Memo to Biden: Spending Is Easy, Investing Is Hard

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President Biden’s economic agenda comes in two stages. Stage one, the $1.9 trillion American Rescue Plan, was intended to jolt the economy back to life with a huge dollop of old-fashioned Keynesian demand-side stimulus. There are already signs it is working as consumers spend their $1,400 checks.

Stage two, which Mr. Biden starts rolling out Wednesday, is more supply-sided: He aims to raise the economy’s productive potential by investing in its physical and human capital. Stage two matters more than stage one because its consequences will be more enduring. It is also much harder to pull off. The formula for long-term growth is elusive, especially when fused to other priorities such as solving social inequities, phasing out fossil fuels, and getting any legislation through a polarized Congress.

Mr. Biden has set his sights on out-competing China, so it is worth remembering how Beijing goes about stimulating its economy. Chinese leaders are notoriously reluctant to encourage consumption, opting for supply-side policies such as more investment and construction. American presidents are just the opposite: More at the mercy of voter demands, they are quick to expand the safety net and hand out cash, even as federal investment in domestic physical infrastructure, research and development and education and training has slipped as a share of gross domestic product.

Starting with an infrastructure plan of around $2 trillion, Mr. Biden would reverse the trend in federal investment. He has certainly picked the right targets. Historically, roads, bridges, and other physical infrastructure have among the highest returns of any federal investment. Every dollar spent on the interstate highway system in the 1950s and 1960s generated around $2.50 worth of economic output by raising the productivity of private investment and workers, according to Daniel Leff Yaffe, a Ph.D. graduate of the University of California, San Diego.

But infrastructure is subject to the law of diminishing returns. Today, interstate highways, with 1% of the nation’s road mileage, account for 25% of distance traveled, Mr. Leff Yaffe writes in his dissertation, a level of utilization difficult to replicate. “A second interstate, or any other highway built today in the U.S., is likely to generate fewer productivity gains.”