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Spending on Infrastructure: Big Numbers, Mixed Impact

President-elect Barack Obama’s advocacy of a historic infrastructure spending plan looks like another example of the federal government wanting to spread the wealth of its economic rescue efforts.

With the government having already employed financial sector bailout packages, special lending facilities, lower interest rates, tax rebates and housing relief, the infrastructure plan appears aimed at helping cash-strapped states as much as the average worker

“We need to try to do some direct stimulus, direct job creation,” says John Irons, research director at the Economic Policy Institute, which has been advocating such a plan for about a year. “You hear from mayors and governors. They all have projects that are ready to go and just need funding. We know the money is going to be spent.”

The seemingly sudden ascension of the infrastructure plan, which cynics say the President elect has inappropriately compared to the Interstate Highway System project of the 1950s, comes in the wake of Obama’s high-profile meeting last week with governors.

“I don't think anything is a coincidental in Washington,” says David Williams, vice president of policy at Citizens Against Government Waste. “He [Obama] really wants to stop the bleeding and this is his attempt to stop the bleeding—to spend more.”

It’s still unclear how much money is being considered, but the potential is large. The National Association of Governors estimates there are some $56.7 billion in shovel-ready projects over the next 120 days. The number swells to $136 billion over a 24-month time frame.

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Analysts say it is now clear the infrastructure plan will be a major part of January’s stimulus package, the cost of which has previously been estimated at $300 billion to 700 billion. That package is also likely to contain direct aid to states, social safety net measures and tax cuts.

What's more, Obama’s interest in infrastructure is hardly new. His stimulus program of a year ago contained some $60 billion over ten years for a National Infrastructure Reinvestment Bank.

What Supporters Say

Construction Highway
AP
Construction Highway

The prospect of significant infrastructure spending was welcomed by business and investors.

“Funding for these infrastructure projects is not business as usual,” says Robyn Boerstling, director of transportation and infrastructure policy at the National Association of Manufacturers. “The needs are so great,” because cash-strapped states have been deferring projects, new or maintenance oriented.

Booerstling and others says the plan will lead to new jobs for the beaten-down construction industry and parts of its supply chain, as well as less obvious beneficiaries, such as engine and equipment manufacturers.

The push for stimulus measures with a job creation component also happens to coincide with a rapidly deteriorating job market, as evidenced by the stunningly large decline in November payrolls announced last Friday.

Irons say such spending will put an immediate “dent in unemployment” and because it is expected to play out for a couple years “will provide enough business to lead to greater employment.”

The American Association of State Highway and Transportation Officials, for instance, recently estimated that $18 billion worth of funds covering 3,000 ready-to-go projects would generate 630,000 jobs.

Another 250,000 jobs would result from $20 billion in green school construction and renovation, according to an analysis by the the Economic Policy Institute.

Other economists were generally optimistic about the positive impact, especially given the large needs of states and cities, some of which have constitutional constraints on deficit spending.

“This is an instance where crisis might present an opportunity,” says Paul Wachtel of NYU’s Sterns School of Business. The improvements could have long-term benefits for the US economy.”

What The Critics Say

Infrastructure spending, however, is hardly without risk and certainly not immune to criticism and skepticism.

In general, economists point to a low rate of return on investment and the potential for corruption and waste.

“I have serious reservations that government spending is stimulus, period,” says Dan Mitchell of the Cato Institute and former Capitol Hill economist. “What would that have been financed if the money was left for other purposes. It didn't work for [presidents Herbert] Hoover or [Franklin Delano] Roosevelt in the ‘30s and it didn’t work for Japan in the ‘90s.”

Though critics admit repair-based projects are preferable to “bridge-to-nowhere” ones, the allocation of money is often based on political factors, not smart economics.

Critics point to expensive mass transit systems in Los Angeles, and even Washington DC and the wide, sometimes irrational dispersal of funding for security measures after the 9/11 terror attacks.

More practically, opponents cite the time lag between the allocation of funds and the actual start of work, which in some cases is long enough that the need no longer exists and any benefit is marginal, if not superfluous.

In addition, companies sometimes find it preferable to pay overtime to existing workers rather than add new ones.

“My main concern is the cost of doing this will probably be double what the price tag will be,” says Steve Hanke of Johns Hopkins University. “Its going to cost a lot more than advertised.”

For all the debate about the pros and cons of infrastructure spending as a fiscal stimulus tool, there are few recent examples on a federal level. And don’t look to the Interstate Highway System as any guide.

Then President Eisenhower championed the project during a time of almost unparalleled prosperity in the 1950s. The highway system was conceived as a 12-year, $25 billion project. By general accounts, it wound up costing $114 billion over three and a half decades.

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