Matt Yglesias

Reconstruction for the USA

Ryan Avent asks what would happen if for just one year we spent as much on infrastructure investments as we do on the Department of Defense:

With that kind of money you could entirely build out a national network of true high-speed rail. One year’s worth of defense spending gets you that. Which makes one wonder: where are all the economists, wringing their hands over cost-benefit analyses of these defense expenditures? Does anyone doubt that the net benefit of $100 billion spent on high-speed rail is easily higher than that for the last $100 billion spent on defense? Have a look at this if you’re unsure.

And while the gains to new investments in infrastructure (and not just in transportation) would be large, it isn’t as though we lack critical needs. What was the cost, human and economic, of the I-35 bridge collapse? Of the Metro crash and resulting limitations on service? Of the Bay Bridge shutdown? And of course, investments in infrastructure constitute positive contributions to the economy, which ultimately strengthen our ability to direct resources toward defense. Aimless defense spending, on the other hand, may well make us poorer and less secure.

Ryan’s link was to my post comparing America’s 2007 defense spending to other countries:

Under the circumstances, I think it’s clear that the marginal dollar spent on defense has a very low value. And of course though Ryan’s thought-experiment is a fun exercise, you couldn’t build out a national HSR network in one year no much how much money you spent. So the real point would be something like if we took 10 percent of the defense budget and re-allocated that to infrastructure, we could have a national HSR network in ten years. And we’d still be spending over triple what our nearest rival spends.

Something worth noting is that for a hegemonic power suffering from slow-but-steady (but very slow) relative decline, wasting money on national security expenditures actually erodes our hegemony. Meaningful U.S.-Chinese security competition is a generation or two away. By that time, money that was spent in 2009 on fighter planes or nuclear submarines or transportation infrastructure in Afghanistan isn’t going to be doing us any good. By contrast, spending money on preschool in 2009 does improve the U.S.-Chinese balance of power in 2049—investment in early childhood education pays enormous dividends, but it takes a long time to turn tiny babies into productive adults. And transportation is just the same. The construction of heavy rail mass transit in Boston, New York, Chicago, and Washington was extremely expensive but has paid consistent dividends for decades and if properly maintained will continue to do so forever.

I can’t vouch for the authenticity of the quote, but someone told me he heard a Chinese official tell him “over the past decade you’ve spent $1 trillion on Iraq and Afghanistan, we’ve spent $1 trillion building the future of China.” I don’t really think we should view that contrast in a paranoid light, but if you do want to take a paranoid view of the American national security situation it makes a lot more sense to worry about that than to worry that someone in a cave might build a bomb.

Tax Expenditures Are a Poor Way of Subsidizing Infrastructure Investment

(cc photo by moaksey)

The intuitive consequence of the U.S. political system’s aversion to taxes is lower levels of public services and public infrastructure. In reality, however, one major consequence is a tendency to provide services and infrastructure through relatively inefficient methods. The reason is that there are two ways for the government to try to finance things. One is to spend more money and the other is to create a special tax break. Either of these things implies offsetting tax increases in the long run. But the tendency is for conservatives and centrists to treat “tax cuts” as good and “spending” as bad, thus putting a big thumb on the scales in favor of using tax expenditures rather than spending.

One special case of this is the use of tax-exempt bonds to finance infrastructure investment. The federal government exempts certain classes of bonds from income taxation, typically bonds issued by state and local governments to finance investments in school construction or transportation. This subsidizes infrastructure investment and it costs money. A different approach would be to just spend federal dollars on subsidizing infrastructure investment. The CBO and the Joint Committee on Taxation have a new study out on the issue concluding that this tax expenditure approach is highly inefficient. As the Director’s Blog explains:

That study concludes that the amount that the federal government forgoes through tax-exempt bond financing is greater than the associated reduction in borrowing costs for state and local governments. Some analysts have estimated the magnitude of that differential and conclude that several billion dollars each year may simply accrue to bondholders in higher income-tax brackets without providing any cost savings to borrowers.

The reason is that the value of the subsidy is shared between the infrastructure project and the buyer of the bond. Consequently $1 in federal tax expenditure generates less than $1 in reduced borrowing costs. In fact, according to the report “only about 80 percent of the tax expenditure from tax-exempt bonds actually translates inot lower borrowing costs for states and localities, with the remaining 20 percent simply taking the form of a federal transfer to bondholders in higher tax brackets.”

In other words, the approximately $7.5 billion in annual lost tax revenue is generating only $6 billion in additional infrastructure investment.

Cities Getting Screwed on Stimulus Transpo Funds

Back during the stimulus debate I was worried that congress was going to wind up passing too much of the infrastructure money through America’s fifty state governments. State government is, as best I can tell, basically a cesspool whose purpose is to implement everything in the worst possible way. In particular, state government loves to direct infrastructure money away from places where people live (metro areas) and toward backwaters. This is economically inefficient and bad for the environment, so the appeal to state legislators is enormous.

Needless to say that’s what’s happening with ARRA money. In terms of the stimulus-qua-stimulus this probably doesn’t matter, but it also means we’re not going to be reaping nearly the long-term benefits we could or should from new transportation investmenets.

The Lost Opportunity

Ryan Avent on the lost opportunity of the bubble years:

On the other side of things, it obviously would have been nice to have thought a bit more deeply about how to take advantage of the savings glut. The glut meant that the American government could borrow extremely cheaply (”deficits don’t matter,” said Cheney), which opened the door for a lot of deficit spending. One might have looked at the dynamics of the economy — a manufacturing economy struggling as China enjoyed catch-up growth — and determined to use deficit spending to shore-up the safety net (to help struggling workers) and invest heavily in education, health care, and infrastructure to secure long-term economic growth. Alternatively, one might have decided to spend several trillion dollars on wars abroad. But again, there was not much public demand for a large program of public investment, deficit funded or otherwise.

I think it lets the Bush administration off too easily to chalk this up to lack of “public demand” while at the same time framing the choice in an unduly partisan way to make it a “war or public investment” choice.

The fact of the matter is that after the economic successes of the 1990s, mainstream thinking in the Democratic Party became pretty narrowly obsessed with a particular view of the budget deficit’s role in economic life. The idea was that balanced budgets would keep private interest rates low and keep the economy vibrant. This was a good diagnosis of problems facing the country in 1992-94. But it meant that relatively few Bush administration critics were prepared to spend the years 2004-2007 arguing that it would be smart to engage in massive deficit-financed public investment. It’s not that nobody was arguing that—my former boss Bob Kuttner was—but the orthodox view among the opposition pointed in a different direction.

In retrospect, though, the private sector was taking advantage of low interest rates to make basically unproductive investments in housing.

This does leave us with a significant issue moving forward. It seems to me that when you look at the things that people buy with their private funds, that the United States is the greatest place on earth. We have the biggest houses, the best TVs and computers, tons of cars, etc. Even in the midst of an agonizing recession, this is basically a land of plenty. But when you look at the things that we buy collectively with public funds, you find many areas where the United States falls short. Our schools are not the best in the world. Our sidewalks are not the best-maintained. Our mass transit systems are sub-standard. Our cities are unsafe. Our intercity passenger rail is a joke. Our internet is not the fastest in the world and our electrical grid is incredibly outdated. As we move toward recovery, it seems to me that if we really want to boost living standards we need to shift the balance between private consumption and public investment.

What Happens When Projects Come In Under Budget?

Yesterday, Barack Obama hailed the fact that stimulus projects are coming in “ahead of schedule and under budget.” This is nice, but Paul Krugman worries that since the point of stimulus is to spend money this may lead to shortsighted policy:

Seriously: if the projects really are coming in cheaper than expected, that doesn’t mean we should bank the savings; it means that we need more projects.

Fortunately, my understanding is that this is what’s happening. As I heard Transportation Secretary Ray LaHood explain it, the grants are going out under a competitive process. The point of the process is to keep authorizing projects until the money is gone. So when projects come in under budget, that means more projects get funded.

My worry about this is that it seems to me the reason projects are getting done cheaply probably has to do with how bad the economy is. The massive reduction in global economic activity should be making materials super-cheap, and letting things get done at lower cost than would be necessary under ordinary times. That’s why, ideally, we should be getting started on many more infrastructure projects than are being contemplated right now. With local governments straining under the burden of falling tax revenues, things like basic upkeep of existing roads and sidewalks is going to get short-shrift even though it’s cheaper and more macroeconomically reasonable to do the fixes now. Businesses are cutting back on investment due to a lack of confidence, but policymakers should be about 100 percent confident that the United States of America will still be here in 2029, 2039, and 2049 and so people will be around to take advantage of well-maintained infrastructure. That’s not to say we should be pouring asphalt on bridges to nowhere. But I’ve never seen an American city that lacks potholes and cracked sidewalks, and the majority of the public lives in metro areas that could use more mass transit capacity. And that’s to say nothing of the things I can’t see like the bridges that are in need of repair.

Transportation Jobs Are Good Jobs

I’ll be speaking soon on a panel about transportation investments that’s part of an EPI/Demos conference on investing in a better economy. As part of EPI’s burgeoning interest in transportation policy, they have this chart:

This is a fairly interesting finding. Relative to the economy as a whole, jobs created through transportation investments are disproportionately likely to not require a college degree. But they’re disproportionately un-likely to fall into the “low-wage” bottom 20 percent of the income distribution. So when dollars are shifted out of current consumption and into transportation investments, this has the effect of pulling people in low-wage jobs into better jobs for which many of them are perfectly well-qualified. And in the end, that should be good for the earnings potential of even those left behind in the low-wage sector.

Of course that doesn’t say anything about what kind of transportation you spend it on. Clearly, though, this works much better as economic policy if you spend it on useful transportation—fixing roads in existing core areas, building out rail transit systems, intercity high-speed rail in a few key corridors, etc.—that could help reduce the economic drag of chronic congestion.

Buy High, Sell Low

I understand that California’s got budget problems, and looking into the sale of potentially valuable state owned land thus has some merit, but it seems to me that it would be pretty unfortunate to sell these parcels amidst a huge recession and real estate bust. The time to sell publicly owned property that’s ripe for redevelopment is when times are good. During good times when there’ll be plenty of buyers you can make sure to sell it to someone whose development plans serve some kind of reasonable conception of the public interest.

Besides which, the smart thing to do would be to monetize those assets during an upturn, and then sock the money to plug budgetary holes during downturns. Or even better, you could use the money to fund capital projects. Currently, we tend to do capital projects during good times when revenues are high, even tough this is also when costs are high. Meanwhile, we sell assets during bad times when revenues are low, even though this is when sale prices are low. The smart thing would be to do the reverse—the overall tax burden would be the same, but we could get much more infrastructure for our money. Not, of course, that sound budgetary practices are typical of state governments in general or California in particular. But our failure to adopt sounded budgeting at the state and local level significantly lowers our economic growth and overall well-being in the long term.

Our Interrelated Crises

David Brooks seems to think that Barack Obama is trying to do too much at once. Steve Benen retorts that “The notion that multiple problems — healthcare, energy, education, infrastructure, economic growth — may be inter-connected seems to elude Brooks entirely.”

Obviously, people who want to do a lot of stuff like to make those kind of interconnection arguments. So it’s worth trying to think clearly and explicitly about the relationships. The starting point, I would say, is growth. There are a lot of factors behind growth including, of course, old fashioned human ingenuity at coming up with new products to offer and new ways to offer old products. But perhaps the most important things policy can do to impact the capacity for sustainable growth—i.e., growth that’s not based on asset price bubbles—is to increase the availability of high-quality human capital and the availability and quality of public sector physical capital. Which is to say education and infrastructure. Energy is related to this in two ways. First, the power grid on which our electricity flows is part of the infrastructure. And second, a lot of energy is used in transportation, and the quantity of energy used in this way is impacted by the nature of the available transportation infrastructure. The goal of curbing carbon emissions probably isn’t vital to our growth prospects except in the sense that over the long run an increasingly deadly and inhospitable environment will be disastrous for all human endeavors. But though avoiding ecological catastrophe is something of a freestanding goal, our growth prospects require new investments in infrastructure, so it makes sense to try to make sure this new infrastructure is suited to our environmental goals. Last, health care. These kind of investments we’re talking about will cost money. Some of that money can and should come from taxes. And some of that money can and should come from short-term borrowing. But to make the investments sustainable we need to put the budget on a sustainable basis. And that requires tackling the health care system in a systematic way.

And so—ta da—it’s all connected. I think there’s plenty of room for disagreement as to exactly what needs to be done on those fronts. But I really don’t think it’s credible to say that we ought to just slow-walk things. What it is fair to say is that it’s too bad the previous administration spent eight years doing nothing whatsoever on the infrastructure, health care, and energy pieces of the puzzle. They tackled education, the smallest of these segments, early on and made some progress but then didn’t seem very interested in following-through.

Obama Posits False Analogy Between “PayGo” Rules and Household Budgets

At yesterday’s fiscal responsibility summit, Barack Obama talked about his desire to re-impose “pay-as-you-go” budget rules, saying:

The pay-go approach is based on a very simple concept: You don’t spend what you don’t have. So if we want to spend, we’ll need to find somewhere else to cut. This is the rule that families across this country follow every single day — and there’s no reason why their government shouldn’t do the same.

This is sort of a political banality, but it’s not very accurate. The way PayGo works is that whenever you want to increase spending on something, you need to identify a precise offsetting increase in revenue or decrease in spending on something else. That’s not at all the way I spend money. If I’m at the local sandwich shop getting lunch, and I see a special sandwich for sale that looks super-yummy but costs a bit more than the sandwich I’d been planning to buy I don’t stop, identify an offsetting future lunch (bring in a sandwich from home instead of buying one…) calculate whether or not it exactly covers the difference, and then place the order. More broadly, Brian Beutler observes:

This is sort of ridiculous. Americans everywhere expend beyond their immediate means all the time. It’s gone too far in the last many years, but there’s nothing wrong, in principle, with buying some stock, taking on a bit of credit debt, having a mortgage on a house, or putting money into a certificate of deposit account. We’d actually have some pretty big problems on our hands if Americans suddenly turned to pay-as-you-go personal budgeting, even though they’re certainly moving into less risky positions as the economy nosedives.

Indeed. Suppose a good college offers to let you study there in exchange for a bunch of money. More money than you have! But then it turns out that you can get a loan to pay your tuition on reasonably attractive terms. It’s not “living beyond your means” in some kind of imprudent way to take the loan. On the contrary, it would be imprudent to let debt-aversion keep you from going to college. The wage premium earned by college graduates far outweighs the debt burden. That’s not to say that PayGo’s a terrible idea. The budget process ought to be different from the way individual households handle their money. But that’s just the point, it gets very misleading to think of the federal government as analogous to an individual. Among other things, people die and the government doesn’t. And the budget process is, obviously, a political process so it makes sense for it to be stilted and formal in a way that household budgeting isn’t.

That said, PayGo is actually a pretty bad model for the component of the federal budget that relates to infrastructure. It would make much more sense to budget for that the way a company budgets for business investment—on a depreciation schedule rather than on an ongoing-cost basis.

The Government Makes the Stuff We Need

A commenter at the Atlantic remarks:

There’s the rub. My company’s bank loan officer has called frequently asking if we need to borrow. They are begging to lend money. For what? We could buy a nice new machine tool at a good price, but why do that when sales are falling? Put an extension on our building? Buy some failing competitor and strap oneself with debt? Unless you absolutely need a new car or a new television or a new roof, the big ticket discretionary purchases paid for by loans aren’t going to be made. The loans the banks are making now are companies rolling over existing debt, not new debt. Given the “stuff” out there that is discretionary purchases, I wouldn’t be at all surprised to see unemployment hit 20% before a bottom is reached.

I think this captures something important. And I also think it’s an important part of the case for increased public investment, somewhat apart from the specific issue of the economic stimulus package. If you try to put the contemporary United States in historical and international perspective, you’ll see that we’re doing really well in a lot of ways. As a society, we’re not suffering from an objective shortfall in the quantity or quality of automobiles we have. We’re certainly not falling short in either the number of houses around or their general size and lavishness. We have a lot of very nice televisions, a lot of computers, a lot of cell phones and DVD players, etc. It’s not just that we’re prosperous enough that people aren’t starving to death, but over and above that compared to anyplace else in the world we just have a ton of consumer goods stockpiled such that even if purchases of new goods slowed enormously for years we could keep on keeping on at a high standard of living.

But that’s not to say that things are perfect. Compared to other times and other countries, there are a lot of scores on which we’re doing extremely well. But there are other respects in which we’re falling well behind what we know is achievable by contemporary societies.

We have a smaller proportion of our population graduating from college than do some other countries, and we’re making no progress. Relatedly, our K-12 education system could perform better. Our intercity passenger rail offerings are much worse than they could be, and none of our non-NYC metro areas have really top-notch mass transit offerings. We have substantially more violent crime than do other countries or historical periods in the United States. The level of prenatal health care our pregnant women are receiving is substandard, as is the physical fitness of our children. Public libraries are generally worse than they were a generation ago. America’s streets and sidewalks are, in general, not especially clean or well-maintained. And though our highways are plentiful, they’re not well-maintained either.

This all adds up to a lot of fields in which it would be plausible to say that we could enhance human welfare by expending more funds. But these are basically all things in which the private sector could realistically only have a secondary role. There’s a lot of dogma about to the effect that jobs working for the government aren’t “real” jobs—that somehow the police and teachers and firefighters and the guys who build the bridges and drive the buses aren’t creating anything of value. But that’s preposterous. The work is real, the jobs are real, and the benefits are real. It’s true that it’s difficult to maximize the efficiency of a public sector enterprise. But it’s also true that there are categories of goods that can’t be adequately provided without a large public sector role. And given the generally high level of wealth we enjoy, compared with the past 35 years of starving the public sector, the marginal dollar invested in these kind of endeavors can do an enormous amount of good. And that’s especially true at a time when it seems that relatively few individuals seem inclined to go further into debt for the sake of acquiring a BlueRay player. There’s enormous willingness out there at the moment to lend money to the United States government, and there’s a lot of stuff the United States government could be doing to benefits its citizens.

Infrastructure Spending Not Targeted to High-Unemployment States: But Should It Be?

Pro Publica put together an informative analysis and interactive chart showing that stimulus money isn’t being targeted at high-unemployment states:

This is useful information. That said, I don’t actually think infrastructure spending should be targeted at high unemployment states. Look, for example, at a quintessential high-unemployment state like Michigan. Things are bad there for the same reasons things are bad everywhere. But the reason things are especially bad in Michigan is the structural decline of employment levels in the Detroit-centered automobile industry. One upshot of this structural decline is that today Michigan accounts for a smaller share of America’s population than it did in the past, and it will represent an even smaller share in the future. Under the circumstances, it wouldn’t make sense to locate a disproportionately large share of new infrastructure money there. Infrastructure should be built where it’s most useful—primarily in the largest and/or fastest growing of the 100 largest metro areas.

One thing to note about this is that it’s not as if it’s impossible for spending outside of Michigan to help people living in Michigan. If currently unemployed Northern Virginia and Maryland construction workers get jobs building the Silver Line and the Purple Line that makes it more likely that they’ll buy the products Michigan makes than they would be if they were sitting around idle.

Stimulus money has dual purposes, to provide direct assistance to people in need and stimulate the economy, and also to lay the groundwork for future prosperity by undertaking worthwhile projects. In the case of infrastructure, it’s appropriate to weight the balance of considerations primarily toward “undertaking worthwhile projects” which means the benefits probably won’t be narrowly targeted at the worst-off places. Other aspects of the stimulus package are directly targeted at unemployed workers and therefore will disproportionately benefit areas with a lot of unemployed workers.

Members of Congress Bragging About Projects They Voted Against

Back in late January, I praised Rep. John Micah of Florida for calling for the inclusion of more passenger rail funding in the stimulus bill. As time passed, substantially more rail funding was included in the stimulus. This led Senator Jim DeMint (R-SC) and Rep. John Boehner (R-OH) to offer sundry anti-rail tirades, alleging that all the money was going to be squandered on an allegedly wasteful LA-Vegas rail line.

And what did Rep. Micah do? Well, he didn’t take to the floor of the House to castigate his colleagues for their backwards attitude on high-speed rail. And he didn’t vote for the bill, even though it had been changed to meet his objection. Instead he voted against the bill and then bragged about the rail:

“I applaud President Obama’s recognition that high-speed rail should be part of America’s future,” the Florida Republican beamed in a press release.

Yet Mica had just joined every other GOP House member in voting against the $787.2 billion economic recovery plan.

This is pretty goofy if you ask me. There’s nothing wrong with conservatives voting “no” on a bill they don’t like. But if they actually do like the bill, they should vote for the bill.

The Value of the Public Sector

One thing that I think gets a bit lost in discussions of stimulus multipliers and so forth is that this kind of argument doesn’t capture the substantial range of opinions that exists about the actual value of public sector projects. When you’re doing GDP calculations, you’re basically just looking at the price of doing the work. So if it costs $12 million to build a bridge, then all else being equal building the bridge adds $12 million to GDP. That’s the right way to do the national accounts data, but it’s not actually the right way to think about a project. In part, this can even get a bit imponderable. The Golden Gate Bridge looks really cool. When planning your future bridge, you could elect to spend extra money on ensuring that you wind up with an awesome-looking bridge and it would be hard to say definitively whether or not it was “worth it” to spend the extra cash. Someone might look at what you’re doing and say your project is full of “waste.” Alternatively, you might reply that the economy is in need of “stimulus” so it’s smart to do the bridge in the most expensive plausible way. But nobody could quite say whether or not the improved aesthetics are actually improved enough to justify the price. It’s just a decision.

By the same token, you can raise GDP a lot by building pointless crap — giant monuments in the middle of nowhere would be stimulus. But it’d be a bit strange to say you were actually adding to the nation’s wealth by doing that. On the other hand, people like the Gateway Arch and Mount Rushmore and the Eiffel Tower even though all that stuff’s pointless from one point of view. Conversely, public projects can increase well-being by far more than their cost. The New York City Police Department is an expensive undertaking, but to try to save money by eliminating it would be idiotic. Similarly, while we have some schools in this country that are spending a lot of money and accomplishing very little, we have other schools that are creating enormous value by educating children. This difference isn’t well-captured by looking at the difference between the schools’ contributions to GDP.

Thus, one thing people are disagreeing about when they disagree about the stimulus is about the value of public sector activities. I’m told that Amity Shlaes was on Bill Bennett’s radio show earlier and told him “the thing that you might want to do on your website is post those pictures of those cement posts of Japan after its multiple infrastructure programs that doubled unemployment.” That’s perhaps a compelling argument against building cement posts. But Japan entered its “lost decade” with infrastructure that was in many ways much more advanced than America’s. The abysmal quality of our current passenger rail service means, for example, that there’s a lot of low-hanging fruit that would improve things. And it seems to me that increasing the energy efficiency of federal buildings and doing repairs on our schools would be extremely valuable. After all, for decades now the country has been persistently governed by folks ideologically predisposed to underinvestment in the public sector. Individual projects are, however, always going to be subject to debate. What most conservatives seem to be doing, however, is just kind of pounding the table and insisting that any public sector undertaking is, by definition, “pork” and/or “waste” and that’s just not a tenable position.

School Construction Stimulus

I got a request in a thread a few days ago asking if I was still dating Sara Mead. Indeed I am. But even if I wasn’t, I would still recommend her piece on why school construction should be part of a recovery package:

New investments in school construction and modernization are a natural fit for the stimulus package. Unlike education programs, which need ongoing funding in order to keep operating, a two-year investment in school construction would produce thousands of school buildings that could be used for decades to come, with no need for continued federal funding. Similarly, investments in “greening” existing school facilities to reduce their energy consumption will produce substantial, ongoing savings that school districts can use to fund pre-k, increased teacher compensation, and other educational programs.

Many states and school districts have construction projects that were already in the works but have been put on hold due to the economic downturn. Federal school construction aid would allow work to resume on those projects, moving cash into the economy quickly. School construction would also create new jobs for construction workers hard-hit by the housing downturn. Because the construction sector is slow right now, schools and districts are likely to secure better deals on projects now than they would if they waited until the economy picks up.

It’s worth noting that, in general, we tend to undertake our public sector construction projects in a perverse way. During boomtimes, there’s lots of revenue sloshing around to be spent, so projects get funded. During downturns, state and local governments are hurting for revenue, so we cut back. It would make a lot more sense to actually separate this kind of spending from the regular budget, establish targets, and encourage projects to be undertaken during downturns when it’s cheaper and easier to get things done.

Rivlin on Infrastructure

A few people have asked me what I think of these remarks from Alice Rivlin:

In testimony before the House Budget Committee yesterday, Alice M. Rivlin, who was President Bill Clinton’s budget director, suggested splitting the plan, implementing its immediate stimulus components now and taking more time to plan the longer-term transformative spending to make sure it is done right.

“Such a long-term investment program should not be put together hastily and lumped in with the anti-recession package. The elements of the investment program must be carefully planned and will not create many jobs right away,” said Rivlin, a fellow at the Brookings Institution. The risk, she said, is that “money will be wasted because the investment elements were not carefully crafted.”

I think that’s pretty reasonable. What I don’t think is reasonable is seeing this as a major criticism of the plan that’s on the table. New infrastructure spending is a very small proportion of that plan. Given the overall size of the plan, I don’t think $0 new infrastructure is the appropriate number. Thanks to declining marginal returns, it’s worth doing some of everything. But Rivlin is right to say that we shouldn’t try to fundamentally shape the nation’s infrastructure around the needs of stimulus. And I don’t think Obama’s doing that. What would reassure me is if Obama supplemented his talk about the stimulus with a recognition that even though this week may not be the best time for a major infrastructure overhaul, that he does think such an overhaul is needed. In my opinion, we need a drastically different approach to infrastructure policy. We also need drastic short-term economic measures. It’s perfectly reasonable to think that the rethinking needs to happen at a somewhat slower pace than stimulus considerations would allow.

A Republican Worth Listening To

Rather than endless coffee sessions with John Boehner, maybe the White House should pay more attention to this guy:

Rep. John L. Mica (Fla.), the ranking Republican on the transportation committee, called the proposed infrastructure spending “almost minuscule” and expressed regret that the administration had not crafted its plan around an ambitious goal such as building high-speed rail in 11 corridors around the country, which Mica said would cost $165 billion.

“They keep comparing this to Eisenhower, but he proposed a $500 billion highway system, and they’re going to put $30 billion” in roads and bridges, he said. “How farcical can you be? Give me a break.”

I wouldn’t call the proposals farcical. My understanding is that the predominant administration view is that the stimulus shouldn’t be infrastructure-focused but that infrastructure should be tackled in a serious way in separate legislation down the pike. I’m not sure I would have gone that way, but it’s not a crazy view. But Rep Mica’s view isn’t crazy either. And when you’re looking to craft legislative compromise, sitting down with the people who have non-crazy objections seems like the way to go.

Getting Shovels Ready

Initially, I was inclined to look forward to a stimulus package that was heavy on infrastructure investments. These are said to have a reliably high multiplier effect and they also have solid long-term payoff—if done right—beyond the short-term stimulative effect. Then I was brought back down to earth by the reality that there’s an unfortunately limited supply of so-called “shovel-ready” projects that could be done within the next two years. But Paul Krugman asks the reasonable question of why the stimulus time horizon is so short, noting that Obama’s economics team is predicting that their plan will leave elevated unemployment all throughout 2011 and 2012:

As far as I can tell, Mr. Obama’s planners have focused on investment projects that will deliver their main jobs boost over the next two years. But since unemployment is likely to remain high well beyond that two-year window, the plan should also include longer-term investment projects.

And bear in mind that even a project that delivers its main punch in, say, 2011 can provide significant economic support in earlier years. If Mr. Obama drops the “jump-start” metaphor, if he accepts the reality that we need a multi-year program rather than a short burst of activity, he can create a lot more jobs through government investment, even in the near term.

Still, shouldn’t Mr. Obama wait for proof that a bigger, longer-term plan is needed? No. Right now the investment portion of the Obama plan is limited by a shortage of “shovel ready” projects, projects ready to go on short notice. A lot more investment can be under way by late 2010 or 2011 if Mr. Obama gives the go-ahead now — but if he waits too long before deciding, that window of opportunity will be gone.

Broadening the window will increase the number of projects that can be completed within the time frame. In particular, it will increase the number of such projects because if you commit in February of 2009 to the money being available in 2011 and 2012 that means you can spend 2009 and 2010 getting the project shovel-ready. And, indeed, it means you can have some stimulus spending in 2009 and 2010 specifically focused on dreaming up and readying new projects. I wouldn’t dogmatically insist that the two-year time horizon is wrong—I’ve been assuming it’s right—but Krugman’s point that the Obama team’s own projections seem to imply it’s wrong seems sound.

I do, however, have some qualms with tying the case for infrastructure investments so closely to arguments about stimulus. There’s a case for enhanced infrastructure spending that’s entirely separate from this. And part of that case involves the idea that infrastructure spending should get different budgetary treatment and ought to be accounted for the way businesses account for their capital expenditures—on a depreciation scale—in a way that would better insulate decision-making from the year-to-year issue of managing the budget.

The Enduring Impact of a Bridge

Tom Friedman is surely right to say that investing in our education system would be a good idea. But not only does the specific proposal he makes suffer from the problems Kevin Carey details, but he’s dead wrong about this purported contrast:

Sure, we’ll waste some money doing that. That will happen with bridges, too. But a bridge is just a bridge. Once it’s up, it stops stimulating. A student who normally would not be interested in science but gets stimulated by a better teacher or more exposure to a lab, or a scientist who gets the funding for new research, is potentially the next Steve Jobs or Bill Gates. They create good jobs for years. Perhaps more bridges can bail us out of a depression, but only more Bills and Steves can bail us into prosperity.

This is totally wrong. A bridge doesn’t “stop stimulating” the economy once it’s done. Well-functioning bridges are integral to economic prosperity. The economic success of Northern Virginia is built in part on a solid foundation of a highly educated workforce. But it’s also built on the fact that there are bridges across the Potomac River. The most important economic impact of the bridges over the river isn’t the immediate job-creation effect that building them had. It’s that first the construction of highway-bridges created the NoVa DC suburbs and second that the construction of rail bridges allowed the creation of the dense corridors of economic activity that shape and define Arlington County.

Right now, the country is suffering tens of billions of dollars in lost economic productivity each year due to traffic congestion in the vicinity of our major metropolitan areas:

Relieving that congestion will due us enormous enduring economic good. And to relieve it, we’ll need new infrastructure. Probably not very many new bridges, as it happens, though we certainly should do repair work on our existing highways and bridges. But new investments in mass transit and freight rail infrastructure will do a lot to mitigate these problems. And combined with state-of-the-art congestion pricing—which, in turn, would require some infrastructure investments to be workable—we could solve the congestion problem and do ourselves a world of good.

This is largely independent of the stimulus question, but insofar as we’re looking to spend money it definitely makes sense to find smart ways to use stimulus funds to kick-start some of the needed activity. That’s not to deny the importance of education. Rather, smart investments in education are in exactly the same basket as smart investments in physical infrastructure—both will help the country enormously over the long-run.

The High-Speed Rail Stimulus?

John Judis has an article expressing skepticism that Barack Obama’s stimulus is of the right size and nature to meet our present challenges that winds up touching on a subject near and dear to my heart—high-speed rail:

One area that is ripe for such investment–and that is not, from what I have seen, a declared priority of the Obama administration–is high-speed rail. Amtrak’s Acela trains–the closest thing we have to one–average less than 100 mph between Washington D.C. and Boston, whereas trains in Western Europe and Japan go more than twice as fast. Many of them also run on electricity. They would be the most energy-efficient and quickest means of getting between places like Boston and New York, or Los Angeles and San Francisco. But they would require a massive investment. For instance, installing high-speed rail in the Northeast corridor could cost about $32 billion, while California’s high-speed rail system would require up to $40 billion. A system that would address the other areas of the country could easily raise the cost to the hundreds of billions. The House transportation and infrastructure committee has currently proposed $5 billion in stimulus funds for intercity rail–not even a down payment on what it would cost to convert the U.S. to high-speed rail.

Investing in high-speed rails would be very expensive, but unlike tax cuts–the benefits of which can be siphoned off in the purchase of imported goods–the money spent would go directly to reviving American industry and improving the country’s trade balance. That doesn’t just mean jobs creating dedicated tracks or new rail stations: Though the U.S. abandoned train manufacturing decades ago to the French, Germans, Canadians, and Japanese, this kind of production could be undertaken by our ailing auto companies or aircraft companies–if the federal and state governments were to place orders. And building trains that would run on electricity would be a paradigmatic example of the “green jobs” that Obama often touts.

Like Special Agent Mulder, I want to believe in this. In particular, I do believe that it would be a good idea to make these kind of investments. But I also know that many people hear about the idea of spending $40 billion in California and $32 billion in the Northeast and maybe comparable amounts to build HSR systems in Florida and the rust belt and they start to blanche. So now that all of a sudden there’s broad political consensus in favor of adding a few hundred billion dollars to the deficit, I really want to put my hand up and say “hey! look over here! some productive infrastructure investments we should make!”

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Density, Recession, and Taxes

This article in the Post on country budget issues, falling home prices, and soon-to-be-rising tax rates in the DC area is quite informative. But near the end they get around to the fact that the situation is much worse in outer ring areas (Loudon, Prince William) than in inner suburbs (Arlington) or District, and I don’t think the piece offers a very clear explanation.

But one main factor is simply that values shouldn’t fall nearly as much in a place like Arlington as they will in a place like Prince William. Prince William County is the kind of place people move because it was too expensive to afford a house in Arlington. Thus, as prices in Arlington fall, buyers who during the boom would have bought in Prince William instead take advantage of the lower prices and buy in Arlington. That both cushions the fall in Arlington and accelerates the decline in Prince William. Nobody can be completely insulated from a broad, nationwide decline in home values that’s intertwined with a global recession but high-value downtowns and inner suburbs will weather the storm better than sprawly exurbs whose raison d’être was the unaffordability of the center.

The other slice of this is infrastructure. Per-home infrastructure costs are lower in more densely-built areas than they are in less-dense areas. It’s a basic efficiency/economy of scale issue. We have some misguided policies in place that lead to the greater cost of low-density living not being wholly internalized by residents of low-density areas. But the high-density to low-density subsidy is, thankfully, not so large (ideally it would be zero or even go in the other direction) as to wipe out this disadvantage. Consequently, when there’s a need to plug a hole in revenues you wind up having a higher per person burden.

The Investment Deficit

Interesting report from the Campaign for America’s Future on America’s investment deficit in infrastructure:

America grew up investing in its land and its people. Historically, we directed roughly 8 percent of our gross domestic product to long-range investments, and the investment paid off. Now we are down below 4 percent. Our post World War II infrastructure is starting to decay, and we aren’t replacing it. We are lamenting the loss of jobs rather than hiring people to renew and rebuild.

Other countries are racing past. China spends 9 percent of its GDP on infrastructure investment and opens a new subway system every year.

Beyond the quantity of funds, one major problem with our infrastructure policies is the quality of our decision-making. Our spending allocations are highly politicized and our politics are highly skewed toward underpopulated areas and toward senior members of congress. But the two places where you don’t need more infrastructure are the places where nobody lives and the places that have already been targeted for spending. Instead of the spending we need, we’ve tended to get round after round after round of bridge and road construction in Alaska when what we need are things that would reduce congestion and support smart future development in the country’s largest metro areas.

Ask The Mineshaft

Bruce Bartlett has a very nice summary of Keynes’ thinking on liquidity traps and the need for stimulation:

What Keynes figured out is that when conditions such as these exist, the federal government must step in to raise spending in the economy and thereby increase velocity. This means running a budget deficit, but that is only part of the solution [...] Keynes argued that the only thing that will really work is if the federal government uses its resources to purchase goods and services. It must buy “stuff”–concrete, computers, paper, glass, steel–anything as long as it is tangible. In other words, the government must spend the way households do, by buying things. It must also employ labor, because much of what people spend money on today is in the form of services [...]

At this point, Federal Reserve policy will become effective again. As prices and interest rates rise, the liquidity trap disappears and money begins circulating more rapidly; i.e., velocity increases. This is what ends an economic crisis. Unfortunately, it was not until World War II that the federal government spent enough on real resources–because they were needed for the war effort–to make Keynes’ theory work in practice. [...]

For what it’s worth, Keynes didn’t know what to do in this situation, either. He suggested building pyramids and burying bank notes in deep mine shafts that had been filled in. As people tried to dig up the money, they would be forced to employ labor and purchase equipment that would raise spending and thereby growth. In the end, it took the greatest war in history to make Keynes’ theory work.

I think that mine idea is pretty clever. But obviously the better answer is SUPERTRAINS. In particular, whenever I start prattling on about high-speed rail, people point out that it would cost an ongodly sum of money. But in our current crisis, one of our main problems is a lack of non-ridiculous ideas about things to spend money on. For example, it turns out that the total cost of “ready to go” infrastructure projects in this country is valued at tens of billions of dollars rather than the necessary hundreds of billions. That’s because planning was done in the old “how will we find the money” world. At the moment, we’re in a weird “how will we find things to spend money on” world. Under the circumstances, one thing I’d be doing if I were president is dedicating a small slice of the 2009 stimulus making sure that we get a big and absurdly expensive list of high speed rail projects “ready to go” in some sense by 2010. Hopefully, by then the economy will be back on the path to recovery in which case interest rates will be back at a level where we don’t necessarily want to engage in huge gargantuan deficit spending. In that case, most of those plans will have to be shelved. But if not, some can roll forward.

Broadband Stimulus

When talking about the idea of doing some infrastructure investments as part of a stimulus package, I’ve mostly focused on things like transportation infrastructure and our sorry electrical grid. But my friend Julian Sanchez has an informative report out about a coalition of telecom firms and advocacy groups that have often clashed with the telecoms in the past over regulatory issues coming together to advocate expenditures on enhancing the country’s broadband infrastructure.

That sounds fine to me, though my understanding (possibly somewhat out of date since I last looked at this a few years ago) is that the largest impediments to getting really fast broadband in the United States are more regulatory in nature than physical. In other words, technology exists and could be deployed and even is being deployed to some extent but it’s all being done at a snail’s pace because there isn’t much competition.

Interstate Infrastructure

I think Greg Mankiw might want to think harder about this: “First, since most infrastructure is used locally, the proper level of spending is best determined by state and local governments rather than by the federal government.”

The country has always had a lot of infrastructure spending take place at purely the state and local level. After all, a lot of infrastructure is a purely state and local issue. Here in DC, a lot of our small city parks are actually under the control of the National Parks Service and it’s a big problem. There’s a small park between my neighborhood and Chinatown that the community wants to redo on a kind of “Chinatown” theme and there are all kinds of hold-ups because it seems doing this will actually require an act of congress. Consider yourself lucky that if you don’t live in DC your local park infrastructure decisions are made on a local level. That’s how it’s always been, and I don’t see anyone proposing that we do otherwise.

But at the same time, we’ve always done some infrastructure spending and planning on a national level. The authority to build roads is one of the congress’ enumerated powers, and if you think back to your US History days you’ll dimly recall something about Henry Clay’s “American System” which involved building canals and such. The issue back then and carrying forward to the present day is that a lot of infrastructure crosses state lines. People who live in New York use Newark Airport in New Jersey and they need ways to get there. And people in New Jersey use Philadelphia Airport in Pennsylvania. People live in Maryland and take MARC trains to work in DC. And of course people in every state consume goods made abroad, but few states contain a major container port. It would be crazy for the federal government to take sole responsibility for infrastructure in such a giant and diverse country, but at the same time there’s no way you can just leave this up to the state and local governments and hope they remember that the highways need to meet at the border.

Deficits Only Matter When They Matter

Paul Krugman says that now is no time to worry about deficits:

Just to be clear, I’m not arguing that trying to reduce the budget deficit is always bad for private investment. You can make a reasonable case that Bill Clinton’s fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade, which in turn helped cause a resurgence in productivity growth.

What made fiscal austerity such a bad idea both in Roosevelt’s America and in 1990s Japan were special circumstances: in both cases the government pulled back in the face of a liquidity trap, a situation in which the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity.

And we’re in the same kind of trap today — which is why deficit worries are misplaced.

One more thing: Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment — of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run.

While on this subject, it’s worth saying that infrastructure spending really ought to be treated differently for deficit purposes than other kinds of spending. Most government spending — on defense, on Social Security, on Medicare and Medicaid, on food stamps — is basically analogous to household consumption. Here you want the accounts to balance out over the long run. It’s fine to run a small operating deficit during a normal recession to avoid disruption, and a big operating deficit when you fear a liquidity trap to avoid depression, but you want to keep the long-run debt load in check so you want balanced budgets or even small surpluses at other times. But infrastructure spending isn’t like this and shouldn’t be treated that way. It’s more analogous to a business’ capital spending. If a business builds a new factory, it doesn’t count all that spending as “spending” and take a huge one-year loss followed by years of extraordinary profits. Instead, the cost of building the factory is spread out for accounting purposes across its useful life on a depreciation schedule. That provides a more accurate picture of the year-to-year financial health of the business.

Infrastructure ought to be accounted for in a similar way. If you’re considering building a bridge that will take 2 years and $X to build, but that will last for decades, there’s no particular reason to think you should raise enough tax revenue to cover the cost during that two year period. Borrowing money in order to make investments that have long-term payoff is what borrowing is there for and the government can borrow on unusually good terms. Of course borrowing money to finance stupid infrastructure projects is a bad idea, but borrowing money to finance beneficial ones is fine even under circumstances when borrowing for other purposes wouldn’t be.