

When John F. Kennedy challenged Americans to land a man on the moon, the nation answered the call. If only it could do the same for the man or woman asking to land on time at Chicago's O'Hare airport. The combination of increased air traffic and inadequate investment in the country's aviation infrastructure has made flight delays an unpleasant fact of life for the more than 2.5 million people who traverse U.S. airports each day.4 Sitting on the tarmac or circling Los Angeles also imposes a high toll on the U.S. economy. A 2010 University of California study found that flight delays cost airlines, travelers and businesses outside the aviation sector $32.9 billion in 2007.

The vast majority of flight delays originate at the nation's most congested airports, like those in Atlanta, Chicago and New York, but delays at those hubs impact air traffic far afield of them, so easing congestion at them could speed up air travel nationally. The question is how best to relieve those bottlenecks. The Next Generation Air Traffic Control System (NextGen) might be the answer.

Designed to make the nation's air traffic control system more flexible and efficient, NextGen is gradually replacing the land-based radar currently being used to guide aircraft with a modern network of satellites. The system will also incorporate digital communications technology to support better communication among pilots and air traffic controllers, enabling the system to respond more quickly to storms, airport power failures or other events that could disrupt air traffic.

When fully installed — supposedly by 2025 — NextGen could make the skies much friendlier for the flying public. By allowing planes to fly closer together and take more direct routes, NextGen would shorten travel times and permit more takeoffs and landings per hour, reducing tarmac backups and the number of flights "stacked up" over U.S. airports. The Federal Aviation Administration reports that NextGen could reduce flight delays by more than 40%, saving U.S. airlines, travelers and the agency itself $38 billion between 2017 and 2020.

Closing the Digital Divide in Rural America

Yellow board with wifi symbol on it

Americans who routinely pay their bills, watch movies or order clothes online may find it difficult to comprehend, but millions of their fellow citizens have no access to high-speed Internet. According to a 2016 Federal Communications Commission (FCC) report, 10% of U.S. residents lack access to broadband. The number of disconnected Americans is far higher in rural areas — where 39% of the population, or more than 23 million residents, does not have high-speed internet.

As the FCC report noted, low broadband penetration hinders economic development in rural America, in part, by disadvantaging small businesses. "We note that small businesses tend to subscribe to mass-market broadband service," the report says. "Thus the urban-rural disparity in deployment [of broadband] also disproportionately impacts the ability of small businesses operating in rural areas to compete in the 21st century economy."

Of course, the cost of poor access to high-speed Internet is borne by more than just small businesses. Students who can't take online courses; farmers who can't access government weather data; and a parent who can't tap online Black Friday sales all pay a price for lack of broadband service.

"There is a real opportunity cost for anyone who lacks access to the Internet, but the cost is especially high for rural Americans," Quinlan says. "In cities, residents with a poor internet connection can compensate by going to physical stores or taking conventional classroom courses, but when you need to drive a hundred miles to reach a mall or get to a community college, not having broadband really hurts."

Easing that pain could pay sizeable dividends not only to broadband impoverished citizens, but also to the country as a whole. Expanding broadband access has been shown to boost economic activity by promoting business formation, expanding the customer base of "Mom-and-Pop" businesses, and linking rural workers to jobs far afield of their homes. An example of the latter is "rural sourcing," through which employers in pricey urban and suburban locales fill jobs with rural workers. Working remotely from home or a nearby satellite office, the worker benefits from a higher wage than one could obtain locally, while the employer contains operating costs by hiring talent in areas where labor is less dear.

Closing the digital divide in rural America will be more challenging than it will be in cities — where affordability is the primary issue — because in rural areas poor access to broadband service often stems from inadequate telecommunications infrastructure. This is known as the "last mile" problem. Private telecommunications companies typically choose not to allocate large amounts of capital to run fiber-optic cable over vast distances to reach relatively few subscribers. The modest revenues from that investment simply do not justify the capital expenditure.

One option to entice private providers to venture into the country is targeted federal and state tax credits, which might make the economics work for some providers depending on the capital requirements and population density of the service area. If tax credits do not address the issue, the federal government might provide grants to fund municipal broadband networks, such as those built by some small cities that were dissatisfied with the quality and cost of the broadband service from private providers.

Because most rural municipalities lack the resources to build their own public broadband networks, some are banding together to create broadband cooperatives. In Minnesota, for example, ten city councils voted to create the West Central Minnesota Fiber-Optic Cooperative, which will build a $45 million network to bring high-speed Internet to homes, businesses, hospitals and government offices across 17 townships. Funding comes from local bond issuance and loans from a consortium of community banks. The Minnesota cooperative's model does not require support from Washington, but federal grants could accelerate the formation of rural broadband cooperatives, bringing the social and economic benefits of broadband access to more rural communities.

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