Volatility makes it hard to meet goals. Whether due to extreme weather, changing political environments, health scares, technological hacks or financially driven uncertainty, resources spent to calm things down can’t be spent on developing products, improving life in general or physical infrastructure that aids future growth. The invisible hand of the free market works best if the underlying system accounts for all inputs and outputs. That seemingly does not occur today, where central planners pick short-term winners and the accounting framework appears to ignore the impact of extracting limited and sometimes harmful resources like fossil fuels, minerals and water.
In previous research,[1] I made an argument that economic growth, as measured by the change in gross domestic product (GDP), is expected to slow due to a number of headwinds. In this article, I will argue that supporting infrastructure, defined broadly, can positively impact growth because it makes conditions more stable. Stability can be driven by actions tied to climatic, economic or political risks. Championing infrastructure generates a world conducive to economic growth. Building from the Emerging Risk Survey[2] categories, this article will address ways that infrastructure can support economic growth from the viewpoint of environmental, financial, geopolitical, societal and technological factors.
What is Soft Infrastructure?
Infrastructure is typically defined as transportation features like bridges, roads and airports, communication and power grids. The basis for stable growth in today’s economy needs more than that, including education, technology, a healthy population, a healthy financial environment and broadly distributed wealth. This is known as soft infrastructure.
In this context, next we will consider risk categories and how they threaten stability or support a healthy growth infrastructure.
Environmental
For the human race, global temperatures since the last ice age (the age of agriculture) seem like a good proxy for the benefits of long-term stability. Notably, the period since the start of the Industrial Revolution has broken this stability. Temperatures have increased since greenhouse gases like carbon dioxide broke the carbon cycle equilibrium as they were added to the atmosphere and oceans. This was also a period of strong economic growth, but future stability was the price. A debt appears to have been placed on future generations.
Temperatures are not increasing everywhere consistently, as polar amplification reflects changes near the poles that are four times those at the equator. This is due to melting ice and permafrost creating feedback loops that speed up temperature rise due to the albedo effect and methane release, respectively.
Environmental instability stresses physical infrastructure and distracts planners from soft infrastructure and economic growth initiatives.
Financial
Volatility is cyclical in the financial world, often depending on behavioral excesses rather than physical realities. Stability of a capitalistic society depends on the rule of law, private property rights, and the right to pursue profits (including creative destruction). Fiscal dominance, where central banks prioritize financing deficits rather than their inflation and full employment mandates, is a current concern as are supply chains and volatile currencies.
John Maynard Keynes, the 20th-century British economist, argued that deficits are beneficial to boost the economy when there is a downturn, but today countries around the world have built up large debts even during periods of strong economic growth, with many currently exceeding what Reinhart/Rogoff[3] identified as worrying levels.
Fiat currencies allow governments to print money without restriction, negating the discipline of forced balanced budgets. This results in leverage that must be paid back by future generations.
A healthy financial system, with wealth distribution, allows movement on the socioeconomic ladder for those who work hard and provides conditions for the American Dream. A healthy public and private banking system allows money to flow to areas where it adds the most value. Credit offered by non-banks created risk exposures in the 1920s that helped lead to a market collapse and the Great Depression.[4] Private credit today is at its highest level since then, increasing fragility. Leverage acts as a multiplier in both directions, increasing growth during good times but potentially crashing a slowing economy.
Insurance provides vital services using the law of large numbers to spread risk, but regulators have recently expressed concerns about ownership structures and investment strategies.[5] As the climate warms, assumptions set using historical data are no longer predictive due to increased exposure to extreme weather events. These unknown knowns create uncertainty such that insurers cannot sustainably compete in some markets. Premiums set to levels that are equivalent to risk exposures will nudge behavior toward a stable market. Public insurance schemes that cover earthquake and flood risk provide stability when priced sustainably, but can make the system fragile if the government abandons the market.
Financial infrastructure enhances stability for economic growth, but it is very fragile. Volatility, leverage and aggressive strategies increase growth challenges.
Geopolitical
A world without conflict enhances stability. It is easier to run a budget surplus to offset prior deficits; money doesn’t have to be spent on wars, so health and education are funded, and policing worries less about terrorism. Trade encourages dialogue. Authoritarian states often temporarily succeed before the people being governed decide a change is necessary (e.g., Italy in WW2) or a war is lost (e.g., Japan). The countries then enter a period of dependence on others, and internal control is reduced or lost, with long-term growth impacts.
Countries lose their long-term perspective when geopolitical stress increases. Trade usually improves infrastructure, but we have seen where an overreliance on supply chains can lead to new challenges.
Societal
Management of demographics, education, health care delivery, infectious diseases and the regulatory framework all can be managed to enhance stability. First among these, in the United States and other developed countries, is demographics. We are an aging society dependent on immigration to maintain total population and the labor force.[6] Having a plan to manage these shortfalls with the excesses of population growth in sub-Saharan Africa will expand global economic growth.
Mathematically, GDP is the product of population and GDP per person. Another way to think of it is the number of people working in jobs that grow GDP times the average GDP for those people. Jobs that support production do not directly contribute to GDP but are important to maintain stability if a balance is to be maintained, like workers in health care, safety, defense, and even some finance jobs.
Higher socioeconomic status is correlated with longevity, with some groups enjoying life spans on average more than five years greater than those less fortunate. Longevity increases have been tied to sanitation, clean water and health care and dental solutions like surgeries, as well as vaccines and antiviral drugs. The scientific process is currently under attack, with pandemic ramifications for some infectious diseases that were thought to be eradicated. Health research is especially important for stability as temperatures rise and conditions change, with vector borne illnesses and antimicrobial resistance driving the need for new techniques for a healthy population.
Keeping populations healthy and productive is a key component when infrastructure supports economic growth. Avoiding constant change, and encouraging stability, sets up success.
Technological
Advances in technology like artificial intelligence may add to economic growth, but also utilize energy resources in ways that create global warming challenges. These energy costs need to be considered as part of the cost-benefit analysis—do data centers and other uses of resources create value when all its costs are included? Naturally occurring energy sources like wind and solar will need to be connected via an updated power grid to users.
Building a population that can use and develop technology requires a robust education system that provides a knowledge base for everyone. This likely means supporting some children with school starting prior to kindergarten and ensuring that all places of learning have basic infrastructure, including internet access and food security.
Infrastructure built to support lower socioeconomic classes is a win-win for economic growth.
Across Risk Categories
The financial system ties together many of these risk categories. Deficits can be justified when a current investment increases the future value of the economy by supporting basic levels of transportation, learning and health. Stable growth requires critical service levels throughout the population. Today, there are grocery, banking and health deserts in rural areas and where lower socioeconomic classes live, which reduce economic growth.
Insurers need sustainable assumptions across consistent pricing time horizons. This means that insurance policies should not extend beyond a period where asset assumptions can be set with a large degree of confidence. High leverage, demographics and environmental changes all shorten this period and increase credit defaults. Regulatory filings should incorporate these issues. Insurers are experts in applying the law of large numbers to diversifiable risks, less so on systemic risks (e.g., equity risk).
The Earth’s ecosystem is susceptible to a concept known as the tragedy of the commons, where individual incentives are not aligned with the collective good. An early example was sheep overgrazing on a town’s common ground but, in recent examples, overfishing has depleted stocks, fossil fuel extraction has led to pollution and global warming, and the extraction of water from aquifers is leading to depletion. Adding a fee for water and grazing, collecting a carbon tax, or regulating maximum resource extraction would better align with Adam Smith’s invisible hand.
Farming is another activity that crosses many of these categories. Technology leads to efficiency but also to monoculture farming, making crops susceptible to viruses that wipe out the entire region’s crop. Farming itself is a primary source of greenhouse gases. Nitrates are strong fertilizers, but also lead to high rates of cancer. Changing trade and international aid policy, along with uncertain fiscal and monetary policy, challenge the long planning cycle needed to complete a harvest. Wars quickly change the economics of areas in the conflict, as well as those who are used to trading for agricultural products, as we have seen in Ukraine.
Economic growth is complex with risk interactions impacting infrastructure often in unexpected or unintended ways.
Impact on the Actuarial Profession
What gets measured gets managed. Across all these categories it is important to have unbiased statistics that are consistent across time so adjustments, often tied to mean reversion, can be made. Actuaries have a role as this data evolves, both as an impartial arbiter of statistics and as a strategic planner with foresight who uses long time horizons to make decisions.
Actuaries have a role to play for each of these risk categories, but if we aren’t perceived as adding value, then we may be replaced by artificial intelligence (AI) or adjacent professions. You may not agree with me, but I believe the goal is to have a balanced discussion so decisions are made proactively, consistently and based on a planning process. Relying on regulatory requirements to keep our jobs could make us redundant. We must add value. Listen to others, but have your own opinions and make them heard. Include AI in the discussion—solutions that include it in the process, but are not reliant on it, might be better than those that exclude AI.
By taking actions and understanding that stability is key to continuing economic growth, we can leave an ecosystem that future generations will use to build even greater things. Infrastructure that is built for the long run is a key component of successful strategic risk management that supports this growth through stability.
This article is provided for informational and educational purposes only. Neither the Society of Actuaries nor the respective authors’ employers make any endorsement, representation or guarantee with regard to any content, and disclaim any liability in connection with the use or misuse of any information provided herein. This article should not be construed as professional or financial advice. Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
Max Rudolph, FSA, CFA, CERA, is a private investor and futurist actuary. He instructs students about enterprise risk management at Creighton University and the University of Nebraska. He can be reached at max.rudolph@rudolph-financial.com.
Endnotes
[1] Rudolph, Max J. Managing GDP Growth. Risks & Rewards. December 2024
[4] Higgins, Mark. Investing in U.S. Financial History: Understanding the Past to Forecast the Future. Greenleaf Book Group Press. 2024.