Road to Nowhere: We Cannot Dig, Build, or Pave Our Way out of Economic Malaise

By de Rugy, Veronique | Reason, December 2011 | Go to article overview

Road to Nowhere: We Cannot Dig, Build, or Pave Our Way out of Economic Malaise


de Rugy, Veronique, Reason


"THERE IS NO MORE persistent and influential faith in the world today than the faith in government spending," wrote economist Henry Hazlitt in his classic book Economics in One Lesson. Our economy is doing poorly; the government can fix it. Our roads are crumbling; the government can fix them. Better still, according to the faithful, pouring money into roads, bridges, rails, buildings, and high-speed Internet lines will fix our economic problems and create jobs.

American public works are hardly in perfect condition, and economists have long recognized the value of infrastructure. Highways, bridges, airports, and canals are the conduits through which almost all goods are transported. But the kind of infrastructure spending the government has been indulging in since 2008 is unlikely to produce much of a stimulus--certainly nothing with the scale and speed the administration is banking on as the 2012 elections approach.

The economist Mark Zandi of Moody's Analytics, one of the most influential stimulus enthusiasts out there, claims that when the government spends $1 on infrastructure, the economy gets back $1.44 in growth. But economists are far from a consensus about the returns on federal spending. Some find large positive multipliers (meaning that every dollar in government spending generates more than a dollar of economic growth), but others find negative multipliers (meaning every dollar in spending hurts the economy). As Eric Leeper, Todd Walker, and Shu-Chum Yang put it in a recent paper for the International Monetary Fund, "Economists have offered an embarrassingly wide range of estimated multipliers."

An additional complication is that, according to stimulus advocates such as former Obama administration adviser Larry Summers, spending is stimulative only flit is timely, targeted, and temporary. Current stimulus spending on infrastructure isn't any of those things, as I found in a recent paper co-authored with my Mercatus Center colleague Matt Mitchell.

By nature, infrastructure spending fails to be timely. Even when the money is available, it can take months, if not years, before it is spent. That's because infrastructure projects involve planning, bidding, contracting, construction, and evaluation. According to the Government Accountability Office, as of June 2011 only 62 percent ($28 billion) of Department of Transportation infrastructure money from the 2009 stimulus had actually been spent.

The only thing harder than getting money out the door promptly is properly targeting spending for stimulative effect. Data from Recovery.gov, the administration's online clearinghouse for information about stimulus spending, shows that stimulus money in general and infrastructure funds in particular were not targeted to those areas with the highest rates of unemployment. Keynesian theory of the type many in the Obama administration favor holds that the economy can be stimulated best by employing idle people, firms, and equipment.

Even properly targeted infrastructure spending may have failed to stimulate the economy, however, because many of the areas hardest hit by the recession were already in decline. They were producing goods and services that are not, and will never again be, in great demand. The demand for more roads, schools, and other types of long-term infrastructure in fast-growing areas is high, but these areas are more likely to have low unemployment relative to the rest of the country.

Perhaps more important, unemployment rates among specialists, such as those with the skills to build roads or schools, are often relatively low. And it is unlikely that an employee specializing in residential-area construction can easily update his or her skills to include building highways. As a result, we can expect that firms receiving stimulus funds will hire their workers away from other construction sites where they were employed, rather than plucking the jobless from the unemployment rolls. …

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Road to Nowhere: We Cannot Dig, Build, or Pave Our Way out of Economic Malaise
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