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Where Haste Is Not Necessary and Waste Is Not Justified

January 29th, 2009 . by economistmom

Concord’s number one complaint about the House-passed recovery plan:  not that it increases the deficit by $816 billion or so over the next ten years (most, but not enough(?) of it, over the first two years), but that so much of that represents spending on longer-term initiatives that shouldn’t have to be deficit financed:

President Obama has stated that the economic recovery legislation “is not just a short-term program to boost employment. It is one that will invest in our most important priorities like energy and education, health care and a new infrastructure that are necessary to keep us strong and competitive in the 21st Century.” These are important goals, yet the budgetary calculus for longer-term fiscal investments is fundamentally different from that of short-term stimulus…

The “spend out,” or budgetary cost, of the various proposals matter, but they should matter in terms of how the costs compare with the benefits. With short-term stimulus, the costs of deficit spending should be compared to the benefits on GDP and employment. With longer-term investments, whether deficit spending is justified depends on whether the longer-term economic benefits of such spending outweigh the longer-term costs. And with deficit financing of those longer-term initiatives, those costs include the adverse effects of deficits on national saving, the costs of debt service that will be incurred with compound interest, and the risk to the short-term stability of the U.S. economy from increased borrowing…

“Fiscally-responsible deficit spending” need not be an oxymoron. In the current debate about how to best engineer a strong and sustainable economic recovery, fiscal responsibility in the short run targets deficit-financing to only the most effective anti-recessionary policies. Over the longer term, fiscal responsibility means investing wisely in projects that will contribute positively to economic growth–and being willing to pay for those worthwhile projects over time. On both fronts, policymakers should not confuse the size of our economic problems with the benefits of various policy options. Cost is a poor measure of effectiveness.

The current temptation to throw federal money “out the door” as quickly and energetically as possible is perhaps understandable as a demonstration that the federal government is doing all it can for the American people in response to the economic crisis. But haste may make for a lot of waste, and many proposals being considered as part of the recovery plan are clearly designed to promote economic growth for the longer term, where haste is not necessary, and waste is not justified.

And today, the Congressional Budget Office sent a letter to Senate Budget Committee Chairman Kent Conrad suggesting that efforts to increase the “haste” of infrastructure spending will (unfortunately) likely also increase the “waste” of it:

Actions that Could Accelerate Spending

CBO has not analyzed the various programs in detail in order to identify the specific steps that might be taken in each case to speed up spending. Some possibilities for accelerating spending in infrastructure and other grant programs include changing federal standards and requirements by:

  • Waiving requirements for environmental and judicial reviews;
  • Allowing contracts and grants to be awarded outside the normal competitive bidding process;
    Waiving maintenance-of-effort requirements for state and local governments; and
  • Changing the way funds are distributed. For example, spending for some education programs might be sped up if the federal government used formulas instead of competitive processes to distribute funds. In the case of transportation projects, it could mean waiving formulas and instead giving priority to those grantees that are able to get to contract most quickly.

Some funds for infrastructure projects might also be spent more quickly if recipients were:

  • Offered financial incentives for work completed within one to two years of enactment;
  • Given deadlines for obligating funds;
  • Given the authority to “pre-award” contracts (that is, award contracts before all of the currently required approvals and certifications are obtained); and
  • Allowed to self-certify compliance with certain standards (federal agencies would then review paperwork and documentation after projects have begun).

States also have contracting and other requirements for carrying out infrastructure projects, however, and changes in those standards might also be necessary in order to accelerate spending. One option might be to make the receipt of federal funds contingent on such changes.

Making such changes to accelerate federal spending could have other consequences, however. Undue speed could result in: errors in planning, design, or contracting that might result in poor performance, legal challenges, or increased project costs; unanticipated environmental impacts; or the undertaking of projects that are of little value but that can be started up quickly.

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