Is Infrastructure Spending Stimulative?

Wyatt Andrews of CBS News writes:

When Moody’s studied the 2009 stimulus package, infrastructure spending rated high. For every dollar spent, $1.44 was returned to the economy.

The problem with this is that it assumes that infrastructure projects will be executed in exactly the way that Keynesian theorists say that they ought to be (“timely, targeted, and temporary” in Lawrence Summers’s words).

That might work on a blackboard or in an (incomplete) computer model, but not in the real world. In the real world, infrastructure projects involve planning, bidding, contracting, construction, and evaluation. All of this takes time, especially if you want to make sure the money is spent wisely (remember, it also must be properly “targeted” or else it won’t work).

And, indeed, as an emperical fact of life, it does seem to take time. According to the CBO:

[F]or major infrastructure projects supported by the federal government, such as highway construction and activities of the Army Corps of Engineers, initial outlays usually total less than 25 percent of the funding provided in a given year. For large projects, the initial rate of spending can be significantly lower than 25 percent.

When macroeconomists account for the delays that are inherent in these types of projects, they arrive at exactly the opposite conclusion of Moody’s. For example, a recent International Monetary Fund paper by Eric Leeper, Todd Walker and Shu-Chun Yang found: Implementation delays can produce small or even negative labor and output responses.” Moreover, these “Implementation delays can postpone the intended economic stimulus and may even worsen the downturn in the short run.”

This helps explain why Lord Keynes himself became a skeptic of these types of projects later in life.  In 1942 he wrote:

Organized public works…may be the right cure for a chronic tendency to a deficiency of effective demand.  But hey are not capable of sufficiently rapid organization (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.

3 thoughts on “Is Infrastructure Spending Stimulative?

  1. 1shelties2

    Whatever brings even a small change is better than no change at all. Remember the adage: from tiny acorns mighty oaks do grow.

    1. Matt Mitchell

      The problem is that acorns cost money.  So if they are worth it, you may end up making yourself worse off. 

    2. Janet

      But what if, the process of growing the acorn, you level an acre of perfectly healthy forest? Are you still better off?

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