In The Modern Economy Infrastructure Spending Simply Can Never Act As Stimulus
Tim Worstall
Two interesting questions. Firstly, what’s the average length of a US recession? Secondly, what period of time does it take to get permission to go build something? If that second period of time is longer than the first then we’re not going to be able to use going and building something as stimulus to get us out of a recession, are we? And the answer is also that that second period of time is longer than the first and therefore infrastructure spending as a stimulus out of recession simply ain’t gonna work.
No, this doesn’t mean the end of Keynesian economics nor of stimulus as an idea at all. But it does mean the end of one particular flavour of it, which is that we should go and spend on infrastucture as that Keynesian stimulus. You know, those boring facts from the real world destroying a lovely theory.
This all comes to mind today as a result of a super little report:
Anyone who rattled down highways replete with moon craters while traveling on Labor Day weekend knows: The government doesn’t excel at managing roads. A major improvement would be bulldozing a permitting process that delays new public-works projects for up to a decade, and a new report from the nonpartisan group Common Good offers a road map.
In 2009 the Obama Administration air-dropped $800 billion of taxpayer cash known as the stimulus package, but as of last year a piddling $30 billion had been spent on transportation infrastructure. One reason the projects proved not as “shovel ready” as promised is that proposals must undergo extensive environmental and permitting reviews, which leave no tedium behind in part to avoid litigation.
That report is here and it tells us such lovely things as:
Rebuilding America’s decrepit infrastructure requires a new permitting system. Approvals today
can take a decade, sometimes longer. Delay dramatically adds to costs, and prevents projects from getting off the drawing board. Delay prolongs bottlenecks which waste time and energy, causing America to lag behind global competitors. Obsolete facilities continue to spew carbon into the air and waste into our waters.
Red tape is not the price of good government; it is the enemy of good government. Time is
money: America could modernize its infrastructure, at half the cost, while dramatically enhancing
environmental benefits, with a two-year approval process. Our analysis shows that a six-year delay in starting construction on public projects costs the nation over $3.7 trillion, including the costs of prolonged inefficiencies and unnecessary pollution. This is more than double the $1.7 trillion needed through the end of this decade to modernize America’s infrastructure.
6 years to fiddle with the paperwork, eh? That’s hardly a good use of the taxpayers’ money and it’s most certainly not going to produce stimulus at the time we need it. Heck, it probably wouldn’t manage to fit the stimulus into one complete business cycle.
There are two components to this initiative: money and permits. This report focuses on America’s paralytic permitting system. We propose a dramatic reduction of red tape so that infrastructure can be approved in two years or less, not, often, ten years. This can be accomplished by consolidating decisions within a simplified framework with deadlines and clear lines of accountability.
No one argues for leaving our nation’s infrastructure in its current state of disrepair—typically
50- to 100-years-old and dangerously decrepit. Bottlenecks waste time and energy, causing
America to lag behind global competitors. Unsafe bridges and flawed flood control systems risk
lives. Obsolete facilities spew carbon into the air and waste into our waters.
As to the other side, the length of recessions, here’s the NBER numbers (NBER is the official body ruling on such things):
Average, all cycles:
1854-2009 (33 cycles)…..17.5 months
1854-1919 (16 cycles)…..21.6
1919-1945 (6 cycles)……18.2
1945-2009 (11 cycles)…..11.1
Right, so we’re trying to get that permitting process down to only two years, which in itself is still twice the length of the average recession. So, clearly, infrastructure spending as a stimulus out of recession isn’t going to work then, is it? Good, excellent, so that argument is dead.
Which leaves us with two further questions. Well, firstly, should we be building infrastructure? Sure: where government can do that better than the private sector and where the infrastructure actually adds value by all means go borrow the money or raise taxes to build it. Great, you’re making the country richer as long as those two conditions are met. And who doesn’t want to make the country richer?
Secondly, should we be trying stimulus when in a recession? Well, there I’m a bit more conflicted. I’m not sure that I believe many of the basic points of Keynesian economics in the first place. But let’s assume that I do: but we cannot use spending on infrastructure as our means because, as above, it just doesn’t work. So, if it doesn’t but we still want to have stimulus then what should we do? My argument would be that we simply cut FICA taxes for whatever period we think necessary and by whatever amount we think necessary. Back with the Bush stimulus we saw that sending people checks above a certain amount led to them saving it: or paying down debt at least (ie, Ricardian Equivalence holds to a certain amount for larger sums of money). That’s really not what we’re trying to achieve at all. But smaller sums were simply spent. Which is what we’re trying, within that Keynesian structure, to achieve. So, given that FICA is a small amount monthly for most people, cutting it will provide a small boost to their budgets and we can expect them to go spend it all: stimulus!
So, for the future, stimulus should be FICA cuts, They’ll feed through into everyone’s paychecks with a month and they will actually be stimulus. Which is why, of course, Keynes himself thought this was a good idea:
I am converted to your proposal…for varying rates of contributions in good and bad times. (June 16, 1942). Keynes, Collected Writings, vol. 27, p. 208.
…[Y]ou are able to show fluctuations in income of an order of magnitude which is significant in the context… So far as employees are concerned, reductions in contributions are more likely to lead to increased expenditure as compared with saving than a reduction in income tax would, and are free from the objection to a reduction in income tax that the wealthier classes would benefit disproportionately. At the same time, the reduction to employers, operating as a mitigation of the costs of production, will come in particularly helpfully in bad times. (July 1, 1942). Keynes, Collected Writings, vol. 27, p. 218.
Now, I know, in the theory this is less effective than infrastructure spending because of the multiplier effects. But as up above, we’ve already shown that the multiplier effects of infrastructure spending are zero because the spending never does occur in the time period when we want the stimulus. If we’re exceedingly lucky we might just about have a shovel ready project by the time the next recession comes around.
Thus, assuming that we stay within our Keynesian structure of wanting stimulus at all, it should be done not by trying to ramp up spending, something which takes too long, but by cutting taxation which can be immediate. The only problem with this of course is politics. Politicians are there for the joy of spending our money their way, not to reduce the joy they get by reducing the amount of our money they spend. But that is a political problem, not an economic one. The economics here is quite clear. Despite the theoretical advantages, the multipliers, of infrastucture spending over reduced taxation, the modern world is so overcome with the necessity for permissions and permits that temporary tax reduction is now the better course.
forbes.com |
