The Corner

Stiglitz Wants More Stimulus

I find statements like this one very surprising:

“What we really need is a second round of stimulus,” Stiglitz said in an interview on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays. “If you gave money to the states they would be able to keep those employees; those employees would then be able to spend money,” which would generate more confidence and investment by companies.

These were the arguments made a year and a half ago when the administration was pushing the stimulus, yet the fact that the promises didn’t materialize hasn’t pushed Stiglitz to revise his expectations. The fact that $814 billion in spending didn’t generate more confidence doesn’t seem to bother him either. At least he has made the goal of the stimulus clear: keep public-sector employees employed.

Earlier on, Stiglitz also commented that for a second round of stimulus to work, it would need to be bigger, the spending would need to take place fast, and it would have to be designed better than it was in the first place. Better designed means much, much, much more infrastructure spending that we had in the first stimulus. Stiglitz in August:

“It’s absolutely clear that you need a second round of stimulus,” Stiglitz said. “It needs to be better designed. It needs to be focused more on returns on investment, education, infrastructure, technology. And if you do those kinds of high- powered investments, the long-term national debt will be actually lower and the growth in the future will be higher.”

Here’s what I don’t understand: How will he get a lot of bang for his buck if the money is spent on education? So far, the stimulus money in education has been used to pay teachers. From what I read, this is not the kind of spending that will increase our human capital in a way that economists consider productive.

Also, how can the next round of stimulus be big, fast, and spent on infrastructure in particular? According to CBO director Doug Elmendorf, infrastructure spending isn’t fast at all. As he explains, if you allocate $1 to highway spending, only 27 cents will have been spent within one year. (See his paper “Implementation Lags of Fiscal Policy,” which he gave at the IMF’s conference on fiscal policy.) That means that if Obama gets the $50 billion he wants to spend on infrastructure, less than $14 billion will be spent after a year. I doubt that Stiglitz would see this as stimulative.

Considering how slowly this spending take place, I wonder how much the president should get to spend on infrastructure before it has any effects. Remember, $100 billion means less than $28 billion spent, $200 billion means less than $50 billion actually spent in a year, $400 billion means $108 billion spent in a year.

The bottom line is that it doesn’t seem to me that infrastructure spending is the way to go to get lots of money into the economy quickly.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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