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.
On the topic of government economic stimulus packages, but in a different country:
ReplyDeleteOn Tuesday January 27th the Canadian government will reconvene after having been prorogued over a federal budget that, according to opposition parties, did not adequately address a declining economy. PM Stephen Harper has said that across the board tax cuts are going to be the central focus of his new budget, but that has again come under a lot of criticism from opposition parties.
You can't cut the taxes of the unemployed. Also, as best exemplified by Bush's attempt last year to cut billions of dollars in taxes to boost the economy, tax cuts are only partially spent. Most tax reductions are saved and/or used to pay off old debt and so have no stimulus effect.
The point is to 'goose' the economy with some sharp, short boosts in demand and liquidity. Short-term infrastructure spending, investments in business or even a tax holiday could provide that type of effect.
Any stimulus will increase the deficit in the short term. There is some benefit to that with infrastructure, as it will leave improved assets in its wake.
But permanent tax cuts will create a structural deficit in the long-term. The lost revenue will not be replaced even when the economy gets back to solid growth, except through tax increases or spending reductions.
From a political outlook, tax cuts have an obvious attraction. People, including me, like to keep more of their money. But deficit-financed tax cuts lose much of that appeal, especially in Canada where there is a strong reluctance to go into deficit.
You can't cut the taxes of the unemployed but you can give tax incentives to companies to hire more. A job is much better for the unemployed then temporary unemployment benefits and better for the economy. And as for Bush tax cuts, there was a big portion of the tax cuts that, after giving in to pressure, fell under the category of tax rebates which essentially means that the government just gave out money to people. After Bush's tax cuts, more of the tax burden fell on the upper classes and more of the people on the bottom were actually paying negative income taxes, meaning their rebates were bigger than their taxes paid. And to the last point, paying off debt would have a positive effect on the economy because as many experts have said, including Bernanke, we are facing a crisis of credit and trust. If companies and people have huge debts to pay off, banks won't loan and therefore the economy will have a much harder time growing.
ReplyDeleteI agree with the point of the structural deficit point, however generally tax cuts cost much less than originally estimated (see Bush's tax cuts) and also a good way to counteract that is to get rid of much wasteful spending. We shouldn't, as a society, jump from one extreme to another: tax cuts didn't work so let's spend instead. Instead we need targeted tax cuts and spending and those that don't spur growth of both categories should be cut.
The reasoning that somehow the government is going to be more efficient with money than private businesses is ridiculous. When governments start new programs such as TARP, who gets put in charge of them? The people who couldn't get jobs at the companies that need help, or the people who left them right before or during this whole crisis happened. The same will be the case with any government programs. However there is the case for the services that private businesses can't provide such as roads.
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ReplyDeleteWhile your comments may be true in regards to the United States, I am referring to Canada, which is in a much different state (at 2.5 per cent of GDP, even a $40-billion deficit proposed by Harper would be dwarfed by the $2-trillion, 10-per-cent-of-GDP monster the incoming Obama administration is preparing).
ReplyDeleteWe did not undergo anything like the same housing boom that the Americans did, nor has our bust been anywhere near as deep. Subprime mortgages, while not unknown here, did not take a remotely comparable share of the market. The credit crisis is not nearly as severe here as there, nor has our economy taken the same nosedive.
Most of the commentary on the economy I read seems to assume that, in the wake of the biggest financial bust in history, no one has to feel any pain. Policy makers are urged to boost consumer spending and force banks to lend, almost as if they mean to repeat the whole sorry story of the last decade. A certain amount of pain is surely coming: banks need to repair their balance sheets, consumers need to save more, and no amount of easy money can avoid that.
Again: Canada is not the United States. Interest rates have further room to fall here, and Canadian banks are not refusing to lend.
It seems like this economic package is trying to "do it all". It has the tax cuts--fiscally conservative economic policy-- and it has the "infrastructure spending"--fiscally liberal economic policy. For this reason, the package seems to be "missing the point." However, this is exactly what we wanted from a new administration and an Obama presidency. He's not going to devise policies based theories adopted by opposing parties; he's just going to do what makes the best sense.
ReplyDeleteDoes this economic package do that? Maybe not down to a T. Some people want less "infrastructure" spending and more tax breaks. Other people want more bail-out type spending. There's no way to tell at this point which way would be the best. A combination of all those (the $700 billion bail-out package plus a little under $300 billion for new tax-cut incentives and close to $500 billion in "infrastructure" spending included in Obama's new package) sounds like a little bit of all.
It sucks that it's going to take a few generations to pay for all this, but as for as policy-forming goes, it seems an unbiased eye would consider what Obama is doing satisfyingly cogent.
And yes...we will have to tighten our belts. Pain will be felt. There's no easy money.
ReplyDeleteMy points about tax cuts and spending were not specific to any situation but rather about the two strategies in general and so would apply to Canada as well. So the points about the deficit/costs of tax cuts as well as the effects on unemployment etc... apply to the Canadian situation as well. In fact, it's not even specific to this recession as this is a debate that has gone on countless times before with past recessions. In fact the first round of Bush's tax cuts were partially to counteract the recession caused by the internet/tech bubble, and they helped. Granted there are some differences between the two, like how interest rates are still a mechanism available to Canada to increase the money supply. The differences would be the reasons for the difference in scope of the recovery plans.
ReplyDeleteI like the point about people not willing to accept a little pain. People forget that recessions are natural parts of a business cycle, a time for restructuring to get the weak parts of the economy out.
To the point about having the "tax cuts" in the stimulus, it seems like that's a largely political move to try and please the right, as it turns out most of the tax cuts are more like rebates and so miss the point of the strategy of tax cuts which should be used as incentives, particularly for businesses. So these rebates will be as effective as Bush's last stimulus package which just gave money to everyone, but, clearly, didn't do much to spur the economy. And as for the infrastructure spending, I've got a good article I'm going to post which talks about the lag effect of government spending.