Friday, February 08, 2008

Public Infrastructure and Fiscal Stimulus

It doesn't happen very often, but I agree with much of what Paul Krugman writes in his column today, "A Long Story." Here's the key part:

Meanwhile, Congress and the Bush administration have reached agreement on a much-hyped stimulus package. But the package, while probably better than nothing, is unlikely to make a noticeable dent in the problem — in part because the insistence of the administration and Senate Republicans on blocking precisely the measures, such as expanded unemployment insurance and food stamps, that are most likely to be effective.

Still, by January the White House will have a new occupant. If the slump is still going on, which is likely, this will offer a chance to consider other, more effective measures.

In particular, now would be a good time to think about the possibility of going beyond tax cuts and rebate checks, and stimulating the economy with some much-needed public investment — say, in repairing the country’s crumbling infrastructure.

The usual rap against public spending as a form of economic stimulus is that it takes too long to get going — that by the time the money starts flowing, the recession is already over. But if this turns out to be a prolonged slump, which seems likely, that won’t be a problem.

On the radio show yesterday, I argued that one month of job loss and an unemployment rate of 5 percent was a little early for extended unemployment insurance benefits. Initial UI claims have jumped in the past few weeks--we've got several months before that wave of entrants will exhaust their benefits. And these benefits can be made available as needed.

Krugman's last paragraph is a good counterpoint to those who argue that public infrastructure projects are not feasible for stimulus, if his thesis about the length of the downturn is correct. But as I argued in The Washington Post last month, the reason to do the infrastructure projects is that they are needed. The reason to accelerate their timing is that in an economic downturn, we can do them more cheaply. Quoting from that op-ed:
The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year.

This approach to counter-cyclical fiscal policy has several advantages. Perhaps most obvious is that it forces the government to establish priorities for capital projects. It reduces overall expenditures by doing more of the work in times of economic slack, when costs are lower. It also abides by pay-go rules, since projects moved up to 2008 need not be done in 2009.

I've got another column in the works that maps this out in more detail. See Mark Thoma for additional commentary.

6 comments:

eightnine2718281828mu5 said...

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we've got several months before that wave of entrants will exhaust their benefits
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If unemployment is currently rising, wouldn't it be prudent to extend benefits for those folks about to be pushed back into a weakening labor market?

A Red Mind in a Blue State said...

Simply excellent--this post and the entire site. I've recommended it to my daughter, a senior econ student at Vandy.

The only problem is you are destroying a lifetime preconceptions about Ivy League professors!

ProGrowthLiberal said...

Paul Krugman decides not to join our coalition against fiscal stimulus and argues for a different kind of fiscal stimulus. A very interesting argument!

Andrew Samwick said...

eightnine,

I just don't think 5 percent unemployment indicates a labor market where jobs are unavailable and where 26 weeks of unemployment insurance is inadequate for most workers. Things I will be watching for are a large decrease in Job Openings (see this survey, next released on Tuesday) as well as the reasons and duration of those unemployed. Increases in involuntary separations or long spells of unemployment argue more strongly for extending UI benefits.

eightnine2718281828mu5 said...

On the other side of the equation, labor stats are influenced by things like the birth/death model that seems to be insensitive to turns in labor market conditions.

One detail I'm curious about: let's say an individual loses UI coverage, but then a few weeks later Congress implements an extension.

If the lapse causes permanent loss of benefits, I would say that that's an additional rationale for an earlier implementation of extensions.

Also, the labor market isn't monolithic; you can have 5% overall unemployent but 15% unemployment in construction or the mortgage industry. Too bad we don't have more focused policy tools to address these types of circumstances.

On your side of the ledger...

There's the theory that US labor was slow to recover at the beginning of the last expansion because a lot of the job creation happened overseas. The flip side could be that US labor won't suffer quite as badly during the down cycle, and the downturn will be more acute overseas.

Anonymous said...

I stumbled upon this blog by accident, and have to say I'm enjoying it immensely. Thanks.

Problems are structural. The issue with the unemployment data is it doesn't indicate the QUALITY of the jobs lost; a blue collar worker losing a $25/hour job has typically replaced it with a job that pays $12/hour or less. They've been able to sustain a reasonable lifestyle these past years by utilizing home equity (loans), savings, and assistance from family. That support system is now falling apart for most.