As we know, one of the things the president will call for tonight is more infrastructure spending. We have heard many times that infrastructure spending, in one form or another, is the key to growth and job creation — and, in the president’s defense, he certainly isn’t the only one who refers to stimulus and government spending as “investing” in infrastructure.
No one disputes that American public works need improving, and economists have long recognized the value of infrastructure. Roads, bridges, airports, and canals are the conduits through which goods are exchanged. However, whatever its merits, infrastructure spending is unlikely to provide much of a stimulus — and it certainly won’t provide the boost that the president will promise the American people tonight.
For one thing, even though Mark Zandi claims that the bang for the buck is significant when the government spends $1 on infrastructure ($1.44 in growth), that’s just his opinion. The reality is that economists are far from having reached a consensus on what the actual return on infrastructure spending is. As economists Eric Leeper, Todd Walker, and Shu-Chum Yang put it in a recent paper for the IMF: “Economists have offered an embarrassingly wide range of estimated multipliers.” Among respected economists, some find larger multipliers and some find negative ones. (Thanks Matt Mitchell for this great paper).
Second, according to Keynesian economists, for spending to be stimulative, it has to be timely, targeted, and temporary. Infrastructure spending isn’t any of that. That’s because infrastructure projects involve planning, bidding, contracting, construction, and evaluation. Only $28 billion of the $45 billion in DOT money included in the stimulus has been spent so far.
We know that the stimulus money wasn’t targeted toward the areas that were hit the most by the recession, but even if the funding were targeted, it still might not be stimulative. First, the same level of job poaching from existing jobs would have happened; construction workers tend to be highly specialized, and skilled workers rarely suffer from high unemployment. Many of the areas that were hardest hit by the recession are in decline because they have been producing goods and services that are not, and will never be, in great demand. The overall value added by improving their roads is probably a lot less than that of new infrastructure in growing areas that might have relatively little unemployment but do have great demand for more roads, schools, and other types of long-term infrastructure.
As for being temporary — which stimulus spending needs to be to work — what the president will propose tonight is likely to cost the American people money for a very long time.
Infrastructure spending tends to suffer from massive cost overruns, waste, fraud, and abuse. A comprehensive study examining 20 nations on five continents (“Underestimating Costs in Public Works Projects: Error or Lie?” by Bent Flyvbjerg, Mette K. Skamris Holm, and Søren L. Buhl) found that nine out of ten public-works projects come in over budget. Cost overruns routinely range from 50 to 100 percent of the original estimate. For rail, the average cost is 44.7 percent greater than the estimated cost at the time the decision was made. For bridges and tunnels, the equivalent figure is 33.8 percent, for roads 20.4 percent.
I should also add that I think it’s a mistake to assume that it is the role of the federal government to pay for roads and highway expansions. With very few exceptions, most roads, bridges, and even highways are local projects (state projects at most) by nature. The federal government shouldn’t have anything to do with them.
In fact, I would argue that taxpayers and consumers would be better off if these activities were privatized. And if states aren’t ready for privatization, they can do what Indiana did a few years back when it leased its main highways to a private company for $4 billion. The state was $4 billion richer, and it was still the owner of the highway. Consumers in Indiana were better off, because the deal saved money. Experiences in other countries have also shown that privatization leads to innovation and reduced congestion. (I really like this paper by Randy O’Toole on these issues.)
Spending more on infrastructure right now, and expecting miracles from it, is a very risky bet.
Here's my interpretation of the CBO methodology for estimating jobs saved / created by the stimulus:
1. Assume a value for jobs per dollar expended, this value is J/$ = S.
I use the variable S since this is speculative.
2. Determine the amount of money spent, B.
I use the variable B since this is Billions of dollars.
3. Divide the expenditure by the assumed value of jobs per dollar: jobs = B/S
And there you have it, complete B/S.
Reply to this commentLinkReport AbuseVeronique,
Re: this Washington Post essay by Peter Fisher:
External Link
Which contains this common but fallacious argument:
"This should take the form of more genuine, direct investment in roads, bridges, railways, ports and other lasting infrastructure that will speed our products to global markets."
Which only makes sense if America's transportation infrastructure were a limiting factor in U.S. competitiveness. Which of course it isn't.
U.S. economic problems extend way beyond its ability to move goods from point A to point B. Infrastructure "investments" won't make a dime's worth of difference in affecting the trade deficit.
P.S. The fact that Fisher attended Harvard accounts for his naïveté.
Reply to this commentLinkReport AbuseWhen people regularly spend 3-5 In traffic commuting in the most congested metropolitan areas, America's infrastructure certainly affects productivity nd competiveness.
Reply to this commentLinkReport AbuseIndeed roads are mostly state and local projects, and counter-intuitively this is true even of Interstates. When I grew up in (ok, ok, I know, I'm over it honest) Beverly Hills, we used to drive visitors to our house from LAX via a road that breached the BH-LA border where quite literally in synch with the Beverly Hills City Limits sign the asphalt suddenly got newer, smoother, and better-maintained. It was like a kind of road department Berlin Wall. I also have driven cross country on the Interstate system, and the dividing line in road repair as you drive, for one example, from well-maintained Kansas into potholed Colorado on I-70 is palpable. The ultimate Libertarian position, of course, would be that states or cities who fail to keep bridges from falling down would experience (a) economic hardships re. transport and communication and (b) higher insurance premiums as people and property were damaged by those roads and thus (c) electorates who'd vote for the road-fixers and against the bums who let them get that way. I'm not so sure this issue is that high on anyone's priority list in the voting booth...which is, of course, the point. It isn't, pax the endless shovel-able Obama "plans," about the roads but about the money. He wants to give it to construction union workers, the rest of us want to save it so we can work at anything at all. It is worth noting that the WPA and other FDR make-work programs, whether you believe they helped or not, were not unionized nor tied to union wage minimums. Funny how far from the "true faith" of Progressivism the Obama folks have strayed in some areas when their "army" of Hoffa-thugs is concerned...or not so funny, perhaps.
Reply to this commentLinkReport AbuseI agree that such spending has little stimulative effect, if any. But it sure doesn't hurt as much as nearly anything else spent in the previous stimulus attempts. At the very least, something tangible and useful is left behind. Unfortunately, very little was actualy spent on infrastructure before. Even as a conservative, I'd love to see some money spent here if this were the only new spending proposed. There are legitimate needs and at the moment the world is willing to lend us money at 3% over 30 years (mysteriously so). The trouble is we're all rightfully skeptical about what the money would be spent on, such as 500+ million dollar loans to now bankrupt "green" companies.
Reply to this commentLinkReport AbuseI'd like to add I'd also prefer local projects be largely funded locally. The advantages are numerous. There are two problems though to keep in mind. One is the fact that so much money is now sent to the federal government, it is difficult for more local governments to properly fund themselves without getting some of that money back. (Solution, send less in the first place.) Also, most projects are not really entirely local. A road that traverses a few counties shouldn't become unusable because a bridge in one of them is left to fall into disrepair.
Reply to this commentLinkReport AbuseWell, there's that whole "Border Fence" infrastructure project that Congress approved all those years ago. Mysteriously, no one's in any apparent rush to put civil engineers and construction crews to work building that one.
Reply to this commentLinkReport AbuseBuilding new infra-structure in areas that are suffering economic decline is counter-intuitive if your intent is to increase productivity. Since infra-structure is fixed, except when you don't maintain it, an area that is declining, by definition needs less infra-structure than it did the year before.
Reply to this commentLinkReport AbuseWhere infra-structure needs to be added, are those areas that are growing economically.
So if you put infra-structure where it is needed, then infra-structure expansion cannot be counter-cyclical in nature.
Even if we could figure out and agree on a value for the economic multiplier of infra-structure construction, that multiplier will not be constant over time.
Turning a cow path into a paved two lane, is going to have a greater multiplier than turning that same two lane into a 4 lane.
Reply to this commentLinkReport AbuseTurning a 8 lane into a 10 lane has even less of a multiplier.
And building a bridge to nowhere has a much lower multiplier than expanding a busy highway. But any infastructure program will be driven by which legislators have seniority and which unions donate the most to Obama rather than any economic criteria.
Reply to this commentLinkReport Abuse"However, whatever its merits, infrastructure spending is unlikely to provide much of a stimulus — and it certainly won’t provide the boost that the president will promise the American people tonight."
I disagree, constitutionally and historically, with Ms. de Rugy about whether it is proper for the federal government to build and maintain "roads and highway expansions". I don't blame her for this - she's not an American and I don't expect her to be familiar with American history (e.g., 1 Stat. 53, 1 Stat. 232) or with the Constitution (e.g., Article I, Section 8, Clause 7, re "post offices and post roads").
But on the larger point - re "economic stimulus" - I wonder what I've wondered since George W. Bush and Barack Obama used "stimulus" in response to the 2001 and 2007-09 recessions: whether it makes more sense to throw the word "stimulus" away (since it requires that you be able to predict what people will do with the money you pay them to build whatever you're building) and instead simply to be direct: (1) we need to build and maintain federal infrastructure (and I'm entirely sympathetic to Ms. de Rugy's argument about what constitutes "federal" v. "state" infrastructure); (2) right now, with unemployment high, we can do it a bit more cheaply than when unemployment is low and so, we should.
Doing this would have the salutary effects of: (a) building and fixing things that need to be built and fixed by the federal government; and (b) employing Americans. But it doesn't promise anything else.
I always thought that President Obama would have been markedly better-off never uttering the word "stimulus", vetoing the first "stimulus" bill and instead asking Congress to pass a series of discrete bills authorizing the spending (and even borrowing) of money to do stuff that needed doing - whether the public would have been more persuaded by a series of laws that each appeared to have the government spending or borrowing money for things that the public thought ought to be done (and that promised nothing else), than to have one big, giant opaque bill that promised that all sorts of good things would happen that no one properly could predict would happen.
Reply to this commentLinkReport AbuseOne of my problems with infrastructure spending as a "stimulus" is that, as recent history has proven, shovel ready they aren't. Consider right of way issues, EPA studies, etc.
Meanwhile, our Air Force Pilots are flying 50 year old bombers and 30 year old fighters. Our soldiers and marines have HUMVEE's worn out by ten years of war. Are the blueprints for those gone? Are the assembly lines incapable of being reopened?
Cut the garbage projects out of our highway programs and let things progress as usual, meanwhile, jobs can be increased if we restock our military pantry.
Reply to this commentLinkReport AbuseRegarding bombers and fighters.
Reply to this commentLinkReport AbuseWhile the blue prints most likely do still exist. The machine tools needed to construct the parts needed in those platforms are very unlikely to still exist. Beyond that, the skilled technicians needed to operate the machines retired years ago.
The Republicans should make this offer: we'll go along with a certain amount of infrastructure spending (not necessarily what Obama asked for) if the Democrats will agree to repeal the Davis-Bacon Act.
Reply to this commentLinkReport AbuseThat Act is a terrible deal for taxpayers, and even with unemployment high will hold how much bridge for the buck you can get to a figure far below what a competitive market would deliver.
The Davis-Bacon Act is yet another way to channel taxpayer money to Democratic campaign coffers.
Brilliant, Veronique! Keep up all your excellent work. The privatization of roads is a subject that will become increasingly salient over the coming years, and we should be having the conversation well in advance so that we can prepare to implement privatization as circumstances begin to dictate.
Reply to this commentLinkReport AbuseEntirely beside the point.
Construction jobs are union jobs. Obama needs union support to get reelected.
End of story!
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