Infrastructure in a Stimulus Package-Becker

Last week we blogged on how much stimulus to GDP and employment might be expected from a version of the Obama fiscal stimulus plan. I concluded that the amount of stimulus from the spending package would be far less than estimated in a study by the incoming Chairperson of the Council of Economic Advisers ("The Job Impact of the American Recovery and Reinvestment Plan", by Christina Romer and Jared Bernstein, January 9, 2009). The activities stimulated by the package to a large extent would draw labor and capital away from other productive activities. In addition, the government programs were unlikely to be as well planned as the displaced private uses of these resources. The stimulus package's plans for spending on "infrastructure" clearly illustrate both concerns. I put this word in quotation marks because of the many definitions of what is included in the concept of infrastructure. Promoters of various stimulus packages- such as the just released House Committee on Appropriations $825 billion stimulus plan- include in infrastructure not only the traditional categories of roads, highways, harbors, and airports. They also include spending on broadband, school buildings, computers for school children, modern technologies, research and development, converter boxes for the transition to digital TV, phone service to rural areas, sewage treatment plants, computerized medical records and other health expenditures, and many other activities as well. Some of this infrastructure spending may be very worthwhile-I return to this issue a bit later- but however merited, it is difficult to believe that they would provide much of a stimulus to the economy. Expansion of the health sector, for example, will add jobs to this sector, but it will do this mainly by drawing people into the health care sector who are presently employed in jobs outside this sector. This is because unemployment rates among health care workers are quite low, and most of the unemployed who had worked in construction, finance, or manufacturing are unlikely to qualify as health care workers without considerable additional training. This same conclusion applies to spending on expanding broadband, to make the energy used greener, to encourage new technologies and more research, and to improve teaching. An analysis by Forbes publications of where most jobs will be created singles out engineering, accounting, nursing, and information technology, along with construction managers, computer-aided drafting specialists, and project managers. Unemployment rates among most of these specialists are not high. The rebuilding of "crumbling roads, bridges, and schools" highlighted by in various speeches by President Obama is likely to make greater use of unemployed workers in the construction sector. However, such spending will be a small fraction of the total stimulus package, and it is not easy for workers who helped build residential housing to shift to building highways. A second crucial issue relates not to the amount of new output and employment created by the stimulus, but to the efficiency of the government spending. Efficiency is not likely to be high partly because of the fundamental conflict between the goal of stimulating employment and output in order to reduce the severity of the recession, and the goal of concentrating infrastructure spending on projects that add a lot of value to the economy. Stimulating the economy when employment is falling requires rapid spending of this huge stimulus package, but it is impossible for either the private or public sectors to spend effectively a large amount in a short time period since good spending takes a lot of planning time. Putting new infrastructure spending in depressed areas like Detroit might have a big stimulating effect since infrastructure building projects in these areas can utilize some of the considerable unemployed resources there. However, many of these areas are also declining because they have been producing goods and services that are not in great demand, and will not be in demand in the future. Therefore, the overall value added by improving their roads and other infrastructure is likely to be a lot less than if the new infrastructure were located 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. Of course, at some point new taxes in some form have to be collected to pay for infrastructure and other stimulus spending. The sizable adverse effects on incentives of these taxes also have to be weighted against any value produced by the infrastructure (and other) stimulus spending. The likelihood that such a rapid and large public spending program will be of low efficiency is compounded by political realities. Groups that have lots of political clout with Congress will get a disproportionate amount of the spending with only limited regard for the merits of the spending they advocate compared to alternative ways to spend the stimulus. The politically influential will also redefine various projects so that they can fall under the "infrastructure" rubric. A report called Ready to Go by the U.S. Conference of Mayors lists $73 billion worth of projects that they claim could be begun quickly. These projects include senior citizen centers, recreation facilities, and much other expenditure that are really private consumption items, many of dubious value, that the mayors call infrastructure spending. Recessions would be a good time to increase infrastructure spending only if these projects can mainly utilize unemployed resources. This does not seem to be the case in most of the so-called infrastructure spending proposed under various stimulus plans.

Comments

[Sheafrodare]

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[atteryncaribe]

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[David Heigham]

Calling immediate fiscal stimuls spending "infrastructure" is public relations, not econmic management. What you can usefully do quickly is limited to maintenance of and marginal expansion of the public sector capital stock. Some of that will be waste: every large organisation makes mistakes and wastes some resources when expanding its capital stock. Government has incentives to make more mistakes than most; so we can assume that it will make more mistakes. But, by and large, they will be the same types and order of mistakes as would have been made in Government's 'normal' spending programme. They are not extra costs of a stimulus programme. The virtue of fitting all this minor stuff (the Mayos' program will be full of it) in a stimulus package is that these minor things will tend to get done where and when local pockets of suitable resources are unemployed. Some of the places where the New Deal dug ditches, they had to be filled in again. Other ditches did nothing much. But a good many are still contributing to welfare. I doubt if any of them competed for otherwise employed resources.

The projects which worry me are the big, complicated, potentially very useful things that people want to do in a hurry to cure the recession. Crash projects crash; and generate really major wastes of resources. For example, the USA has needed widespread, radical improvements to its power grid for decades.If we try to do all that in a sudden rush now, not only will it compete for resources which we expect to still be scarce, we can confidently expect that it will also go over budget, over schedule and fail to deliver a good many of the intended benefits.

[David Kendall]

Just taking the fact that depressions signal too much production and too little consumption, might this in part be due to the lopsided taxation of income compared with capital gains, dividends, and interest.

I don't have an ax to grind here. I would just appreciate some analysis of what changes in the structure of taxation can do to help or hurt the situation.

[Kevin Cabral]

In addition to "bad infrastructure" there's an awful lot in the stimulus that doesn't look at all like infrastructure. See the full text here:

http://www.washingtonwatch.com/blog/2009/01/18/stimulus-bill-text/

For instance:

- $1 billion to the Bureau of the Census

- 113% increase in food stamps benefits. This is about $40 billion additional at 2008 participation levels (which will grow)

- $650 million for coupons for digital-to-analog TV converters.

- $2.5 billion for general National Science Foundation research. (50% budget increase)

- $1.2 billion for "youth activities" including summer jobs for youth. $0.75 billion for special "energy efficiency career training" whatever that means.

- $1 billion for "low cost energy assistance" payments

I'd venture to guess that about $200 billion of the stimulus are pure transfer payments especially when you start to count loan subsidies like public and rural Section 502 housing, small business administration.

[Jack]

David: Well you seem pretty close in my opinion, in that flat median income for two decades is bond to lead to a flat economy; but it looks like lagging wages and FAR too few participating in the wealth derived from a doubling of productivity is a bigger problem than tax policy........ even though it does seem counter productive to water the wet parts of the lawn.

[sujat kamal]

1. Infrastructure within the agriculture sector might be a good choice for increased spending especially if rise in food prices is traceable to such deficiencies. Also income generated in agriculture jas higher multiplier effect and less crowding out effect.

2.Planning time can be reduced if there are identified large well developed projects which had been shelved due to funding constraints.

3.Given these recessionary times, it might be best to give higher priority to employment generation( as it will do more increase business confidence i think) and resulting spending will decide where the output should come from as in market economy.

4.if an additional reason for recssion is bank lending being severely restricted due to lending fears, then government could give guarantee bank loans if borrowers meet certain performance criteria ( with penalty for banks for violation of norms- thus checking moral hazard problem). This will direct credit to good pvt investment projects starve due to credit constraints.This will reduce burden on stimulus package and also direct credit already planned large projects and manufacturing activities

5.if present production structure has been due to years of overspending by groups whose pv income is less than high income groups there is a case for structural change which can only be addressed by reforms

[Anonymous]

دردشة صوتية

[Anonymous]

فيديو بنت

[rebuilder1]

We think infrastructure investment is getting a bad rap in the recovery package review. The number one goal of the recovery effort should be to create sustainable jobs. The House Transportation and Infrastructure Committee challenged the states to show that they could move quickly with "use it or lose it" restrictions on the highway and transit allocations. Most states have responded with lists of projects that can be in placed within 180 days. That's good job creation, with the highest "multiplier effect" of all the funding options. We think "use it or lose it" should also be applied to the federally administered spending programs - it's a good idea.

Governors are not leading the charge for infrastructure because they see an opportunity for bailout funds (Medicare cost-sharing, etc.) that will ease growing deficits. State deficit reductions contribute very little to long-term recovery.

Our project, www.rebuild-usa.org, highlights the important benefits that can come from infrastructure investment as a significant component of the recovery plan. As we see it, the short and long term benefits are worth the risk of the huge debt we're all incurring with this package.

[Bruce Skerry]

Here's an idea for the stimulus package - we have many, many recent college graduates who are carrying large student loans. These loans are preventing them from taking advantage of the hard work they have put in to receive graduate or post graduate degrees. Perhaps the fed could cover these loans on a one time only basis for recent graduates. This would no doubt free up significant monies that would directly stimulate the economy. Help give these youngsters a chance...

[Jeff]

NOW HERE IS A STIMULUS PACKAGE!!!!!!!

Let's assume on the low end of the spectrum that the bailout is going to total 5 trillion dollars. That is estimated low based on the money we've already used to bailout the banks, the money we're going to use to "stimulate the economy" and the future forecast of bailing out the banks, the autos and wallstreet.

Here is what that money could have done to help the actual people, in the meantime saving the banks and keeping the economy rolling.

$5,000,000,000,000.00 Bail Out Money

300,000,000.00 People In US

$16,666.67 Money Per Person
2.78 Average People Per Household

$46,333.33 Total Money Received Per Household

[Jeff]

NOW HERE IS A STIMULUS PACKAGE!!!!!

Let's assume on the low end of the spectrum that the bailout is going to total 5 trillion dollars. That is estimated low based on the money we've already used to bailout the banks, the money we're going to use to "stimulate the economy" and the future forecast of bailing out the banks, the autos and wallstreet.

Here is what that money could have done to help the actual people, in the meantime saving the banks and keeping the economy rolling.

$5,000,000,000,000.00 Bail Out Money

300,000,000.00 People In US

$16,666.67 Money Per Person
2.78 Average People Per Household

$46,333.33 Total Money Received Per Household

[John N. Ely, Ph.D.]

I agree with the concept of an economic stimulus, but I disagree with where the money is going to go. Economies are driven (and stimulated) by the amount of currency in the hands of people who exchange it for goods and services, the demand for which generates employment, putting more money into the hands of more people who exchange it, and generate demand, for more goods and services. I would suggest that the authors of this or any stimulus package closely examine two examples of successful economic development: the Native American Tribes and Nations and the Model Cities projects of the late 1960's and early 1970's. They succeeded for the same reason: they gave the money to the community and gave the community, rather than governmental entities, soveirgnty over the funds. The communities, rather than government, decided what services and goods they wished to produce, trained and hired their own members to do it, and generated their own internal economies which then interacted with the economy as a whole to produce an exchange for goods and services obtained from outside. A simple way to put it: trickle-down doesn't work; trickle-up does. Get the money into the hands of the communities and, ultimately, the people and the economy will, over time, repair itself.

[Anonymous]

دردشة صوتية

[Keith Sprankle]

Build a road and after the project is done the job is gone. Yes our roads need work, but they do not create new income.

Build a ship, and you create jobs for thousands which will last for twenty years. You bring money back into this country through sales to overseas travelers.

The icing on the cake, Sea, Sun N Fun Cruise Lines is offering a plan to return the stimulus money back to the government within 10 years.

That would be responsible spending of taxpayers dollars, so our children are not left holding the bill.

[The Personal Finance Playbook]

I would make one point with regard to green energy. Making buildings more energy efficient will pay for itself over time. The earlier you make buildings "greener," the more money you will save. Not making buildings more energy efficient is costing us money.

[narly]

i agree Keith, but they not looking in the future, these corporations are for the dollar, and the dollar right now...

[1stN4most]

stimulus package, or no? that is the question... and i dont have an answer bc im on the fence about if im for it or not. i'm all for obama though... i trust what he does, so hopefully, change will happen with our economy

[comedyman21]

this economy keeps going down the drain.

[shaun]

Jobs! We need jobs!

[Jack]

David K suggests:

Build a road and after the project is done the job is gone. Yes our roads need work, but they do not create new income.

.......... Well not quite right. First there is as you mention the original income and then the secondary multiplier of about 4X the original amount. Then there are dividends to us all in terms of smoother, safer roads that are easier on our cars and trucks. We've a number of choke points that a recent article showed costing us billions in delays along with wasting fuel while standing still. We've so long delayed our highway maintenance that there are years of this work to be done.

Build a ship, and you create jobs for thousands which will last for twenty years. You bring money back into this country through sales to overseas travelers.

...........LONG ago, when we still had a shipbuilding industry it was one of my first jobs and one that paid well too. Even then other nations could build cargo ships much cheaper than we could in the US, so a deal was made: The navy subsidized most of our cargo ships with the caveat that in times of emergency the navy could take them over. That eventually went away, and not only were our ships built "over there" but they operate under foreign flag and are crewed by those of the cheapest possible venue.

"This cost us big time in both Gulf wars as in 1990 we were down to rust-buckets and not many of them, so have had to rely heavily of air support which is extremely costly compared to ocean transport. Ha! We FLY fuel to Iraq! Cruise ships are almost entirely foreign flag, even down to loading passengers for Alaska in Vancouver so as to duck the Jones Act mandate that US flagged vessels be used from port to port within the US.

What we end up with is US built tankers ONLY for the Alaska-West Coast trade....... the following shows we're up against, not only dirt cheap labor in a very labor intensive industry but government subsidies as well:

" A 2000 U.S. Coast Guard study predicts a serious shortfall in double-hulled tanker capacity beyond 2005 as single-hulled tankers are phased out. But most new tanker construction is going to South Korea or China where labor costs are much lower and national subsidies are higher.

Because of the Jones Act, double-hulled tankers for the domestic trade cost $100 million or more compared with about $35 million for a comparable vessel from a South Korean or Chinese shipyard.

The Jones Act passed in 1920 mandates all ships carrying cargo between U.S. ports be built in the United States and have a crew of U.S. citizens. There are two domestic single hull tankers operating on the Alaska-West Coast route. The tankers, owned by Houston-based SeaRiver Maritime Inc., will be phased out in 2009 and 2010.

We don't build tankers for international markets, said Cynthia Brown, president of the Washington, D.C.-based trade group the American Shipbuilders Association. The reason is that U.S. shipbuilders are not owned by the government, and we are not given huge subsidies to offset the price of our ships like Chinese shipbuilders."

Grim, eh?

[Jack]

There seems to me a lot of confusion as to what stimulus spending creates the best bang for the buck with many suggestions of just getting cash out to consumers of all levels.

That's probably not right in today's economy. At lower levels of income it will surely be spent and make the lines longer at Walmart for a few weeks as the dollars are shunted off to China, or off to the Saudis in the case of a few extra tanks of gas.

For leverage perhaps the $8,000 credit for first time home buyers is one of the best. It will either help lighten up the inventory of existing homes or trigger the construction of a new home in which case a few thousand down creates the jobs to build the entire house, typically followed by buying new appliances and furnishings; items that for the most part we still make, sell and service here.

Infrastructure spending, likewise has a good spurring bang, as the first expenditure goes largely to wages with say, 20% being taxed back, then, after the money is earned it is spent in the economy.

Further the "direct consumer" dollars do not fix up our infrastructure nor lead us into a new era of energy and energy conservation. Perhaps there's even an element here of being "grown ups" and tending to business for a while instead of just "going shopping?"

I post the following as I'll bet many here will be surprised to learn which types of government spending provides the best "bang".

First, let's hear from Mark Zandi, chief economist for Moody's economics..com. His testimony before Congress last month included this assessment of the "bang for buck" of assorted elements of the stimulus package.

Spending Increases
Temporary Increase in Food Stamps $1.73
Extending Unemployment Insurance Benefits $1.63
Increased Infrastructure Spending $1.59
General Aid to State Governments $1.38

Temporary Tax Cuts
Payroll Tax Holiday $1.28
Across the Board Tax Cut $1.03
Accelerated Depreciation $0.25

Permanent Tax Cuts
Extend Alternative Minimum Tax Patch $0.49
Make Dividend and Capital Gains Tax Cuts Permanent $0.38
Make Bush Income Tax Cuts Permanent $0.31
Cut in Corporate Tax Rate $0.30

Other Tax Cuts
Refundable Lump-Sum Tax Rebate $1.22
Nonrefundable Lump-Sum Tax Rebate $1.01

(Note "refundable" in this usage is that of paying a "tax cut" that may be beyond what the taxpayer owes, the extra "bang" is because money going to the lowest earners is spent most quickly.)

In a nutshell, the best stimulus involves giving money to the down-and-out. Cutting taxes for corporations and the rich provides much less oomph.

[Christian Debt Relief]

Good info. Thanks.

[TMNK]

I'm just a NOBODY, a street artist, but here's my creative opinion on the subject:
Its been said a picture is worth a thousand words. Cool, I'll share one and a little less than the other, as a NOBODY like me offers his opinion on the so-called STIMULUS PACKAGE: (see my painting on Flickr, PUSHERMAN)

i'm your mamma, i'm your daddy i'm that n%##a in the alley i'm your doctor, when in need want some coke, have some weed you know me, i'm your friend your main boy, thick and thin i'm your pusherman i'm your pusherman.- Curtis Mayfield
These are the lyrics from Curtis Mayfield's, 1972 hit Pusherman, from the Superfly soundtrack. It described an everyman, drug dealer, who understood what his people were craving and he, the pusherman was the dude with their fix.

Our nation is in a terrible recession, and our President says he has the fix for our economic woes. So he has moved with rapid speed during his first 100 days to push his stimulus package through to help the American people. And while I'm a big supporter of our President, quick fixes seldom do anything more than keep people strung out, more dependent on their pusher, man. Only time will tell if this was the right prescription. But even a nobody like me has to respect our President's hustle. He got that package off with the quickness. - TMNK