Tag Archives: Lord Keynes

The Political Economy of Infrastructure Stimulus

Economists have long recognized the value of infrastructure. Roads, bridges, airports, canals, and other projects are the conduits through which goods are exchanged. In many circumstances, private firms can and should be allowed to provide this infrastructure. But in other cases, there may be a role for public provision at the local level. But whatever its merits, infrastructure spending is not likely to provide much of a stimulus.

That is my colleague, Veronique de Rugy, and me. In our latest working paper, we examine the macroeconomic literature on infrastructure stimulus. In my view, the most significant problems with stimulus have less to do with macroeconomic theory and more to do with its real-world application. Lawrence Summers, an eminent Keynesian famously noted at a Brookings event a few years ago that:

Fiscal stimulus is critical but could be counterproductive if it is not timely, targeted and temporary.

In the real world, it seems that most stimulus—especially infrastructure-type stimulus—fails one or more of these tests.

The bottom line: even if it did work in theory, the political apparatus seems incapable of implementing Keynesian stimulus in the ways that Keynesians want them to. That seems to explain why Lord Keynes himself grew skeptical of the policy tool. Near the end of his life he wrote:

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they 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.

Here is Veronique on our piece.

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.

Why This Isn’t A Time to Worry that Government Is Spending Too Little

Last week, Ezra Klein wrote that state budget shortfalls constituted a massive “anti-stimulus” which might overwhelm the Federal Stimulus (implying the need for further federal spending). I responded with a post arguing that, while Klein’s story is plausible, the numbers just don’t add up. The massive increase in federal spending in the last few years has more-than made up for any decreases in state spending.

This, in turn, prompted an interesting response from Harry Moroz over at Huffington Post. Mr. Moroz writes:

Obama’s efforts to counteract the economic downturn…accounted for only 34 percent ($205 billion) of increased spending in 2009. The rest of the increases have little to do with stimulating the economy….A comparison of federal spending and aggregate state spending is irrelevant. Comparing federal stimulus spending and state spending cuts is only appropriate and useful because both are responses to the economic downturn.

In other words, Mr. Moroz would prefer that we not look at overall spending increases because most of these increases were not intended to be stimulative. (I trust that Mr. Moroz will correct me if I am mischaracterizing his assertion.)

I agree with Mr. Moroz’s point that most of the spending increases were not stimulative (that’s kinda the problem). But the much-ballyhooed Keynesian model—on which proponents of increased government spending hang their intellectual hats—makes no allowance for intentions. Instead, they assert that all government spending, no matter what it is spent on, is stimulative. Here is Lord Keynes on the subject:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again…there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

For his part, President Obama made a similar claim in February of 2009:

Then you get the argument ‘well, this is not a stimulus bill, this is a spending bill.’ What do you think a stimulus is? That’s the whole point. No, seriously. That’s the point.

And though Mr. Moroz would not like to count President Bush’s $700 billion TARP bill either, the fact remains that that president, too, thought he was stimulating the economy.

The real question is: Intentions aside, does government spending actually stimulate the economy? Over the long run (when Lord Keynes said we were all dead) the answer is almost certainly “no.”

Using international data, a number of peer-reviewed studies have examined the relationship between government size, somehow measured, and economic growth. Here is a sample: Barro (1991 and 1989); Folster and Henrekson (2001); Romero-Ávila and Strauch (2008); Afonso and Furceri (2008); Chobanov and Mladenova (2009); Roy (2009); and Bergh and Karlsson (2010). Each of these studies finds a strong, statistically significant, negative relationship between the size of government and economic growth.

What about the short run? Here again the evidence seems weak at best. Consider new research by Harvard’s Robert Barro and Charles Redlick. They find that for every dollar the government spends on the military (read: takes out of the private economy), the economy gains just 40 to 70 cents. Spending a dollar to obtain 40 to 70 cents does not a good deal make. Or consider another study by Harvard’s Laruen Cohen, Joshua Coval and Christopher Malloy. They rely on the fact that the federal government tends to spend more money in districts whose congressional members are chairs of powerful committees than in districts whose members are just rank-and-file. They find that firms actually cut capital expenditures by 15 percent following the ascendency of a congressman to the chairmanship. Moreover, firms seem to scale back employment and experience declines in sales.

It seems to me that by just about any measure, we are currently conducting a large-scale experiment in massive government spending. Moreover, I believe the results of previous experiments predict that this one will lead to slower growth and less economic opportunity. This is not the time to worry that perhaps we have spent too little.

I may be missing a nuance in Mr. Moroz’s argument. I hope he will disabuse me of my errors with a reply.