President-elect Obama is intent on stimulating the economy once he takes office, and while he has a couple different plans the big one everyone is talking about is the infrastructure rebuild. Many people have questioned whether this is the best plan of action, but if rebuilding the infrastructure isn't the best course of action, what is? Mark Thoma from the Economist's View looks at an opinion from Susan Woodward and Bob Hall in his blog post below.
Susan Woodward and Bob Hall have expanded their views on the type of stimulus package they believe would be the most effective:
Options for Stimulating the Economy, by Susan Woodward and Robert Hall: In 2009, GDP in the U.S. is expected to be about $900 billion below its normal growth path. The ideal stimulus would have most of its effect in 2009 and would close a reasonable fraction of that gap. We see five general strategies for stimulus:
- Further expansion by the Fed
- Income tax cuts with rebates, as earlier this year
- Tax cuts that reduce the prices of consumer goods temporarily
- Tax cuts that reduce the cost of labor to businesses
- Increase in purchases of goods and services by state and local governments
... Conclusions We foresee a mixture of stimulus policies for the coming year. Monetary policy can only [add] a small further contribution. Income-tax rebates seem to have little support and would probably have relatively small effects within the year, with undesirable continuing effects in later years. We are enthusiastic about removing sales taxes for the year and perhaps somewhat longer, with a phase-out. We are not sure that an employment stimulus from a reduced business payroll tax would raise employment enough to be a contender as a stimulus and to prevent the flowing through of the funds to business owners rather than workers. We believe that some federal subsidies to state and local spending would make sense, but are concerned that too large a program would result in stimulus continuing past the time when it would be needed and that it would create excessive rents for contractors and skilled workers. Thus the sales-tax buyout seems to be the best way to spend the bulk of the stimulus dollars.
In the accompanying argument, they explain their lack of enthusiasm for infrastructure spending:
President-elect Obama supports federal funds for state and local construction projects as an element of a stimulus package. ... Government units have backlogs of projects waiting for funding. The questions are how big are the backlogs, how quickly spending can accelerate, and how beneficial are the projects.
State and local construction spending is currently $300 billion per year. The Obama team is hard at work trying to find out how much of a backlog is “shovel-ready”... We are not aware of any easy source for this information.
Timing may be a problem, as it was in the old days when these kinds of projects were called public works. Complicated projects take time to ramp up... Some interstate repairs can be executed in a year, as was the case in rebuilding the collapsed I-35 bridge in Minneapolis last year and in re-opening earthquake-damaged freeways in Los Angeles in 1994, while it took many years to reopen all the damaged roads in San Francisco after the 1989 earthquake.
The president-elect has also mentioned less conventional spending programs, including broadband facilities and online medical records facilities.
All of these proposals for stimulating state and local spending suffer from a common problem–they will end up generating employment for highly specialized businesses and workers, rather than stimulating economic activity more broadly. The consensus of macroeconomists ... is that a spending stimulus raises total spending by between 1.0 and 1.5 times the amount of the direct increase in spending. The follow-on or multiplier effects are between zero and half the direct increase in spending. Thus a program that funnels money to construction firms and their workers mainly raises their incomes and employment levels and has relatively little effect elsewhere. Rebuilding aging interstates and upgrading the energy efficiency of public buildings calls for highly specialized skills. A large-scale infrastructure program will drive up the profits of the limited number of firms capable of doing this type of work and drive up the wages of the skilled workers who know how to do the work.
It’s hard to imagine that a significant fraction of the large stimulus under consideration for 2009 will take the form of state and local construction and other infrastructure spending. We are hoping that discussion of stimulus will not become sidetracked over this part of the program and neglect the opportunities to stimulate consumer spending broadly without complicated, detailed, and time-consuming decisions.
This article has been reposted from the Economist's View. The full post can also be viewed on the Economist's View.