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

[Enzymn]

–û—á–µ–Ω—å –ø–æ–Ω—Ä–∞–≤–∏–ª–æ—Å—å, –¥–∞–∂–µ –Ω–µ –æ–∂–∏–¥–∞–ª–∞.

[michael webster]

I think that the any stimulus has to bring about a trade that probably would not happen outside of a crisis.

Here is my suggestion.

The Chinese government is expected to buy US Treasury Bills, to prop up their current holdings.

The Chinese cannot export goods to the US because nobody wants to buy crap anymore, and the Chinese in response produce even cheaper crap.

The Chinese don't have a regulatory system at their local levels worth crap and to institute such a system would cost a great deal of money, possibly something that could only be bought with US treasury bills.

Anybody see a deal here?

[blake]

I agree that the government should be careful to waste as little as they can, which, historically speaking seems unlikely. I think though that you underestimate how much of the economy is dictated by the government at the moment. In a choice between government spending and well regulated (so not health care, the military, banks, the stock market, schools or pretty much anything) private sector growth the private sector growth is likely to be more efficient, sustainable, and make people rich without them skimming off the government dime(agriculture atm). Fortunately in my opinion we aren't in such a position, both our private and our public sector are grossly mismanaged.
I think our country doesn't have to worry so much about where it's pulling the workers from, how about the unemployment rolls, and ya alot of them are probably going to need extensive retraining, are you suggesting that the government should subsidize their unmarketable skills to spare them the time and hassle of learning to do something useful?
This isn't a downturn brought about by a short term liquidity crisis, the liquidity crisis is a symptom, and the root causes need to be addressed in a long term sustainable fashion. Since the government also wants to help lower unemployment by tightening the labor market 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 and computerized medical records seems just what the doctor ordered (other than the converter boxes).
This is going to be ugly in the short haul and the long haul also. I have no idea what is going to end up happening to the deficit either, the government appears to be having no trouble borrowing cash at low interest rates, but how long can that last? How would the cost of the higher taxes to repay the debt compare with the nightmare of a debt holiday? Can you inflate it away? Ugly weirdness incoming, that's for sure.
On the bright side Obama utilized the web brilliantly in his campaign, there is some hope I think that he can use the internet to greatly increase government accountability, which is the main benefit the private sector has traditionally held as I see it.

[Ulceliidiose]

–±–æ–ª—å—à–æ–µ —Å–ø–∞—Å–∏–±–æ!–í–∑—è–ª–∞ —Å–µ–±–µ —Ç–æ–∂–µ-–ø—Ä–∏–≥–æ–¥–∏—Ç—Å—è.

[Kneexothet]

–±–æ–ª—å—à–æ–µ —Å–ø–∞—Å–∏–±–æ!–í–∑—è–ª–∞ —Å–µ–±–µ —Ç–æ–∂–µ-–ø—Ä–∏–≥–æ–¥–∏—Ç—Å—è.

[Kneexothet]

–±–æ–ª—å—à–æ–µ —Å–ø–∞—Å–∏–±–æ!–í–∑—è–ª–∞ —Å–µ–±–µ —Ç–æ–∂–µ-–ø—Ä–∏–≥–æ–¥–∏—Ç—Å—è.

[Infasymn]

–î–∞ —É–∂. –í —ç—Ç–æ–º –±–ª–æ–≥–µ —Ö–æ—Ç—å –∫–æ–º–º–µ–Ω—Ç–∞—Ç–æ—Ä—ã –Ω–æ—Ä–º–∞–ª—å–Ω—ã–µ.. –ê —Ç–æ –ø–∏—à—É—Ç –æ–±—ã—á–Ω–æ –≤ –∫–æ–º–º–µ–Ω—Ç–∞—Ä–∏–∏ –µ—Ä—É–Ω–¥—É –≤—Å—è–∫—É—é.

[Andrew]

On stimulus for Detroit, you write "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."

As a longtime resident of the Detroit area, I find this appalling on a moral level: we don't deserve help unless we can prove we're valuable? On an economic level, it's a classic Catch-22. Detroit does not deserve economic stimulus unless it produces things people want. On the other hand, Detroit is unlikely to attract newer, more innovative businesses unless it can address its crumbling infrastructure, high crime, failing schools, and urban blight. So where does that leave us?

[twojeanonse]

Nice to see so good informations. Very good blog.

[upholo]

–Ø –≤ –ø—Ä–∏–Ω—Ü–∏–ø–µ, –º–∞–ª–æ, —á—Ç–æ —Å–º—ã—Å–ª—é –≤ —ç—Ç–º –ø–æ—Å—Ç–µ, –Ω–æ –ø–æ—Å—Ç–∞—Ä–∞—é—Å—å –≤—Å–µ —Ç–∞–∫–∏ –ø–æ–Ω—è—Ç—å.

[upholo]

–Ø –≤ –ø—Ä–∏–Ω—Ü–∏–ø–µ, –º–∞–ª–æ, —á—Ç–æ —Å–º—ã—Å–ª—é –≤ —ç—Ç–º –ø–æ—Å—Ç–µ, –Ω–æ –ø–æ—Å—Ç–∞—Ä–∞—é—Å—å –≤—Å–µ —Ç–∞–∫–∏ –ø–æ–Ω—è—Ç—å.

[upholo]

–Ø –≤ –ø—Ä–∏–Ω—Ü–∏–ø–µ, –º–∞–ª–æ, —á—Ç–æ —Å–º—ã—Å–ª—é –≤ —ç—Ç–º –ø–æ—Å—Ç–µ, –Ω–æ –ø–æ—Å—Ç–∞—Ä–∞—é—Å—å –≤—Å–µ —Ç–∞–∫–∏ –ø–æ–Ω—è—Ç—å.

[upholo]

–Ø –≤ –ø—Ä–∏–Ω—Ü–∏–ø–µ, –º–∞–ª–æ, —á—Ç–æ —Å–º—ã—Å–ª—é –≤ —ç—Ç–º –ø–æ—Å—Ç–µ, –Ω–æ –ø–æ—Å—Ç–∞—Ä–∞—é—Å—å –≤—Å–µ —Ç–∞–∫–∏ –ø–æ–Ω—è—Ç—å.

[Flagelopweafe]

–ü—Ä–µ–ª–µ—Å—Ç–Ω–æ)

[beauctib]

Опубликовал на своем блоге вашу статью, и напечатол там конечно-же обратную ссылку на вас. Но вот зашел посмотреть поевился ли трекбек, а его нет…

[Jack]

Andrew: I know very little about Detroit other than its history etc, and have been wondering about its potential second life. With its geography it's easy to see why it was a power in the heavy steel and auto era, and today with the same plus freeways converging etc it would seem to have some natural advantages.

But in mfg the plains and southern states are tough competitors, often "buying" factory placement with land and tax breaks.

There's a good point in saying "no sense investing in declining areas" say a mining town that's "done" but I'd think there is still so much in Detroit that it's more of a turnaround proposition and up to local politics and the city fathers to have a regeneration plan that would justify its getting federal assistance. There will surely be competition for what fed funds there are, and I take Obama at his word of trying to make every buck count.

Is there leadership there with a plan for the New Detroit?

[Dave]

I don't see how infrastructure spending can be used to stimulate the economy during all but the most protracted recessions. It will take months to get the bill passed, still more months to plan these projects, more months to acquire land, choose contractors, order material and supplies, and when all of that is done, then they can hire the workers. The likelihood that we will still be in a recession by that time seems very remote. More likely, the project will draw off workers from overheated sectors of the economy, stoking inflation. And when the projects are done, the workers will be laid off, just in time for the next recession.

[Dave]

I don't see how infrastructure spending can be used to stimulate the economy during all but the most protracted recessions. It will take months to get the bill passed, still more months to plan these projects, more months to acquire land, choose contractors, order material and supplies, and when all of that is done, then they can hire the workers. The likelihood that we will still be in a recession by that time seems very remote. More likely, the project will draw off workers from overheated sectors of the economy, stoking inflation. And when the projects are done, the workers will be laid off, just in time for the next recession.

[neilehat]

C'mon guys, Grosse Point is doing just fine. Don't Diss Detroit simply because most of it's Employers bailed out years ago and left the City holding the bag. Anyone with half a brain jumped ship as well and went elsewhere.

What are you're left with? Not much! Perhaps, we need not so much of an Urban Renewal Project, but more of an Urban Removal Project. Then we can start with a clean slate. Most major Cities across America are in the same fix. The infrastructure is so old, rotten, and toxic, lead and asbestos, not too mention, "brownfield" problems; it'll be cheaper and easier, to level, clean, and build anew.

[alkatt]

–±–æ–ª—å—à–æ–µ —Å–ø–∞—Å–∏–±–æ!–í–∑—è–ª–∞ —Å–µ–±–µ —Ç–æ–∂–µ-–ø—Ä–∏–≥–æ–¥–∏—Ç—Å—è.

[Pies]

up until the point of serious deflation private lending institutions will view any deficit spending as predatory. should deficit spending under normal circumstances increase inflation the value of private lending institution assets shall decline. confronted with such a prospect they shall employ their resources to ensure congress does not pass any bills that authorize deficit spending of large magnatude.

the problem is compounded as of late as the cost to organizing for private financial institutions has declined as the industry has become more concentrated. this is a uniquely american problem as european countries chose to buy into private institutions rather than to bail them out, thus increasing the autonomy of the state.

in my opinion, the quandry on these boards assumes a level of state autonomy for the United States that is in conflict with reality; in general, very complex economic matters are handled by assuming away political implications.It would be most awesome if the Hoover institution would draw from its sizable repository of talent to add a political scientist to the becker posner blog.

[Jack]

Dave: Almost everyone around today has is used to recessions being some brief nuisance like a speed bump in a parking lot; but my bet is this one is three or more years long, and even then, I'm concerned that we've some structural unemployment problem that will take a long time, if ever, to solve. But! I hope I'm wrong! if so am willing to put up with a dab of inflation while getting infrastructure et al up to par.

[Ref]

I wish I could be more optimistic about Obama's chances of turning the American economy around.

[beauctib]

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–≥–æ—Ä–¥–∞—Ö, —ç—Ç–æ —Ç–æ–∂–µ —Ç–µ–º–∞ –∏ –∏—Å—Ç–æ—Ä–∏—è, –ø–µ—Ä–µ—Å–º–æ—Ç—Ä–∏—Ç–µ —Ç–µ–º—ã.–Ø –ø–æ—á—Ç—É –ø—Ä–æ—Å–º–∞—Ç—Ä–∏–≤–∞—é, –º–Ω–µ —à–ª—é—Ç –Ω–µ –ø–æ–π–º–∏ —á—Ç–æ, –Ω–µ –∑–Ω–∞—é –∫—Ç–æ, —Å—Ç–æ–ª—å–∫–æ –º—É—Å–æ—Ä–∞, –º–æ–∂–µ—Ç –æ–Ω–æ –∏ –Ω—É–∂–Ω–æ, –Ω–æ –Ω–µ –≤ –¥–Ω–µ–≤–Ω–∏–∫–µ.–Ø —Ç–∞–∫ –ø–æ–Ω–∏–º–∞—é, –¥–Ω–µ–≤–Ω–∏–∫ —ç—Ç–æ —á–∞—Å—Ç—å —Ç–≤–æ–µ–π –¥—É—à–∏.–ù–∞–º –¥–∞–µ—Ç—Å—è –ø—Ä–∞–≤–æ –≤—ã–±–∏—Ä–∞—Ç—å - –ø–æ–ª—å–∑—É–π—Ç–µ—Å—å. –ê –∏–Ω—Ñ–æ—Ä–º–∞—Ü–∏—è –±–µ—Å–ø–æ–ª–µ–∑–Ω–æ–π –Ω–µ –±—ã–≤–∞–µ—Ç

[frigeofs]

–±–æ–ª—å—à–æ–µ —Å–ø–∞—Å–∏–±–æ!–í–∑—è–ª–∞ —Å–µ–±–µ —Ç–æ–∂–µ-–ø—Ä–∏–≥–æ–¥–∏—Ç—Å—è.