Federal Stimulus Missed Key Infrastructure Opportunities

Published on September 21, 2010

Austan Goolsbee Chairman, Council of Economic Advisors

The National Bureau of Economic Statistics has declared that the recession ended in June 2009, eighteen months after the downturn began in December 2007.  The recession was the most severe since the Great Depression of the 1930s both in terms of duration and contraction in GDP.  Fifteen months after the recession ended, GDP has yet to achieve the peak levels of the prior expansion and unemployment remains elevated.  The Wall Street Journal’s article covering this topic includes relevant statistics and graphs that put the recession in historical context.

Stimulus Effectiveness Questioned

One of the most contentious debates over the past two years has involved the efficacy of the federal government’s $787 billion stimulus program which was enacted by Congress in February 2009.  The package included a variety of measures that were intended to appeal to different constituencies and even the architects of the plan admit that it was mired in bureaucracy that delayed implementation of infrastructure projects for months.

One example of the bureaucracy that impeded quick action involved the $5 billion grant to insulate homes which has sometimes been referred to as “cash for caulkers”.  As The Wall Street Journal article published today points out, the program was impacted by delays from the start due to questions over the wages that would have to be paid due to the labor provisions of the 1931 Davis-Bacon Act.

In the video shown below, Austan Goolsbee comments on what he would have done differently to make the stimulus program more successful.  Mr. Goolsbee recently replaced Christina Romer as Chairman of the Council of Economic Advisors.  He had a major role in designing the stimulus bill.  While the interview took place in October 2009, the points that Mr. Goolsbee makes are still relevant today.

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Infrastructure:  The Missed Opportunity

Charlie Munger, who recently spoke for two hours at the University of Michigan, has been a strong advocate for spending stimulus funds on infrastructure projects. Such spending would provide society with tangible benefits in exchange for the heavy debt that was assumed.  In addition, spending on highways and similar infrastructure would likely be less controversial than other programs due to a near universal acceptance of the legitimacy of federal involvement in matters of interstate commerce.

One of the major problems with the stimulus bill is that only a small portion of the spending involved infrastructure projects and, as Mr. Goolsbee admits, much of the spending was delayed.  The case study of the $5 billion “cash for caulkers” program shows that federal bureaucracy and the need to placate unions created major impediments to timely expenditure of the funds.  The same issues apply to road construction projects.

If the $787 billion stimulus program had been divided between infrastructure spending coupled with a temporary suspension of the Davis-Bacon Act and more aggressive tax relief, it is likely that greater impacts would have been seen in 2009 and earlier this year.  A payroll tax holiday combined with a suspension or major reduction in the capital gains tax in 2009 could have addressed lackluster demand while simultaneously encouraging redeployment of private capital to new ventures.

Mr. Goolsbee and others within the Administration seem to be aware of the limitations of stimulus programs associated with top-down government controlled projects.  While the political realities in Washington obviously create limitations standing in the way of an optimal policy, it is unfortunate that politicians were unable to collectively come up with a more coherent stimulus plan at a time when it could have potentially reduced the duration and severity of the recession.

Federal Stimulus Missed Key Infrastructure Opportunities
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