Pros and Cons of Spending $50 Billion on Infrastructure
On Labor Day, president Obama rolled out a plan to save jobs that included $50 billion for infrastructure. The Wire already brought you the debate on the political savviness of the move, and whether such a stimulus would be likely to pass. But there's also the practical question: what effect would spending $50 billion on infrastructure actually have? Commentators seem to be divided into three camps: one group endorses the move, one backs the general idea of infrastructure spending but thinks this proposal is too little, too late. A third camp is against the proposal entirely, opposing the economic theory behind it and the cost.
'Much Too Small,' complains economist Paul Krugman, adding that "it's a good idea," in theory, and that "it won't pass anyway." He accuses the administration of "once again ... striking right at the capillaries."
'Scarcely Worth the Bother,' says John Quiggin, Australian economist, at Crooked Timber. "Last time I looked at a proposal to spend $50 billion on infrastructure to stimulate the economy, I thought it was a great idea ... Why have I changed my mind?" Well, he explains, last time the $50 billion was being spent in Australia with "population 20 million, GDP (about) 1 trillion, stimulus about 5 per cent of GDP." This time it's being spent in the U.S. with "population 300 million, GDP (about) 15 trillion, stimulus about 0.3 per cent of GDP." It's a drop in a much larger bucket.
Finally, the President Stops Relying on the Fed Marshall Auerback at The Daily Beast hasn't liked the extent to which the president has been leaning on monetary policy to solve current economic problems. He also points out that "the last few decades have seen very little investment in infrastructure in the U.S." Though Auerback is one of many to note that $50 billion is a small number compared to what could be spent on infrastructure, this wrinkle seems to bother him less than others:
To repair all the areas of infrastructure to good condition or a grade of "B" would cost $1.6 trillion over five years. Obama's plan yesterday barely touches that figure, but it still would be good enough to rebuild 150,000 miles of roads, construct and maintain 4,000 miles of railways, enough to go coast-to-coast; and rehabilitate or reconstruct 150 miles of airport runways, while also installing a new air navigation system designed to reduce travel times and delays.
These are the kind of projects that create long-term prosperity. Even the author of the Wealth of Nations, Adam Smith, long beloved by free-market conservatives, was very much in favor of public works and public institutions that facilitated commerce.
'An Important Step,' agrees The New York Times' Bob Herbert, despite its being "a first step." Though it won't solve all the infrastructure problems overnight, "it's a smarter approach to infrastructure investment than the wasteful, haphazard, earmark-laden practices that we’ve become accustomed to, and it will put some people to work in jobs that pay decent wages."
Not a Fan of the Economics Cato economist Dan Mitchell picks apart Keynesian economics at Big Government, saying government spending is simply not the answer in a recession. Here's "the best that can be said about the new White House proposals," in his view:
They're probably not as poorly designed as previous stimulus schemes. Federal infrastructure spending almost surely fails a cost-benefit test, but even bridges to nowhere carry some traffic. The money would generate more jobs and more output if left in the private sector, so the macroeconomic impact is still negative, but presumably not as negative as bailouts for profligate state and local governments or subsidies to encourage unemployment – which were key parts of previous stimulus proposals.
Who Is Going to Pay for This? Investment professional and economics blogger Mike Shedlock doubts the Obama administration's assertions that the plan is fiscally sound and will be "fully paid for." Absent an explanation of how, exactly, the plan is being paid for, Shedlock declares the president "either disingenuous or a blatant liar. Is there not even $50 billion in military spending he could cut? Nothing?"
