EconomistMom.com

Economists Susan Woodward and Bob Hall have started a new blog (”Financial Crisis and Recession” -obviously timely!), where today they argue that infrastructure spending seems a pretty good bet as effective fiscal stimulus.  They cite a Valerie Ramey paper that concludes that each additional dollar of “exogenous” government spending (i.e., spending changes that aren’t merely responses to the business cycle) translates directly into an economy that’s one dollar bigger.  So Woodward and Hall conclude that:

…the one-for-one rule derived from wartime increases in military spending would also apply to increases in infrastructure spending in a stimulus package. We should not count on any inducement of higher consumption from the infrastructure stimulus but we should also not worry that infrastructure spending might displace consumption and other categories of spending.

Thus, infrastructure spending seems to be the new “darling” of ideas for the next stimulus package, likely to be taken up in January–among conservatives and liberals alike.  (Bob Hall is the economist who developed Dick Armey’s “flat tax” proposal in the mid 1990s, by the way, and as I’ve mentioned before, Marty Feldstein, another prominent economist who has traditionally favored supply-side tax policies, has recommended infrastructure spending over tax cuts for the next stimulus.)  The problem with more tax rebates or other ways of just “throwing money” at households, is that ordinary households don’t seem to be in the mood to shop right now.  Better for the government to spend money directly, as fast as it can.  Dollar-for-dollar is a lot better than 20 cents on the dollar…

But how?  This CNN-Money story offers some ideas, but big questions remain.  Economists seem to have only stylized or anecdotal evidence of how effective infrastructure spending would be at immediately creating new jobs and otherwise stimulating the economy.  (And where would these projects be, and who would get the new jobs?  Could some laid-off autoworkers get them, for example?)  We seem to know little about how much infrastructure spending could be realistically undertaken ASAP without turning the “fast” spending into “stupid” spending.  Ideally we would like to pursue projects that would provide the most effective short-term stimulus while also leaving us with lasting investments that encourage economic growth and will pay off over the longer run.

I’m hoping the Congressional Budget Office (CBO) will revisit their analysis of policies for fiscal stimulus which they did nearly a year ago now, before the last stimulus which consisted largely of tax rebates to households (influenced largely by CBO’s wisdom).  At the time of the last stimulus, CBO was pretty down on infrastructure spending as “stimulus”:

Conceptually, spending on these kinds of projects seems to offer an appealing way to counteract an economic downturn and has the potential to enhance long-term economic growth. Because these projects are capital projects, their timing can be flexible. When demand is not sufficient to fully employ productive resources in the economy, a backlog of such projects is available that can employ workers and use capital. If those resources were indeed not being used fully, the social cost of the projects could be substantially reduced.

Practically speaking, however, public works involve long start-up lags. Large-scale construction projects of any type require years of planning and preparation. Even those that are “on the shelf” generally cannot be undertaken quickly enough to provide timely stimulus to the economy. For 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.

Some of the candidates for public works, such as grant-funded initiatives to develop alternative energy sources, are totally impractical for countercyclical policy, regardless of whatever other merits they may have. In general, many if not most of these projects could end up making the economic situation worse because they would stimulate the economy at the time that expansion was already well under way.

But much has changed in the economy and in economists’ minds since the last stimulus, so I’m wondering what CBO would say now.