Trickle-Up Economics and Labor Infrastructure

When both parties agree then you know something is wrong. Infrastructure spending (IS) has gained a lot of bipartisan support lately. There is a lot of pressure on Trump and Congress to put together a really big package on infrastructure. What does that mean and is that the best we can do with our money?

The usual support for more IS focuses on simple theories. Paramount is that IS is part of the production and delivery process of goods and services. An improvement in infrastructure will accordingly increase our lagging national productivity. When workers are more productive the nation becomes more competitive.  A second logic is that building more infrastructure takes workers and therefore employment will increase. Third, when those workers have more income they will buy more goods and services thus providing more business and employment for other firms and workers. Can you hear the horns blowing? Who could be against more IS?

The reason people can be against more IS is that the above is simple theory. Put all this into the context of 2017. For any of the above magic to transpire we have to have viable projects and we have to have them pretty fast. Unlike a tax cut which immediately gives a tax payer more money to spend, an infrastructure project has to be planned, approved, contracted, environmental regulations checked, and so on. Shovel ready projects are a joke. This spending could drag on long after my ashes are spread in Biscayne Bay.

And then there is the issue of where this infrastructure might be built. Since Harry Reid is a has-been it probably won’t be done in Nevada. Politicians will be in seventh heaven fighting for the next bridge, road, or waterway. What a glorious boondoggle!

And then even if some projects get started, what about the spending multiplier theory? The employment-spending-more employment-more spending theory assumes everything else is the same. In 2017 our nation is deep in debt. Our firms are not expanding. Perhaps construction workers will pocket some money, pay off some bills, and the story ends there.

And finally – tada – what about cause and effect? Is our slow growth these days really caused by potholes? I don’t think so. But one major thing many of us agree is that growth is very much impacted by slow labor supply growth, a mismatch of skills, and generally a poorly-functioning labor market. So why not focus on that? If that is the real problem then more IS is really what liberals usually call trickle down. Why wait years if not decades for an uncertain trickle? No prostate jokes please!

Instead we can use some or all of that IS money to improve our work situation. We could seriously fund training, retraining, and relocation. Rather than spiffy highways we could create the world’s employment champion. Wouldn't it be cool if global companies starting moving to America because we have the world's most outstanding employees for the 21st century?

We know that transition is a constant. If we know that renewables will take a larger share of national and world production, why not have the world’s best labor for that? If we know that the GIG economy is employing more and more millennials, then why not shout to the world that the best labor for that is right here in the USA? If Internet security is going to be a global challenge for the foreseeable future why don’t we have the best minds trained here? Healthcare? Entertainment? Whisky? (You didn't think I was going to leave out JD did you?)

If labor is the problem in this country then it ought to be solution. We need to stop wringing our hands and most of all – we need to stop thinking that the best we can do is use company subsidies to improve the labor market. Companies may or may not decide to spend a subsidy on labor.

And of course notice what there is no trickle down if we focus directly on the labor market. Helping people do better in the labor market has immediate impacts on their employability. It makes them more productive, competitive, and valuable. Perhaps we could call this trickle up economics since the benefits start with the workers and then radiate outward to more successful and competitive companies.

Finally when I say labor I don’t mean labor unions. A sincere focus on training, retraining, and relocation means we are strengthening workers for what they want – better pay, improved mobility, and more sustainable jobs and careers. Labor unions can get on board but this idea is not about enriching union bosses. Remember when we decided as a nation to put a man on the moon. We had a clear focus and we made it happen. America can be the training ground for a revolutionary new center of employment readiness. I'd rather see us spend a lot of money in that way than on infrastructure boondoggles. 

The Infrastructure Scam

More Infrastructure is the new hot phrase. Hillary wants it. Trump wants it. Your local asphalt company wants it.  I think maybe even the Pope wants it. All together now – three cheers for more infrastructure.

More infrastructure will cure our ills. More infrastructure will improve productivity, wages, employment, and economic growth. More infrastructure may even shrink your horribly swollen prostate. Sorry kids – this is an adult blog.

From the above words you are ready for the punchline. Surely there can’t be anything wrong with this new focus on more infrastructure. Or can there be?

Notice that more infrastructure spending mostly means spending more on our existing infrastructure. Most discussions mention dilapidated bridges, pot holes in highways, and leaky water systems. We can add sagging power lines and possibly an inefficient network of information technology equipment.  

When we refer to infrastructure we are legitimately singling out another dimension in the list of factors that produce output in a country. We know that how much output we get depends on how much input we use. Labor and capital are the two traditional labels for organizing our thinking about the inputs we use to alter the amount we produce. Now we are emphasizing a third factor – infrastructure.

Imagine a manufacturing company that produces those lovely little outfits worn by female beach volleyball players. That company has sewing machines (capital) and it has workers (labor). But notice that even the tiniest of these garments has to be shipped via truck or airplane. Orders might come in from the Internet. While having capable workers and great sewing machines is important to Tiny Garments, Inc, so is the quality of roads, airports, and computer networks.

The basic theory of infrastructure is not being questioned by me today. It is pretty clear why more and better infrastructure would be better for companies and therefore for their customers. I am not doubting the need for improvements in infrastructure. I am doubting the magnitude of the impacts of the current proposals. 

The questions I have are practical. For one thing, we are not talking about Tiny Garments Inc deciding on the best machines to create their very tiny garments. We are instead talking about society ordering improved roads for all the companies of America. Wow. Can you imagine the mess when the studly representatives of Wyoming get into a duel over whether they need the highway improvements more than brainy Connecticut. Or when kindergartners stage rallies demanding an equal share of the new fiber being laid for the purpose of America’s productivity.  There is only so much we can spend on infrastructure though listening to our main candidates suggests that the sky is the limit.

Which brings me to the next point – what is the optimal amount to spend on infrastructure if our goal is to increase America productivity, wages, and employment? Can you imagine Paul Krugman and Rush Limbaugh coming to some consensus about that. Surely we don’t want too much or too little? After all we have a pretty big national debt and infrastructure won't come cheaply, right?

Once we know how much we want, there is this question about whether or not more infrastructure today will really work to raise productivity, employment, and wages. Remember that this is 2016 and not 1956. In 1956 Eisenhower was President, manufacturing was dominant, and I had a full head of black hair with a pompadour. Putting in a new highway system was a lump sum investment and probably was worth every penny we spent on it after 1956. But in 2016 will another $300 billion or more have similar impacts? I know I have a few black hairs among the few hairs that populate my head and I know Eisenhower is no longer President.

I also know that trucks are already very efficient even on crappy roads and that drones are elbowing their way into delivery. Will $300 billion worth of better roads really make today's workers more valuable to companies? How much better will companies be able to compete because of the better roads? How much will they lower prices because of these efficiencies? How much will our spending and employment increase as a result of these price reductions?

And hold on – is it not possible that in today’s globally competitive high technology environment that some firms may react to improvements in infrastructure by using even less labor? Recall that some equipment is called labor-saving equipment. Some machines replace labor. Is it not possible that infrastructure improvements will mean a smaller demand for labor and lower wages? If infrastructure spending switches from roadways to super IT highways, might we need fewer workers?

I know we don’t expect our politicians to actually think about the things they say. But as I see it, this More Infrastructure thing is more complicated than they explain. It is clearly not a slam dunk no matter what they legislate. But that puts the cart before the donkey. What will they really legislate? Is this a serious attempt to improve economic growth or just another backdoor scam that appears to look like they are doing something? Or are we getting agreement from both parties because a new investment in infrastructure is rife with opportunities for rewarding friends and gaining from corruption?