The vast piles of dollars proposed, pending and spent to stimulate the U.S. economy must be used as an investment in the future of America and not just to bail out companies that have failed to live up to their promises to investors and customers. One of the major flaws in all the discussions of how to do this is the lack of detail regarding the benefits infrastructure investments receive from economic multiplier effects. These benefits include not just the jobs created immediately and directly by the construction but also the indirect and induced benefits in other parts of the economy.

Economic Multiplier Effect Makes Transportation Tops

Transportation infrastructure projects are uniquely suited to produce a higher multiplier level because the finished projects, if chosen correctly, are high-velocity items used by all segments of the economy. They increase economic productivity by easing congestion, by moving goods and service providers to customers faster and more cheaply and by stimulating corridor investments in housing, schools, retail space and offices. Missing-link and “debottlenecking” projects are especially valuable to leverage economic activity.

The multiplier-effect theory was first articulated by economist John Maynard Keyenes in 1936. He said government can stimulate growth and stability in the private sector through interest rates, taxation and public works. In infrastructure, the initial investment starts a cascade of events that increases economic activity. That cascade is difficult to calculate because of the indirect and induced economic activity, never mind the additional complication of how the transportation dollars are spent.

The American Association of State Highway and Transportation Officials estimates 35,000 jobs are created for every $1 billion spent on transportation projects; state governors claim up to 40,000. One California study suggests that for every construction job created, an additional 0.76 job is created in other sectors, for a total employment multiplier of 1.76. It also says the state would see an additional 97¢ in indirect and induced spending, and many transactions would result in sales-tax revenue for even more gain for the state and local governments.

Bailing out financial institutions and automakers is far more murky. Their survival is not guaranteed, there is no incentive to change and their multiplier effect is minimal. As long as the stimulus plans stay away from pork projects like Alaska’s “Bridge to Nowhere,” the public will receive a substantial return on investments in infrastructure.