Advertisement
UK markets close in 8 hours 15 minutes
  • FTSE 100

    7,952.23
    +20.25 (+0.26%)
     
  • FTSE 250

    19,801.00
    -9.66 (-0.05%)
     
  • AIM

    742.11
    0.00 (0.00%)
     
  • GBP/EUR

    1.1683
    +0.0014 (+0.12%)
     
  • GBP/USD

    1.2609
    -0.0029 (-0.23%)
     
  • Bitcoin GBP

    55,837.39
    +389.38 (+0.70%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CRUDE OIL

    81.84
    +0.49 (+0.60%)
     
  • GOLD FUTURES

    2,212.00
    -0.70 (-0.03%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,558.25
    +165.41 (+1.01%)
     
  • DAX

    18,493.21
    +16.12 (+0.09%)
     
  • CAC 40

    8,216.60
    +11.79 (+0.14%)
     

Is Another Big Infrastructure Spending Plan Necessary?

Is Building Coming Back? Construction Spending Rose in January

(Continued from Prior Part)

The Keynesian debate

While private construction is the lion’s share of construction spending, public construction also matters. Historically, the use of public construction dollars has been the big lever that the government uses to stimulate the economy. This dates back to the New Deal. It was used as recently as 2009 in the American Recovery and Reinvestment Act.

The use of federal construction dollars to raise demand in the economy has been an issue of tremendous debate. Generally, the left seems to believe that a Keynesian pump-priming exercise would alleviate suffering and help the economy. On the other hand, the right tends to argue that Keynesian spending’s track record has been mixed at best.

ADVERTISEMENT

Opponents cite Japan as an example. The country took its debt-to-GDP (gross domestic product) 1 ratio to 2.2x. It pursued public construction to stimulate the economy. It had little to no economic growth to show for it. Now, it’s issuing bonds at negative interest rates. Japan may have reached the point where public debt has become so large that it acts as an economic anchor.

Stimulus plans

The stimulus plan from early in President Obama’s term has been credited by its adherents for turning around the economy. However, it has been characterized as a waste of money by its detractors. Did the spending boost in the American Recovery and Reinvestment Act stop the tailspin? Or was it the tax cuts? Or was it the Troubled Asset Relief Program? It’s impossible to prove these arguments one way or another. The explanation tends to fall along ideological lines.

Crumbling infrastructure argument

Democratic presidential candidates Hillary Clinton and Bernie Sanders are arguing for a big public spending program—often referred to as “infrastructure investment”—to create jobs and address infrastructure issues. Clinton proposed spending $275 billion on infrastructure. Sanders wants to spend $1 trillion. The underlying premise is that US infrastructure has been allowed to fall into disrepair due to limited government spending. Is that true?

As you can see from the above chart, public construction as a percent of the GDP was pretty constant for almost 30 years until President Obama’s stimulus measures pushed it up to highs not seen since the Carter administration. While public construction spending did fall after the stimulus ran its course, it’s hard to make the argument that public construction has been neglected.

Recovery

As we discussed in the previous part, home price appreciation indicates that we have a tight housing market in general. As the Millennials get jobs and work off some of their student loans, they could start looking to buy.

Rising home prices are helping homebuilders such as Lennar (LEN), D.R. Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL) raise profits and hire. This trend could drive the economy going forward. The SPDR S&P Homebuilders ETF (XHB) is an alternate way to invest in the housing sector.

Browse this series on Market Realist: