Advancing a Free Society

Why More Infrastructure Spending Is Unlikely to Create Jobs and Stimulate the Economy

Saturday, September 10, 2011

New York Times columnist Paul Krugman insists that he did not say that the only problem with last month’s DC earthquake was that it was not big enough.  But he did say, ad naseum, that the American Recovery and Reinvestment Act (ARRA) of 2009, combined with subsequent appropriations and other stimulus measures, was not big enough.  Apparently, President Obama agrees.

In his Thursday evening speech to a joint session of Congress the President proposed a $450 billion combination of spending and tax cuts.  $240 billion would be foregone revenue from the pay-roll tax holiday extension, $70 billion for general infrastructure like roads and bridges, and $25 billion for school renovations. Another $10 billion would provide seed money for an “infrastructure bank.”

In making his case for infrastructure spending, the President described the state of the nation’s infrastructure as “inexcusable.”  “Building a world-class transportation system,” said the President, “is part of what made us an economic superpower. And now we’re going to sit back and watch China build newer airports and faster railroads?”  The President went on to say that there are “millions of unemployed construction workers [who] could build them right here in America.”

After months of Congressional focus on reducing the fiscal year deficit and the national debt, and in light lukewarm Republican reaction to the President’s speech, it is appears certain that Congress will not enact the President’s proposal in its entirety.  Although the President asserted that the entire $450 billion program would require no new borrowing, he explicitly kicked the financing can down the road.  The reality is that the spending cuts and tax increases necessary to finance the plan cannot be ensured by the current Congress.  Thus, financing the President’s proposal is effectively delegated, like debt, to future Congresses and future generations of taxpayers.

But assuming the Republicans and fiscally conservative Democrats in Congress can be persuaded to incur more debt on the promise of lowering the unemployment rate, will the plan work?  Keynesian theory says yes, though Krugman is certain to argue that the President’s proposal is still not big enough. But experience, both long term and from the 2009 stimulus effort, suggest otherwise.

As best one can tell from the vague description offered by the President, the two principal job creation initiatives in the Administration’s proposal are an extension of the payroll tax holiday and new infrastructure spending.  Because it is popular with most taxpayers, the former could gain Republican support, although the experience of the past year, with the reduced payroll tax in effect, suggests that continued payroll tax relief is unlikely to contribute to significant job creation.  As for infrastructure spending, the President argued that there are two objectives: 1) to create jobs in the near term and 2) to provide the infrastructure necessary for long term growth and economic prosperity.

As I pointed out in a chapter on infrastructure investment in Hoover’s Reacting to the Spending Spree: Policy Changes We Can Afford(2009), in promoting the 2009 stimulus bill the Obama Administration relied on wildly optimistic projections of job creation and economic growth.  The Administration projected the creation of 47,000 jobs from each one billion dollars spent on infrastructure, while the Alliance of American Manufacturers (AAM) put the number at 18,000 jobs from the same spending.  But as an unemployment rate still above 9% evidences, even the AAM projection was overly optimistic.  The Obama Administration projected 3.7 percent GDP growth and nearly 3.7 million new jobs as a result of the 2009 stimulus.  The record, sadly, speaks for itself.

There are several reasons why a new burst of infrastructure spending by the federal government is unlikely to stimulate a significant economic recovery.

  • To create jobs in the near term, spending must be in the near term.  Although spending planned for infrastructure was actually a small fraction of the 2009 stimulus package, there was enough to make clear that there are few, if any, “shovel ready” projects in our heavily regulated world.  Even deferred maintenance often requires extensive regulatory approvals before work (and hiring) can begin.
  • Pressures to create jobs in the short term, combined with the absence of shovel ready projects, leads to “make work” projects selected because they can be implemented immediately, and not because they are part of a comprehensive and long term infrastructure plan.  The result, at best, is temporary employment and a completed project that is unlikely to contribute to long term economic growth.
  • Another lesson relearned with the enactment of ARRA and the 2009 Omnibus Appropriations Act is that rent seeking, on behalf of the district or state members of Congress represent, is difficult to overcome even when the President has declared an end to earmarks.  In his Thursday speech the President insisted, again, that there would be no earmarks.  It is possible that public opposition to earmarks (at least for others) is sufficiently strong to prevent a rerun of the 2009 scramble for shares of the federal largess.  But absent earmarked spending, it is unlikely an infrastructure spending bill can be passed.  And if a bill is passed with earmarked spending, the resulting infrastructure is, again, unlikely to be part of a considered plan that will promote long term economic growth.
  • Although more muted than in the past, the President clearly remains committed to promoting “green jobs” and a “green economy.” While such spending might create some short term jobs, and there might be a long term future for alternative energy solutions, the recent failure of solar innovator Solyndra (and the earlier collapse of Spain’s alternative energy ambitions) should remind us that the much ballyhooed green economy will not be achieved in a timeframe relevant to solving current economic challenges.
  • The idea of an infrastructure bank has been around for several years and was part of ARRA (as the National Infrastructure Reinvestment Bank).  The idea is to attract private capital to infrastructure projects, a good idea that will only work if markets are allowed to play a significant role in the defining of infrastructure priorities.  That seems unlikely in an Administration wedded to central planning and government control of the economy.
  • Without significant reliance on market indicators of demand, government supplied infrastructure will be, as often as not, a net drag on economic development.  The President promised no more “bridges to nowhere,” but without market signals it is difficult to know where nowhere, or somewhere, is.  We are left to rely on experts (in the Progressive tradition) guided by visions of the good society, rather than user demand.

President Obama often touts as precedents the federal subsidy of 19th century railroads and the mid 20th century federal investment in the Interstate and Defense Highway System.  He fails to mention that a large majority of the (increasingly heavily) subsidized railroads went belly up, but he is not wrong in insisting that there is a federal role in infrastructure development.  The problem with his just announced proposal, like the infrastructure spending in ARRA, is its ad hoc nature.  For federal spending on infrastructure to support long term economic growth it must meet needs that will not be met privately, will be of the right type supplied in the right places, and is best funded by the federal government rather than state and local governments.  These are not questions Congress or the Administration can answer if the proposal is enacted and implemented “right now.”

If any or all of the proposed infrastructure spending gets funded by Congress, the most interesting question will be whether anti-earmark Republicans in Congress will be strong enough to resist the smell of fresh pork.

(photo credit: David Spreekmeester)