Will we be over-stimulated?

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Stimulus fever is in the air, and with the election of Sen. Barack Obama to become the 44th US president, it’s now reaching a fever pitch. US automakers have already made the rounds on Washington DC, meeting with Congressional leadership to generate political support for another $25 billion in government subsidy to avoid bankruptcy. Now, congressional leaders and some economists are clamoring for $150 billion to $300 billion in additional stimulus to goose the national economy – all this on top of the $700 billion financial services “rescue package” passed in October.

Harking back to the days of the Great Depression, many policymakers see transportation spending in roads, highways, and transit as an effective job creation program. Indeed, the American Association of State Highway and Transportation Officials has identified 3,109 “ready to go projects” worth $18.4 billion that could, in theory, produce 644,000 jobs.

That’s more than double the number of jobs that disappeared in October according to the U.S. Department of Labor. Unemployment edged up to 6.5% in October as the economy shed 240,000 jobs. The number of employed has fallen by 1.2 million workers since the beginning of the year. Meanwhile, wages for those with jobs increased an average of 3.5% over the last year, significantly lagging inflation (for urban consumers) of 5.3% during the same period. More than half of that fall occurred in September, October, and November.

These numbers embolden economists and pundits alike. Paul Krugman, writing in the New York Times, advises President-elect Obama to be bold and audacious in his fiscal stimulus:

“My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little. In short, Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity.”

Krugman’s observation is an extraordinary statement because little evidence exists that this kind of discretionary fiscal policy has a meaningful impact on the economy. Alan Aurbach, one of the nation’s leading macroeconomic policy experts and an economist at the University of California at Berkeley, examined fiscal policy during the 1980s, 1990s and early part of 2000s and concluded:

“There is little evidence that discretionary fiscal policy has played an important stabilization role during recent decades, both because of the potential weakness of its effects and because some of its effects (with respect to investment) have been poorly timed.”

Where fiscal policy has been effective it’s been through “automatic stabilizers”– programs such as social security and unemployment insurance that maintain income levels regardless of current economic conditions. Of course, these programs are not discretionary—they are ongoing programs resistant to manipulation by politicians responding to the immediate political climate.

In short, a blanket infusion of cash through a one-time (or two or three) Congressional stimulus package(s) focused on transportation is not likely to be effective. This is true for a number of reasons. The key should not be how many miles of concrete we pour, or even how many jobs we create. Instead the focus should be on how much the investment creates a more productive and globally competitive American economy.

It’s true transportation spending will ramp up construction jobs, but these are temporary ones that provide little stimulus to the advanced service, information technology, and manufacturing jobs that are critical to the long-term growth of the US economy. In addition, construction jobs tend to be seasonal, hardly the type of job creation that builds long-term economic expansion.

More substantively, the transportation needs of a globally competitive, service-based economy differ fundamentally from those of the industrial economy that benefited so much from federal highway largess in the 20th century.

In the 1950s, transportation investment was rather straightforward. Mobility was relatively low and restricted. Most households owned a car, but usually just one. Most households lived close to where they worked and walked to meet their daily needs. Typically, the wife stayed home, dropping the husband off at the train or bus station to take mass transit into work, picking him up at the end of the day. Many families could afford to allow one spouse to stay at home.

A national transportation infrastructure program was relatively easy to identify during this period (even if it was politically controversial): connect major urban cities to create a unified economy, keep freight moving, and ensure workers could get to their places of employment. An Interstate Highway System linking the Central Business Districts of major cities, complete with beltways to shuttle employees and through traffic around these centers, created a highly efficient hub-and-spoke highway network.

Today’s travel environment is far more complex, and doesn’t lend itself to the hub-and-spoke system. Current travel patterns point to a transportation network that should focus on improving point-to-point travel in a dynamic economy, more of a spiderweb than a hub-and-spoke network, as Adrian Moore and I point out in our new book Mobility First: A New Vision for Transportation in a Globally Competitive Twenty-first Century.

In an era of customized travel, massive infusions of funding into a transportation network designed for the industrial era won’t be effective. Moreover, the legislative process is likely to be far less efficient at allocating transportation funds in a meaningful way without a system that allows travelers and highway users to determine what projects get the highest priority. What politicians or even federal planners think is important may not be to travelers. Only by adopting the latest and newest technology to gauge user willingness to pay, most usefully through electronic tolling, can the right projects be put in the right place at the right time while also ensuring a sustainable funding stream for the road network.

Perhaps not surprisingly, economists Clifford Winston and Chad Shirley, writing in the Journal of Urban Economics, estimate that the return on investment to highway spending has fallen from 15% in the 1960s and 1970s to less than 5% in the 1980s and 1990s. They suggest one reason for the decline in productivity impacts has do with the fact that the highway system is already built out. Another reason is that federal transportation policy often targets unproductive investments – such as “Bridges to Nowhere” – rather than high-priority items, reducing transportation spending’s effectiveness at boosting overall economic growth.

All this suggests that blanket spending on transportation projects may not have substantive long-run impacts on the economy. In fact, it could work against job creation and productivity if the added spending reinforced a transportation network that is already poorly suited to the needs of a modern, 21st century services-based economy.

Douglas Elmendorf and Jason Furman, writing for the Brookings Institution, report that infrastructure spending has a lackluster record for boosting short-term economic growth. The focus should be elsewhere. For example, we should look more to the longer-term impacts of investments that actually increase productivity and competitiveness.

Infrastructure should be seen, then, as a way to boost the speed of information and movement of goods, not as a quickie jobs program. Congressional leaders and urban planners should keep these cautionary points in mind as they ponder the need and efficacy of yet another stimulus package.

Samuel R. Staley, Ph.D. is director of urban policy at Reason Foundation (www.reason.org) and co-author of Mobility First: A New Vision for Transportation in a Globally Competitive Twenty-first Century (Rowman & Littlefield, 2008).



















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I actually liked obama at first, now I look forward to him being replaced, maybe the US will get a decent president for a change

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With the economy we have

With the economy we have today we now badly need to think the solution that can solve this problem. Pres. Obama has already come up with the economic stimulus. And as of now our country is still struggling to survive this crisis and more and more people today are now losing their job. The economic stimulus package has a very unpopular provision in it, but thus far it's only unpopular with other countries. No stimulus funds are to be given to companies that outsource jobs, or hire guest workers on H1-B visas. This provision of the economic stimulus package is regarded as rank protectionism by other countries, which are (understandably) upset by the diminished ability that results of not being able to provide their citizens with good jobs, especially India. India has provided tech-savvy guest workers for years, and those jobs are incredibly lucrative. It seems that if it is supposed to help America, the economic stimulus package is hurting someone else.

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