The Dilemma - Why investments Must Be Boosted But Also Why Society May Not Be Able to Afford It

"It's a slightly old-fashioned and perhaps also a somewhat bourgeois way of looking at it. I believe that we in Denmark can invest us out of the crisis we are in at present." Mette Frederiksen, Danish Prime Minister

You know society is in trouble when the Prime Minister of your country stands up and says something along the lines of “of course we can afford to take on more debt – you are old-fashioned if you think otherwise”. That is roughly what the Prime Minister of Denmark, Mette Frederiksen, said a few weeks ago, and that is the conclusion a classically trained economist like me came to when she uttered those words, but could she actually be on to something? Or is it just another case of a political leader in the Western world saying what many are thinking, i.e. that, if Japan can get away with all that government debt, why can’t we?

The issues at heart

As we all know, the global infrastructure is far from perfect, although it is clearly more dilapidated in some countries than in others. A simple example is electricity grid reliability, which is one of the most important productivity agents in the modern world. Without a reliable electricity grid, there are many things we can’t do these days, such as working from home during a pandemic. I have referred to the poor US electricity grid before, and why it is to blame for many of the big US wildfires over the past few years but, as you can see in Exhibit 1, the USA is far from the only OECD country suffering from a sub-optimal electricity grid.

Exhibit 1: Electric grid reliability by OECD country (7=best)
Source: JP Morgan Asset Management

Investments in the electricity grid account for only a modest share of overall infrastructure spending, though. In the USA, it is about 20%, as you can see in Exhibit 2 below. By far the biggest item over there is the spending that goes towards the transportation infrastructure. As you can see, between roads, railroads and airports, transportation accounts for over half of total infrastructure spending in the USA. Unfortunately, I don’t have data from any other countries so wouldn’t know if those numbers are meaningfully different elsewhere.

Exhibit 2: US public infrastructure needs, 2016-2025
Source: JP Morgan Asset Management

You may have noted, as I immediately did, that spending on the digital infrastructure is not even included in Exhibit 2 and, as we have all learned over the past 12 months, having a robust digital infrastructure is critical these days. There may be one or two readers who will disagree with what I am about to say, and I should point out that I am biased, as I live in a town (only 30 miles from Trafalgar Square) where the digital infrastructure is rather poor. I feel quite strongly, though, that the pandemic should be a lesson to the political elite everywhere that the digital infrastructure is not yet good enough, although it is much better in some countries than in others with the UK firmly in the ”other” category.

The desperate need for upgrades

This could end up being a very long letter unless I limit myself. The list of things to modernise and improve in society is so worryingly long that a thorough review of the topic could turn this letter into a 50-page monster, and I shall save you from that. Let me instead give you a few examples – from the US and the UK respectively. The US first.