Why Aren’t We Getting More Infrastructure Spending with Borrowing Costs So Low?

by Mike Larson
Money and Markets

Infrastructure. Infrastructure. Infrastructure. Economists and policymakers from both sides of the political spectrum keep saying we need to spend more on it.  And let’s face it: With interest rates so low on U.S. Treasuries and municipal bonds, we wouldn’t need to break the bank to fund major investments in roads, bridges, airports, mass transit, state universities, water-treatment plants, power-grid upgrades, or any number of other things. But as a recent Wall Street Journal story points out, infrastructure spending is on ice! Consider the following stats:

Cities and states sold only $140 billion in new project bonds in 2015. That’s the lowest level in the past two decades. If you inflation-adjust the figures, they look even more striking. Infrastructure-related financing is down 53% in real terms from a decade ago and 21% from two decades ago. The Commerce Department now estimates that non-federal governments are investing the least on infrastructure projects since the early 1980s, at least as a percentage of the overall economy.

The average muni bond yield just sank to 1.6%, the lowest in 20 years. So why aren’t governments borrowing like mad? According to the Journal, voters won’t back many new projects by agreeing to pay more in taxes. Pensions are in such dire shape that policymakers have to shore those up rather than spend money on infrastructure. And overall tax revenue isn’t rising at a fast enough clip to justify heady new spending.  

It’s tough to say what will change this state of affairs. Maybe a true surge in economic growth that boosts tax revenue, or an increase in consumer confidence that encourages voters to sign on to capital projects? 

But it’s worth pointing out that corporations aren’t investing much on plant, property, or equipment, either, judging from the latest government figures. So it looks like we’ll be stuck with substandard airports, roads full of potholes, second-rate transportation networks, and rundown schools for the foreseeable future. It also means “infrastructure plays” in the stock market – including construction companies, materials suppliers, engineering firms, and the like — may not be the best bets for your money.

In any event, what’s your take? Would you be willing to pay more in taxes in exchange for better infrastructure? Or do you think the money would be poorly spent? Will governments beef up their borrowing soon? Or will they continue to tighten their purse strings despite record-low borrowing rates?