How to shock the U.S. economy back to life

During the Great Recession, U.S. gross domestic production -- the nation's total output of goods and services -- dropped below the trend rate of growth that prevailed before the collapse. More than five years into the recovery, the economy shows no signs of returning to that prior rate of growth.

Instead, as the following graph shows, although the economy is growing at roughly the same rate as before the crisis, the growth is from a much lower level of output:

Is this the "new normal" we hear so much about? Do Americans have no choice but to accept the lower level of output, and the lower level of employment and living standards that comes with it, or is there something we can do to push the economy back to the pre-Great Recession trend?

One solution is to increase government spending on America's roads, bridges and other infrastructure. But does infrastructure spending raise the level of GDP and employment while at the same time enhancing the prospects for future growth? Or does it simply crowd out other types of private sector spending so that, all told, there is little or no net stimulus?

Recent research from economists at the Federal Reserve Bank of San Francisco suggests that infrastructure spending on highways enacted with the stimulus package just after President Obama took office in 2009 might be just what the doctors ordered.

The researchers conclude that such spending "had a significantly positive effect on economic activity." Examining the broader economic impact of highway spending connected to the stimulus package, the researchers found that:

... states increased their highway spending more than dollar-for-dollar in answer to the federal stimulus authorized by the American Recovery and Reinvestment Act. Without these extra funds, we estimate that national spending on highways would have declined roughly 20 percent between 2008 and 2011, on par with the decline in state tax revenues. Given the large multiplier effect from infrastructure spending that past studies have documented, the additional spending on highways likely had a significantly positive effect on economic activity.

With interest rates still at rock bottom so that borrowing to pay for infrastructure is as cheap as it gets, and with so many idle resources -- the large number of unemployed in particular -- and with output running so far below the previous trend, it is an opportune time to undertake infrastructure projects. Even if the spending on infrastructure doesn't fully resolve the problem shown in the graph above and return us to a higher trend rate of growth, it will at least begin to overcome our large infrastructure deficit and provide employment for households still struggling to recover from the Great Recession.

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