<blockquote>"
Clearly, therefore, if President Barack Obama could find an equivalent to the Interstate Highway System program in his inbox, it would provide economic stimulus as the money was spent, long-term economic benefit from its adoption and tax revenues from increased GDP down the road that would at least partly pay for it. Such expenditures have a high Keynesian "multiplier" to use one economic formulation, or a large "supply side effect" to use another that is not always in opposition to the first.
The bad news is that such projects are extremely rare.
...
It becomes pretty clear that, far from repeating the successes of the Interstate Highway System, the proposed economic stimulus is likely to have a net depressant effect on the U.S. economy. Misguided large-scale government activities of this kind produced the disaster of the Great Depression in the United States at a time when Britain among other countries was able to achieve economic recovery by pursuing the opposite policy of state retrenchment. We're not in the Great Depression yet, nor close to it, but the House version of this economic stimulus would take us a substantial further step in that direction. Tax increases would also be necessary, beyond the already-scheduled repeal of the Bush tax cuts at the end of 2010 (which itself will have a negative supply-side effect) before the economy will have had time to recover.
Passing such a poorly thought-out stimulus, followed by a tax increase, is the same mistake Herbert Hoover made in 1930-32. If the legislation reaches him in something like this form, the intelligent President Obama should have the sense to veto it."</blockquote>
The Un-stimulating StimulusBy Martin Hutchinson
February 02, 2009
Source (More:
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Until the House Republican revolt this week, there has been a worldwide consensus that the way to get out of a deep recession is through fiscal "stimulus" – gigantic gobs of public spending that explode the budget deficit but provide jobs to those without them. It’s a theory first publicized by John Maynard Keynes, but it rests on a central fallacy: the "job-providing" expenditures have to be financed somehow, and their financing may crowd out other private-sector projects that would have created more jobs.
Let's start by exploding a fallacy in the opposite direction that is popular with some on the political right. It’s not true that government expenditure is in all cases less productive than private expenditure. Much private expenditure goes to McMansions and casinos, things society would be better without. On the government side, there are a very few functions – defense and the administration of justice – that are more efficiently carried out by government. There are also a few cases of expenditures where a private sector operation does not capture the external benefits of a project. The Interstate Highway System was one such; its "social rate of return," including all the benefits to society from its construction, was many times its economic rate of return, even had all the highways been toll roads.
The Interstate Highway System was authorized in 1956 and completed in its original form in 1992; however real expenditure on the system fell off sharply after 1971 and 83% of the system's mileage was open by 1973. A 1996 study by the American Highway Users Alliance estimated the benefits of the system over its then 40 years of existence at $2.1 trillion to $2.5 trillion in 1995 dollars, around seven times its real original cost. Its annual benefit in 1995 was estimated at $78 billion to $110 billion, around 1.1% to 1.6% of GDP.
Not only was the Interstate Highway System nearly completed by the early 1970s, its congestion was then far lower than it later became. Thus the early 1970s will have seen its peak annual economic benefit. That benefit was considerable, even in the context of the entire U.S. economy. An uncongested interstate system allowed travelers to calculate their travel time with a high degree of reliability by dividing the miles traveled by 60, a far more aggressive equation than would have been possible earlier, or indeed later on the congested East and West Coasts. Whereas the bus journey from Florida to New York in the 1934 movie "It happened one night" took a week, by 1970 it was perfectly feasible to do the drive in a day.
The reliability of an uncongested highway system was as important to productivity as its additional speed; it made planning for journeys involving the crowded East and West Coasts much easier than before or after. Thus if the system’s benefit was 1.1% to1.6% of GDP in 1995, it was significantly higher in the early 1970s, perhaps 3% of that period’s lower GDP (roughly half that of 1995, in real terms.)
The Interstate Highway System can thus be estimated to have added around 0.2% to annual economic growth and productivity growth in the 15-year 1957-72 period. Economists have for many years debated why productivity growth in the period to 1973 was consistently higher than that since that date; the Interstate Highway System was certainly one reason for the difference. Indeed, its 0.2% annual addition to productivity growth between 1957 and 1973 was more than a quarter of the productivity growth differential between 1957-73’s 2.49% per annum and 1973-2007’s 1.78% per annum. Thus the Interstate Highway System was the most productive expenditure the Eisenhower administration could have undertaken, probably adding even more to economic growth than would have been gained by a reduction in the ludicrous 91% top income tax rate of the period.
Clearly, therefore, if President Barack Obama could find an equivalent to the Interstate Highway System program in his inbox, it would provide economic stimulus as the money was spent, long-term economic benefit from its adoption and tax revenues from increased GDP down the road that would at least partly pay for it. Such expenditures have a high Keynesian "multiplier" to use one economic formulation, or a large "supply side effect" to use another that is not always in opposition to the first.
The bad news is that such projects are extremely rare. Even viewed in the most favorable light, the House version of the stimulus program doesn’t have many of them, if it has any at all. Going through the bill item by item:
1. Of the $27 billion agriculture spending, only $4 billion has any positive spillover, for extending rural broadband Internet access. Not much spillover though, as the private sector is already pretty active here.
2. Of the $14 billion commerce spending, $2.8 billion is for broadband Internet and $3 billion for scientific research. Maybe $6 billion of the total has positive spin-offs.
3. $4.5 billion for defense maintenance. Gets spent quickly, but no significant spin-offs.
4. Of the $49 billion for energy and water programs, $18.5 billion is for energy efficiency, $8 billion is to provide loan guarantees for renewable energy, and $4.5 billion to modernize the electricity grid. The last has a spin-off, but the others, not so much. Maybe $10 billion, and that’s being generous. Anyway, only about 20% of this money will be spent in 2009-10.
5. $8.7 billion to promote energy efficiency in government. Presumably if this was economically beneficial, it would pay for itself in lower fuel costs.
6. $15 billion for water infrastructure. Again only 20% spent in 2009-10; maybe $3 billion has spin-off benefits.
7. $92.3 billion for labor, human services and education programs. A Congressional Democrat wish list, none of which looks to have significant spin-off benefits without root-and-branch reform of the public education system, which isn’t on the agenda. Measurable educational or economic benefits from the more than $200 billion so far spent on the 2001 No Child Left Behind Act have been insignificant.
8. $6 billion for military construction. Probably no economic spin-off.
9. $59.5 billion for transportation and housing. Of this, $30 billion is highway construction (give it the benefit of the doubt, but only about 20% will be spent in 2009-10); most of the remainder is for housing assistance which is of no economic benefit in an economy with such over-investment in housing.
10. $79 billion for stabilization of state budgets. This will mostly go to the states that overspent most egregiously during the housing bubble. No significant spin-off benefits.
11. $249 billion in increases in unemployment insurance, Medicaid payments etc. No significant spin-off or supply-side benefits.
12. $188 billion in tax reductions, of which $13 billion would be accelerated business investment write-offs and therefore has a supply-side effect.
13. $40 billion to extend the COBRA health-care provisions for laid-off workers. Some modest supply-side effect here; call it $10 billion.
14. A net $18 billion in subsidies for health information technology spending, which will increase the efficiency of the health-care system – give it the benefit of the doubt.
Of the roughly $850 billion in expenditures and tax rebates outlined above, only roughly $81 billion in expenditures and $13 billion in tax reductions would have any economic spin-off effect or supply-side effect respectively. That's 11% of the total, much of it being spent in 2011 or later. All the remainder would have a Keynesian multiplier of 1.0 or less, in other words run the risk of being on a net basis damaging to the economy by sucking resources out of other more productive uses.
Add to the above the financing and inflationary problems produced by a federal budget deficit that was already out of control before this "stimulus" and the waste and corruption inevitable in government programs of this size (such as the infamous "Davis-Bacon" provisions adding 20% to federal construction costs by requiring unionized labor). Add also damaging requirements such as the "Buy America" provisions in relation to steel and manufactured goods, which significantly raise the danger of a trade war that would hugely damage the U.S. and world economy.
It becomes pretty clear that, far from repeating the successes of the Interstate Highway System, the proposed economic stimulus is likely to have a net depressant effect on the U.S. economy. Misguided large-scale government activities of this kind produced the disaster of the Great Depression in the United States at a time when Britain among other countries was able to achieve economic recovery by pursuing the opposite policy of state retrenchment. We're not in the Great Depression yet, nor close to it, but the House version of this economic stimulus would take us a substantial further step in that direction. Tax increases would also be necessary, beyond the already-scheduled repeal of the Bush tax cuts at the end of 2010 (which itself will have a negative supply-side effect) before the economy will have had time to recover.
Passing such a poorly thought-out stimulus, followed by a tax increase, is the same mistake Herbert Hoover made in 1930-32. If the legislation reaches him in something like this form, the intelligent President Obama should have the sense to veto it.