How investment in transportation infrastructure boosts productivity

The impact that congestion has on the U.S. economy goes beyond the time people spend stuck in traffic while commuting — the bigger downside to poor roads is its impact on worker productivity. The nation’s transportation network functions as a virtual conveyor belt for American manufacturing, and when that conveyor belt slows down, so does our economy. And right now, it is operating much slower than it needs to.

{mosads}Our network of roads, bridges, ports and railroads allow U.S. manufacturers to maintain a far-flung network of suppliers. The process of disintermediation — doing more and more of the tasks of manufacturing outside of the final assembly plant — has been a major catalyst for productivity gains in the manufacturing sector the last 30 years, if not longer. Rather than doing every single production process in-house, these days most major manufacturers primarily assemble parts made more efficiently elsewhere into a finished product. If these parts get stuck in ports for days at a time or regularly get caught in traffic en route to the factory, it slows down that conveyor belt and reduces potential productivity gains.

A firm’s suppliers endeavor to deliver their inputs to manufacturers precisely when they are needed, which minimizes inventory costs and helps manufacturers avoid managing unnecessary warehouses. Congestion makes it much more difficult to coordinate that operation, and companies respond by doing more things in-house and keeping larger stocks of inventory, both of which reduce potential productivity growth.

Gains in labor productivity — defined as output per hour of work — is an unalloyed good thing for an economy. In the long run, productivity is the primary determinant of wages, and its healthy growth prior to the Great Recession helped jobs from moving overseas. It is easier for companies to keep production in the U.S. and pay higher wages if workers are more productive.

While higher productivity may mean that companies can produce goods with fewer workers, that’s no reason to lament its growth. U.S. manufacturing jobs support myriad other jobs — in logistics, marketing, sales, administration and a host of other areas — that pay as well as or better than manufacturing. Higher productivity creates lots of jobs — it’s just that not all of those jobs actually entail doing manufacturing work.

However, in the last decade, manufacturing productivity growth has fallen substantially, and since the end of the Great Recession has been well below the average of the prior 20 years. This decline has contributed to sluggish wage growth and there is evidence that the increasing congestion on our roads, ports and railroads has had something to do with the decline.

We decided to see if we could find evidence that congestion is crimping productivity growth and so compiled data measuring road congestion across the country along with data on manufacturing sector productivity to construct a simple model estimating the effect congestion has on manufacturing productivity.

The data — which we discuss in a study published last week by Bloomberg BNA — reveal a significant relationship between the two: As congestion increased, manufacturing productivity fell, which in turn led to lower growth and income. We estimate that in 2015 alone, the cost to the economy of our substandard infrastructure exceeds $100 billion. We believe this link constitutes the strongest argument for expanding our investment in transportation infrastructure.

Attempting to balance the budget by economizing on infrastructure spending is the epitome of being penny wise but pound foolish. Having better roads, bridges and ports would make U.S. manufacturers more competitive, boost wages and create jobs throughout the economy that go well beyond the people hired to actually build the infrastructure.

Brannon is president of Capital Policy Analytics, a consulting firm in Washington. Gorman is professor of business analytics at the University of Dayton.