While the mechanics of a payroll tax cut are simple, spending hundreds
of billions wisely on infrastructure is hard. Currently, the federal
government spends about $40 billion a year in transportation, and
another $20 billion on other forms of infrastructure. There is a case
for significantly increasing this amount. Our roads do need repairing,
and it makes sense to invest more in a downturn when unemployment is
high. But even doubling the current federal infrastructure expenditure,
a vast increase, would represent only 8 percent of a $750 billion
package.
Here is much more, on the mark throughout. Here is related material by Mark Thoma and Paul Krugman. Here is a related post by Alex.
Addendum: Obama now is calling for $300 billion in tax cuts as part of the stimulus plan, roughly forty percent of the total.
As usual, Glaeser is right on the mark.
His point about giving money to local governments makes sense. It remarkably counterproductive for so many states to halt projects that are already underway, some on the verge of completion. That’s very inefficient.
The first place federal money should go is to all the states in sufficient quantity that they can a) complete all projects already approved and b) start a few new projects on the margin, presumably those that would have been funded next had the money been available. States that don’t have many projects could use their pro-rata share for tax rebates to their citizens.
This won’t add up to all the needed stimulus, but at least it would eliminate the current foolishness we see where most states are halting previously-approved projects.
This is good news, isn’t it?
If we can double infrastructure spending at low cost, why not? I hope no one is letting the cart lead the horse, and thinking that we’ve “got” to spend $750B, rather than … just looking for good and appropriate stimulus.
(I think stimulus should “time shift” needed expenditures forward, but not “make work” with wild abandon.)
I think it is interesting to note Keynes’s view of start-stop public works-infrastructure spending. This is from a 1942 BBC radio talk:
“The difficulty of predicting accurately the appropriate pace of the execution of the building programme is extremely tiresome to those concerned. You cannot improvise a building industry suddenly or put part of it in cold storage when it is excessive. Tell those concerned that we shall need a building industry of a million operatives directly employed – well and good, it can be arranged. Tell them that we shall need a million-and-a-half or two million – again well and good. But we must let them have in good time some reasonably accurate idea of the target. For it the building industry is to expand in an orderly fashion, it must have some assurance of continuing employment for the larger labour force. (Keynes, Collected Works, vol. XXVII, p.268).”
Our roads do need repairing, and it makes sense to invest more in a downturn when unemployment is high.
I realize this sounds eminently reasonable, but I think it is wrong. During a recession, everyone needs to cut back on discretionary spending. Americans overconsumed during the housing bubble, so the way to fix that is to underconsume now. By throwing hundreds of billions in borrowed money at anything that moves, the federal government simply makes it that much harder for Americans to replenish their net wealth. (I am assuming my household balance sheet goes up more when I am allowed to invest $1,000 than when the government borrows that much on my behalf and spends it on “infrastructure.”)
Bob makes an interesting argument. The problem is that political incentives make “do nothing” an impossible answer, especially since there is widespread belief (it certainly may be wrong as I’m not a scholar of the period) that Hoover did nothing and that prolonged the Depression.
DanC is concerned that sending money to the states may “reward states that are big spenders while punishing states with prudent management.”
The solution is to send back to states an amount proportional to what their citizens currently send to the national gov’t. If the state wants to use the funding to maintain or expand infrastructure investment, great. If they don’t want or need such investment, they can simply rebate the money to their citizens directly.
Bob M. assumes that “my household balance sheet goes up more when I am allowed to invest $1,000 than when the government borrows that much on my behalf and spends it on “infrastructure.”"
That assumption is not grounded in standard economics. Because of the existence of (partially) public goods like bridges, roads, public health, basic research, etc, it is entirely possible that the marginal dollar will create more wealth via investment in public goods, which is systematically under-provisioned by private spending. The oft-repeated claim that government spending is inherently less efficient than private spending reflects an ideological view, not basic economics.
Tax cuts are a great idea. He’s smarter than I thought.
Yahoo headline says 300 MILLION, which is a dollar per person!
It seems like they shouldn’t spend money on construction, but destruction. Tare down the unwanted homes, developments, and infrastructure and convert them to farms or wilderness. It would help with the housing glut and decrease future maintenance expenditures. There are places all over the country that could use this, from the rust-belt to the sun-belt.
//I realize this sounds eminently reasonable, but I think it is wrong.//
I disagree, with the first part only: To me it is completely counter-intuitive to suggest that we waste money (for, as we all well know if we are honest with ourselves, government expenditures result in much waste and inefficiency) during a recession. Also, it makes more sense, to me, to invest when we actually have the money to do so. As Mr. Murphy suggests, we have spent too much as it is; my basic common sense gut-feeling is that now we – both gov’t and consumers – should save. Investment will pick up again when it should, but now’s not the time to push that OR more spending. But that’s only the common sense side, which clearly holds little sway in the economic realm.
And to “student of economics”: //it is entirely possible that the marginal dollar will create more wealth via investment in public goods, which is systematically under-provisioned by private spending.//
Is it not possible that investment in public goods (roads, bridges, etc.) is (would be-how could we ever know since it’s hardly been given a chance in private hands?) entirely OVER-provisioned by gov’t, and poorly/inefficiently priced to boot? Witness road congestion and *wait for it* over investment in suburban homes due to easy and convenient access to distant workplaces via public roads. Oh, and I think an Austrian economist like Murphy would know that sometimes his assumptions are not based in standard economic theory. They’re, um, based in Austrian economic theory.
student of economics: //since it reduces congestion and other negative externalities//
Let’s be clear: An externality, properly defined, is a market failure. Congestion on public roads is decidedly not in this category: The roads are provisioned by gov’t for public use, so the failure becomes one not of the market but of the gov’t to properly price the usage thereof. Private roads solve the problem easily with tolls, which are efficient, and so there is no “market failure.” That’s where I disagree with John Dewey: The most cost effective way to reduce congestion is not highway expansion -which will soon enough be clogged up again anyway- but by tolls. Congestion is not an externality unless one abuses the term to encompass anything and everything that imposes some “cost” that is not adequately provided for. If you’re going to call congestion on gov’t roads an externality, we may as well designate as the same smelly people, ugly people, beautiful people, and harmful gusts of wind.
Sorry, John, I did not realize you were talking about politically realistic options. I agree toll roads aren’t coming soon: nobody wants to pay a toll, or vote for someone who makes them do so. And if that’s off the table, then you are probably right about reducing congestion with more highway space.
I will say that they’ve done it in London, and although I’ve read positive and negative reviews of this policy, it seems to have worked decently as far as reducing congestion. We’ll see if the “political will” changes to incorporate this other, more efficient, option.
JD asks: “Please tell me, student, what are the negative externalities you believe light rail trains have reduced?”
A: Well I didn’t limit transit to light rail. Busses, subways, etc. count, too. But since you asked, congestion is reduced (as you note in your own post), though the benefit is not as great as you would like. Also, air pollution, accidents, global climate change, funding of terrorists also are externalities that are reduced.
@John Dewey and a student of economics
That’s funny. Ed didn’t mention that 15% of gasoline taxes paid by vehicle drivers actually subsidize the tiny portion of commuters nationwide who use mass transit. I can only hope that he will use his status as an eminent urban economist to promote such fairness in funding of mass transit. It is only fair that train riders pay for their trains.
It is even worse than that…In the USA mass transit uses more energy per passenger mile than cars do!
I like the idea of safer motorcycles/scooters like the BMW c1 200. Also safer cars through electronics (sensors etc) rather than through heavier vehicles. These two things might decrease congestion, save time money, fuel and lives.
student of economics: “However, unregulated private ownership of roads will almost surely set the price too high, creating a monopoly deadweight loss.”
Can you provide either logic or evidence to support this assertion? Who decides what is “too high”, anyway?
student of economics: “Well I didn’t limit transit to light rail. Buses, subways, etc, count too”
Well, my unhappiness is with light rail and commuter rail, which consume by far the most funds diverted from gasoline tax highway funding to other uses. That’s why I asked what negative externalities light rail has reduced.
As far as I know, no city in the U.S. is getting funding for subway development. I cannot imagine that anyone would be foolish enough to attempt subway construction with 21st century labor and environmental costs.
student of economics: “congestion is reduced (as you note in your own post)”
What I said in my own post is that
“reduction of congestion on highways provided by light rail has been very slight”.
What I should have added is that such very slight reduction is also very temporary. The cost for a city for such very slight reduction in congestion for a very short period is many years of many millions of dollars of subsidies.
student of economics: “air pollution, accidents, global climate change, funding of terrorists also are externalities that are reduced.”
Rail transit projects generate more air pollution and consume more energy during construction years than is removed or consumed by reduced vehicle usage for many years. Furthermore, after operation begins, both diesel and electric trains consume huge amounts of fossil fuels, either directly or indirectly. If the trains were operated at capacity for most of the day, energy usage might be reduced. But the trains aren’t used at anywhere near the claims made by proponents.
Global climate change is not going to be significantly affected by removing vehicles from roadways. Variations in solar activity is by far the main driver for changes in global climate.
Any reduction in energy demand realized by billions and billions of dollars for rail projects is so slight that the impact on global energy prices is completely inconsequential. If oil money is being used to fund terrorists, rail construction in the U.S. is not going to change that.
Comments on this entry are closed.