Wednesday, January 14, 2009 5 comments ++[ CLICK TO COMMENT ]++

Infrastructure stimlus looks like a bad plan

The US government thinking of pursuing infrastructure spending as part of its stimulus program. According to this article, the benefits are likely to be small. The article talks about Canada but the economy of the United States is somewhat similar:

While infrastructure spending is a great way to prop up economic activity, many economists don't see it doing much for job growth, where money may be better spent on daycare and nursing homes.

The knocks against infrastructure are that it is not as labour-intensive as it used to be, tends to employ many more men than women and, these days, requires skills in engineering, technology and architecture that are already in short supply, critics say.

"A lot of this ethos of infrastructure-equals-jobs comes from the 1930s when you put a lot of guys to work digging ditches and shovelling gravel. And we don't do that any more," said Dr. Jim McNiven, professor emeritus and former dean of management at Dalhousie University.

"You can't just take unemployed people off the street and have them build roads and overpasses," he said.

Much new funding may well wind up being spent on new machinery rather than hiring, he added said.

"You might as well just send a cheque to Caterpillar in Illinois."

If you are trying to increase productivity, it is good to have money being spent on machinery. But if the goal is to create jobs, this may not help as much--especially if the machinery is imported from other countries.

Also, the goal is to do something quick so the projects with long-term benefits (say building a nuclear reactor) will not be pursued with these programs.

Let's also not forget, as I referenced in a Bloomberg article a few weeks ago, that some of the spending will be to build bridges to nowhere (to placate the rural citizens,) rather than building something more useful like mass transit in cities (ok, being an urban dweller, I'm biased ;) .)

Perry Sadorsky, associate professor of economics at York University's Schulich School of Business, suggests Central Canada's traditional factory base should morph into a hub of green manufacturing that would supply growing demand here and abroad.

Pushing for "green" manufacturing makese more sense in theory; but the reality is quite different in my opinion. First of all, there are very few projects that are economically viable without a carbon tax (and USA and Canada don't seem to be interested in enacting a carbon tax of any sort.) So even if you build up factories, they will go bankrupt in a few years.

Secondly, it is extremely difficult for developed countries to compete against low-cost countries such as China when it comes to manufacturing. Let's not forget that some of the fastest-rising solarcell manufacturers are in China. Trying to re-tool the manufacturers in Canada, or America, to produce "green" products seems tought.

So, overall, I'm not too sold on the infrastructure idea--especially if it is oriented towards short-term, so-called shovel-ready, projects. As the quoted expert mentions, if you want to create jobs, it has to be service jobs.


5 Response to Infrastructure stimlus looks like a bad plan

January 14, 2009 at 3:03 PM

Infrastructure spending may not be all that bad.

1. We don't dig ditches by hand any more, but somebody needs to build, maintain and operate all the machinery. Extra jobs at Caterpillar and it's competitors help as much as jobs anywhere else. A big construction program should also cushion the blow to the construction industry now that nobody is building homes, malls and offices anymore.

2.Modern manufacturing is mostly extremely capital intensive and becoming more so. Low wages are not very important when labor is a small part of your total cost. Quality of labor matters more. Even more important is political stability and reasonably honest government. You really do not want to sink billons of $ into a new plant only to have it seized by some government cronies. The developed world has huge advantages there over countries with low wages.

3.Bridges to nowhere may have a limited payoff once completed but their construction still creates jobs and keeps spending going. As Keynes observed, you could just build bridges to nowhere and then blow them up again (to help the demolitipn industry)

Bring on the infrastructure spending I say.

Oh, and cut taxes big time, by increasing available income the real debt burden of the private sector will be reduced so the current delevering process might be over quite a bit sooner.

(if only the idiotic clowns that claim to be our government here would heed this advice...)

January 14, 2009 at 8:02 PM

It all depends on what you are tryign to stimulate. If you assume that the goal is to stimulate jobs, and hence try to prevent sharp declines in consumer consumption, then some of what you are suggesting won't help much.

Regarding points 1 & 2... spending that goes primarily into machinery will not help jobs very much. Furthermore, if you believe that there is overcapacity in manufacturing, particularly in China but possibly in Germany, USA, and others as well, then it simply sustains the current overcapacity. For instance, if there was indeed a bubble in commodities, then Caterpiller HAS to cut capacity. Trying to sustain is not going to accomplish much. (This is similar to my argument that one shouldn't try to maintain the same capacity at GM/Ford/etc. Try to prevent a collapse of GM, yes, but not maintain the same capacity.)

The goal should be reduce overcapacity while trying to prevent consumption from completely collapsing. This requires job growth and not necessarily heavy investments in technology or machinery (although in the long run, these things help society.)

IANAE but Austrian Economists, not that I'm a fan of them, would be all over you for your point #3 ;) But even if you assume that the broken window theory implies that society can benefit, I think it would only be appropriate in an extreme scenario (say the Great Depression.) I suspect Keynes would argue the same thing. We are nowhere near that point. Even the bearish economists are expecting US GDP to only contract by around 5% (I personally don't think it would be worse than -3%, but a lot depends on oil prices, US$ exchange rate, and things like that.) Perhaps you will argue that we need to do it before the situation gets out of control but that's a judgement call. I personally would not support draconian actions such as #3 on a large scale. I simply don't think we are in the same situation.

As for taxes, I'm against cutting them in general but certain ones may be ok. Perhaps cutting payroll taxes or sales taxes or some such thing may be help. I am skeptical of supply side notions of the benefits of tax cuts and I certainly don't think it's very prudent for USA to be doing it now with large deficits. Let's also not forget that the Bush administration enacted massive tax cuts, hurting the budget situation, which, according to some like John Hussman, may have been recycled into the dubious real estate bubble.

January 15, 2009 at 12:43 PM

It is not clear that a package this size can be implemented and managed in a manner that gives any confidence of success. Anyone with experience in government procurement knows this will take many months from release of funds to actually getting people to work.

There is an interesting analysis of the impacts of such a stimulus at

In a nutshell, their analysis says that it is too small and unless coordinated with an integrated global response, will achieve little to nothing.

January 15, 2009 at 1:57 PM


You raise the good point that all of this may be too small and possibly end up accomplishing very little in the near term. Even the Keynesians pushing for big stimulus, such as Paul Krugman, don't think it's enough.

I personally don't think the spending in most of the developed world will be critical in the grand scheme of things. Instead, what it will come down to is the situation in places like China. Current account surplus countries, like China, Germany, etc, are the ones that need to somehow boost demand...

January 15, 2009 at 3:05 PM

I would agree that Obama's proposals are probably far too small. They are also likely to be too slow. I agree also that is germane for Germany, China and other big surplus countries (including the Netherlands!) to stimulate domestic demand. Without coordinated action on that front a lone effort by the US will mostly balloon the trade deficit and lay the ground for a disastrous trade war.

I disagree that the problem isn't bad enough to go for really drastic action. Around the world GDP shrank at frightening rates in q4 2008. Trade is collapsing and with everybody and their granny cutting production and consumption q1 2009 is going to be fugly. And now the sovereign downgrades begin... The situation already ia out of control, the task at hand is getting it back under control.

As noted, building machinery or any other capital investment will create jobs. In the end, all payments made by he government as part of a stimulus program will end as either wage payments or payments to investors (dividends, interest). The bulk will be wage payments unless the share of labor income in GDP suddenly falls of a cliff. It is entirely irrelevant if those wages are paid by Caterpillar or anybody else and therefore almost irrelevant what exactly the government spends on.

Almost all infrastructure investment will have a positive effect on eventual GDP growth. Better roads and bridges are definitely not a negative and even a bridge in a remote area will at least beneft the (few) inhabitants of that area. The idea of blowing bridges up to stimulate the demolition industry is, of course, in jest. If we are going to stimulate the demoliton industry I propose we have the blistering idiots that call themselves "Austrian economists" demolished. Now that is a benefit to society... :)

I disagree there is such a thing as overcapacity. In fact I would venture that "overcapacity" is conceptually impossible. Human wants are infinite so you can never have enough productive capacity. What we have is a coordination problem in getting the people who want to consume the means to consume and not trash economic incentives along the way. (Interfluidity blog has a rather clever post on the subject, please do read it!)

There is strong evidence that high taxes discourage and distort economic activity so lowering taxes is generally a good idea. Governments are trying to do far too much anyway and not doing it well either. (and before you say I am being incosistent, I am always much in favor of limited government but one crucial function of a limited government is rebalancing the economy when it manages to get itself in a tailspin. Limited governments have the big advantage that they can enter a bust like this with modest debt and possibly a budget surplus so they would have far greater firepower in dealing with the bust).

An added benefit of lowering taxes is imo that it will increase real income and thus decrease the real debt burden of the private sector. That would be very usefull in a situation where everybody is frantically trying to reduce hus debt burden (and failing because this effort reduces economic activity, thus increasing the real debt burden faster then debt can be paid down). Cutting taxes can also be done quickly so the problem of timing the stimulus is dealt with.

So, I will renew my call:

Lower taxes and start spending on infrastructure now!

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