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Why Infrastructure Spending Is a Bad Bet
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 â?? and, in the presidentâ??s defense, he certainly isnâ??t the only one who refers to stimulus and government spending as â??investingâ? 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 â?? and it certainly wonâ??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), thatâ??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: â??Economists have offered an embarrassingly wide range of estimated multipliers.â? 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 isnâ??t any of that. Thatâ??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 wasnâ??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 â?? which stimulus spending needs to be to work â?? 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 (â??Underestimating Costs in Public Works Projects: Error or Lie?â? 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 itâ??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 shouldnâ??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 arenâ??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 Oâ??Toole on these issues.)
Spending more on infrastructure right now, and expecting miracles from it, is a very risky bet.
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COMMENTS 13
COLLAPSE
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. That 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.
One 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.
Regarding bombers and fighters. While 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.
"However, whatever its merits, infrastructure spending is unlikely to provide much of a stimulus "â? 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.
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. Turning 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.
Building 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. Where 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.
Well, 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.
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