Infrastructure-Spending Benefits Questioned

By Mark Magnier of the WSJ. Excerpts:

"“When you flip the infrastructure switch, the light doesn’t necessarily turn on,” said Andrew M. Warner, an economist at the International Monetary Fund. “The returns are a long way from being automatic.”"

"Washington-based Progressive Policy Institute concludes that every dollar spent on U.S. roads, bridges and public transport spurs $1.50 to $2 of growth."

"In the 1980s, research by economist David A. Aschauer concluded infrastructure spending produced sizable benefits, sparking others to posit that projects could pay for themselves nearly three times over through added tax revenue. Later research using more refined models that factored in the impact of higher taxes needed to pay for building programs, for example, pared these estimates.

Mr. Warner, in an August paper, found little evidence that infrastructure projects spark economic booms. While big projects are often credited with spurring growth, he says, many are initiated after an economy is gearing up and may be a result, rather than the cause, of expansion."

"He cites the cases of South Korea and Taiwan, which saw high growth for decades without evidence of an infrastructure-led boost, and Bolivia, Mexico and the Philippines, which saw low growth despite high infrastructure spending.

Another potential problem is the reliability of data used to justify many projects, much of which comes from government agencies and groups with a vested interest in approval.

Politicians often prefer dams, long-distance highways and bullet trains that make the news, critics add, rather than schools, hospitals and smaller projects that may be more economically productive."

"A more recent IMF report hit a cheerier note. Conditions for ramped-up investment are ideal, it said, provided projects are well chosen and structured, address a pressing need, are financed through efficient public investment systems and pass a vigorous risk-benefit analysis." (that is a pretty tough list of requirements)

Energy stimulus programs are like "attaching a lawn mower to a fire hydrant"

See Waste cited in energy stimulus program, 11-2-11, by CAROLYN LOCHHEAD of the San Francisco Chronicle. Excerpts:

"The Department of Energy's Inspector General said Wednesday that the 2009 stimulus program for green energy was so at odds with the realities on the ground that it was akin to "attaching a lawn mower to a fire hydrant.""

"...weatherization programs of such shoddy quality that more than half of those audited failed inspection because of substandard workmanship."

"... problems also plagued training programs for green jobs that were allocated nearly $500 million. Of the roughly 125,000 workers targeted for training, only 40 percent received it and only 8,035 participants landed jobs."

"... there is no difference between a plumber who installs a water-saving, low-flow toilet and a plumber who installs a standard toilet, other than the government's definition of the first job as green."

"..."in reality, few actual 'shovel ready' projects existed,"..."

"...as late as last month, 45 percent of the stimulus funds had not been spent."

:...bureaucratic hurdles such as the "literally thousands" of state and local officials, contractors and others involved."

"...the Energy Department "now confronts the unpleasant task of laying off significant numbers of the contractor workforce, many of whom had just recently been hired.""

"W. David Montgomery, a former official at the Congressional Budget Office and Energy Department who taught economics at Stanford University and the California Institute of Technology, said that trying to promote clean energy as a jobs program was misguided."

"..."loan guarantees such as the kind that Solyndra received "will amount to nothing more than pushing on a string," because there will be little market demand for alternative energy."

A $38.6 billion loan guarantee program creates fraction of jobs promised

See Green dog bites man by

"Here’s a shocker from the Washington Post:

A $38.6 billion loan guarantee program that the Obama administration promised would create or save 65,000 jobs has created just a few thousand jobs two years after it began, government records show.

The program — designed to jump-start the nation’s clean technology industry by giving energy companies access to low-cost, government-backed loans — has directly created 3,545 new, permanent jobs after giving out almost half the allocated amount, according to Energy Department tallies.

President Obama has made “green jobs” a showcase of his recovery plan, vowing to foster new jobs, new technologies and more competitive American industries. But the loan guarantee program came under scrutiny Wednesday from Republicans and Democrats at a House oversight committee hearing about the collapse of Solyndra, a solar-panel maker whose closure could leave taxpayers on the hook for as much as $527 million.

The GOP lawmakers accused the administration of rushing approval of a guarantee of the firm’s project and failing to adequately vet it. “My goodness. We should be reviewing every one of these loan guarantee” projects, said Rep. Marsha Blackburn (R-Tenn.).

Obama’s efforts to create green jobs are lagging behind expectations at a time of persistently high unemployment. Many economists say that because alternative-­energy projects are so expensive and slow to ramp up, they are not the most efficient way to stimulate the economy.

Sometimes, “many economists” are right. Here’s some wisdom from one economist:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

F.A. Hayek

The plan was to create (or save) 65,000 jobs. It apparently didn’t turn out that way."

Raising taxes on the wealthy and businesses may not be a good way to pay for the proposed stimulus

See Obama's Job Plan: A Never-Never Bill by Megan McArdle.

"I was tenatively in favor of the jobs plan that Obama proposed last week. But that's before I realized that he has no intention of trying to get it passed:

The White House said Monday that President Obama wants to pay for his $447 billion jobs bill by raising taxes on the wealthy and businesses. Jack Lew, director of the Office of Management and Budget (OMB), said the tax hikes would pay for Obama's entire bill, which the administration is sending to Congress Monday evening.

The chief provision announced by Lew would be to limit itemized deductions for individuals who make more than $200,000 a year and families that make more than $250,000, something the Obama administration has previously pushed to do through its budget proposals. Lew told reporters at the White House press briefing that this would raise about $400 billion.

The administration would tax the income investment fund managers make, known as "carried interest," as regular income instead of as capital gains, which has a low 15 percent tax rate. This is another longstanding administration goal that has been resisted by Wall Street as well as some Democrats.

The administration estimates the capital gains change would provide $18 billion in revenue.

The administration also wants to eliminate tax breaks for the oil-and-gas sector, which would raise $40 billion, the administration said.

Another $3 billion would come from changing the way corporate jets depreciate. With a few other revenue increases, Lew indicated the total measures proposed by the administration would bring in $467 billion, $20 billion more than the cost of the bill.

It's worth noting that a deduction phase-out is actually worse than a marginal tax hike. Deduction phase-outs amplify other rate increases--depending on how they're structured, a deduction phase-out can actually mean that you make less money at $251,000 than $249,000.

But more importantly, paying for the bill with tax hikes--any tax hikes--is going to substantially reduce the stimulus this bill provides. Just as government spending boosts aggregate demand, tax hikes (yes, even on rich people), reduce aggregate demand. Providing stimulus through payroll tax cuts that are financed with tax hikes on other people is like trying to boost your household income by making your wife pay you to mow the lawn.

Yes, yes, I know--why should you believe me, when we all know that libertarians sell their souls to Satan Corporations in a secret ceremony involving Charles Koch, The Wealth of Nations, and a silver chalice full of Olde English malt liquor? Well, don't listen to me then--listen to that torrid old conservative shill, Christina Romer, former chair of Obama's Council of Economic Advisors:

This paper investigates the impact of changes in the level of taxation on economic activity. The paper uses the narrative record ñ presidential speeches, executive-branch documents, and Congressional reports ñ to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth. We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.

Of course, you can still argue that the bill will provide some stimulus, because maybe the stimulative multiplier on payroll tax cuts for the middle class is higher than the contractionary multiplier of tax hikes on the affluent. I might even agree with you. But why would you want a stimulus that relies on the delta between two fairly similar multipliers, when you could get much more stimulus by borrowing the money this year, and paying it back later, when we're richer? No matter how you look at it, unless these tax cuts happen well into the future, structuring the bill this way means that it will be much less stimulative than it could be.

If the president were serious about providing stimulus, he would pay attention to the work of his old CEA chair, and pay for the jobs bill by decreasing the growth rate of something-or-other in the future by 0.2%. This is also what he would do if he were serious about getting any part of it through Congress. Instead he is apparently sending them a less-stimulative bill designed to be maximally embarrassing to the GOP--which by definition means minimally politically viable.

You can say that Obama has no choice, because the GOP is just so damn obstructive that they won't pass anything anyway. As it happens, I disagree--I don't think that he could have gotten the whole thing through, but the GOP would probably have given him a few pieces to avoid looking like total jerks, and while that might not have done too much for Obama's re-election chances, it probably would have meant a lot to the schmoes trying to make their mortgage payments in a tough economy.

But say it's true. If it is, I really wish that Obama hadn't wasted my Thursday evening, and that of 31 million other Americans, listening to a jobs plan that was only designed to produce one job--a second term for Barack Obama. I mean, I don't blame him, exactly. But I get a little pang when I realize that I could just as well have spent that time bleaching the grout in the master bath.

Update: I see from the comments that this was taken as primarily a complaint that Obama is raising taxes. Depending on how it's structured, it's a little bit of a complaint that he's raising taxes--you don't, I think, get all that much stimulus by pairing a temporary tax cut on the middle class with an even bigger permanent tax hike on corporations and high earners, though others may disagree."

But it's mostly half annoyance and half genuine disappointment, because if this is true, I think it means that Obama has given up on even trying to pass it; this is just political theater. Maybe you think he had no choice--I disagree, but I can see where others may differ. But either way, you have to be way more invested in Obama's re-election than I am to take much interest in pure political theater."

How ineffective was the stimulus really?

Great post by Tyler Cowen of "Marginal Revolution."

"1. Labor market polarization. This is a very popular idea among the Progressive Left and rightly so; it seems to be true and increasing in importance. Yet it gets dropped like a hot potato when discussions of stimulus come up. A simple interpretation of the data, consistent with labor market polarization, is that we have a larger sum of money chasing the same set of well-qualified, easily-employable workers. Polarization also means not so much substitutability and there is plenty of evidence in the Jones-Rothschild paper of employers finding labor markets — for what they want — somewhat tight.

2. The Jones-Rothschild paper has an estimate that only 42 percent of the job offers went to the unemployed. A lot of the money also was spent on capital, land, raw materials, and other factors of production. I’ve never seen good estimates here, but labor’s share is about seventy percent of gdp, actually a bit shy of that. Let’s say seventy percent of the stimulus gets spent on labor at all, and only forty-two percent of that gets spent on unemployed labor. (It’s actually worse than that because it is 42 percent of the job offers and may well be less than 42 percent of the revenue, most likely so if you think of the unemployed as bringing lower wage offers.) That’s less than thirty percent of the initial expenditure being spent on unemployed labor and that is before any other problems with the expenditures kick in. It’s hard for me to see that as a triumph of the program (NB: we are only talking about one part of ARRA here); would direct government employment have overhead costs that high? How about monetary stimulus? What’s the new calculation for cost per job saved per year?

3. Cutting nominal wages of workers hurts their morale and firing people hurts the morale of everyone left behind. Employers weigh these morale costs carefully when making personnel decisions. To get to the matter in question, when times are tight employers are often quite relieved when workers leave the firm voluntarily. It eases their cash flow, prevents a firing, and everyone is happy, sort of. Bad times are precisely when replacements of these workers do not happen. (Another version of that argument: If Keynesians are right about labor hoarding, job shifters don’t get replaced very often.) So the claim that an ARRA hire of an already-employed worker led to a replacement for that worker at the original firm is not so strong. This happened during down times and very often replacement is postponed, perhaps indefinitely. The Keynesian view, after all, stresses how AD problems hit virtually the entire economy.

4. Very often when the replacement does happen, the replacement is drawn from the pool of workers who are doing well. Some of those workers will be unemployed. But they are the unemployed who least need the help. Their average search time goes down, and that is somewhat of a social gain, but it is hardly the goal of a fiscal stimulus program. We’ve failed very badly at reemploying the hard-core unemployed and that is borne out by other numbers. So of the forty-two percent of offers going to the unemployed, how many were going to the “don’t so much need the help but were searching” unemployed? That will make the calculation look uglier yet.

Labor market polarization, labor market polarization, labor polarization. Market-oriented economists don’t like to stress this theme, but it’s true and it’s a big reason why the stimulus didn’t work better. It’s not an idea we should suddenly leave behind."

Why didn’t the stimulus create more jobs?

Great post by Tyler Cowen of "Marginal Revolution."

"There are many studies of the stimulus, but finally there is one which goes behind the numbers to see what really happened. And it’s not an entirely pretty story. My colleagues Garett Jones and Daniel Rothschild conducted extensive field research (interviewing 85 organizations receiving stimulus funds, in five regions), asking simple questions such as whether the hired project workers already had had jobs. There are lots of relevant details in the paper but here is one punchline:

…hiring people from unemployment was more the exception than the rule in our interviews.

In a related paper by the same authors (read them both), here is more:

Hiring isn’t the same as net job creation. In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations after January 31, 2009, were unemployed at the time they were hired (Appendix C). More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%)(Figure 2).

One major problem with ARRA was not the crowding out of financial capital but rather the crowding out of labor. In the first paper there is also a discussion of how the stimulus job numbers were generated, how unreliable they are, and how stimulus recipients sometimes had an incentive to claim job creation where none was present. Many of the created jobs involved hiring people back from retirement. You can tell a story about how hiring the already employed opened up other jobs for the unemployed, but it’s just that — a story. I don’t think it is what happened in most cases, rather firms ended up getting by with fewer workers.

There’s also evidence of government funds chasing after the same set of skilled and already busy firms. For at least a third of the surveyed firms receiving stimulus funds, their experience failed to fit important aspects of the Keynesian model.

This paper goes a long way toward explaining why fiscal stimulus usually doesn’t have such a great “bang for the buck.” It raises the question of whether as “twice as big” stimulus really would have been enough. Must it now be four times as big? The paper also sets a new standard for disaggregated data on this macro question, the data are in a zip file here."

John Taylor On The Failure Of The Stimulus

See An Empirical Analysis of the Revival of Fiscal Activism in the 2000s. Here is the conclusion:

"In sum, this empirical examination of the direct effects of the three countercyclical stimulus packages of the 2000s indicates that they did not have a positive effect on consumption and government purchases, and thus did not counter the decline in investment during the recessions as the basic Keynesian textbook model would suggest. Individuals and families largely saved the transfers and tax rebates. The federal government increased purchases, but by only an immaterial amount. State and local governments used the stimulus grants to reduce their net borrowing (largely by acquiring more financial assets) rather than to increase expenditures, and they shifted expenditures away from purchases toward transfers.

Some argue that the economy would have been worse off without these stimulus packages, but the results do not support that view. According to the empirical estimates of the impact of ARRA, if there had been no temporary stimulus payments to individuals or families, their total consumption would have been about the same. And if there had been no ARRA grants to states and localities, their total expenditures would have been about the same. The counterfactual simulations show that the ARRA-induced decline in state and local government purchases was larger than the increase in federal government purchases due to ARRA. In terms of the simple example of Model A versus Model B presented above, these results are evidence
against the views represented by Model A, and thus against using such models to show that things would have been worse.

Others argue that the stimulus was too small, but the results do not lend support to that view either. Using the estimated equations, a counterfactual simulation of a larger stimulus package—with the proportions going to state and local grants, federal purchases, and transfers to individual the same as in ARRA—would show little change in government purchases or consumption, as the temporary funds would be largely saved. Of course, the story would be different for a stimulus program designed more effectively to increase purchases, but it is not clear that such a program would be politically or operationally feasible.

More generally, the results from the 2000s experience raise considerable doubts about the efficacy of temporary discretionary countercyclical fiscal policy in practice. In this regard the experience with the stimulus packages of the 2000s adds more weight to the position reached more than 30 years ago by Lucas and Sargent (1978) and Gramlich (1978, 1979)."

Obama Subsidizes Job-Killing Outsourcing, While Attacking Job-Creating Outsourcing

See this post at the Competitive Enterprise Institute Blog by Hans Bader. Excerpt:

"In his 2008 campaign, Obama demagogued about “outsourcing,” but his own policies have outsourced thousands of American jobs, at taxpayer expense, as I explain today at The Washington Examiner.

As ABC News notes, “Nearly $2 billion in money from” the stimulus package has “been spent on wind power,” but “nearly 80 percent of that money” — $1.6 billion — “has gone to foreign manufacturers of wind turbines.” Indeed, “a recent report by American Wind Energy Association showed a drop in U.S. wind manufacturing jobs last year.” These subsidies effectively outsource American jobs, driving up America’s trade deficit.

Weirdly enough, Obama supports this taxpayer-subsidized outsourcing, which wipes out American jobs, even while opposing non-subsidized (free-market-based) outsourcing, which can actually save American jobs by reducing the cost of finished goods that are produced mostly — but not entirely — in America. (How can firms’ decisions to outsource save American jobs? Here’s how: An American manufacturer of a finished product, facing stiff cost competition from overseas manufacturers, can reduce its overall costs, and thus avoid going out of business, by outsourcing low-skill jobs producing crude components of the finished product to low-wage overseas workers, thus enabling the more valuable finished product designed or assembled by skilled American workers to be cost-competitive with finished goods produced entirely overseas.)"

More John Taylor On The Stimulus

See The Empty Chairs at the ARRA Hearing from his blog. Here is an excerpt:

"My testimony focused on the eight quarters of data since the start of the stimulus which have now been made available by the Department of Commerce, updating a recent study by John Cogan and me. The most striking finding of that data is that only .04 percent of GDP in the large $862 billion package went to federal infrastructure spending, and the large amounts of funds sent to the states for infrastructure spending have not resulted in an increase in infrastructure spending. Raul Labrador of Idaho asked me if the stimulus package would have worked better if there had been more infrastructure spending, but the lesson is that it’s not really feasible to start large government infrastructure projects in a timely enough manner to affect the economy in a recession. There is no such thing as “shovel ready.” In my view we learned that from the 1970s stimulus packages, and indeed it is part of the reason that many of us teach in elementary economics that such discretionary stimulus packages are ineffective."

Russ Roberts On The Failure Of Stimulus Spending

See Congressional Testimony on the Stimulus at Cafe Hayek. I especially like how he explains that after WWII and a big drop in government spending, the economy did not slide into a recession (the last two paragraphs below). Excerpts:

"There have been two explanations. One is that the economy was in worse shape than we realized. The only evidence for this claim is circular—the standard Keynesian models under-predicted unemployment.

I prefer a simpler explanation: the models that justified the stimulus package were flawed. Those models were broadly based on the Keynesian notion that the road to recovery depends on spending. In the Keynesian worldview, all spending stimulates. Somehow, subsidizing university budgets in the Midwest or paying teachers in West Virginia helps unemployed carpenters in Nevada. That may be good politics. It’s lousy economics.

This isn’t the first time the Keynesian worldview was wildly inaccurate in predicting the impact of changes in government spending. Look at the beginning and end of WWII.

Keynesians frequently argue that the military spending on WWII ended the Great Depression.

Certainly unemployment fell to nearly zero because of the war. But did the war create an economic boom? There was a boom for the industries related to the war. But there was little prosperity for the rest of the country. The war was a time of austerity. Government spending didn’t have a multiplier effect on private output. It came at the expense of private output.

What about the end of the war, when government spending plummeted?

Paul Samuelson, a prominent Keynesian, warned in 1943 that when the war ended, the decrease in spending combined with the surge of returning soldiers to the labor force would lead to “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” He was not alone. Many economists predicted disaster.

What happened? Government spending went form 40% of the economy to less than 15%. And prosperity returned to America. Unemployment stayed under 4% between 1945 and 1948. There was a short and mild recession in 1945—while the war was still going on. But the economy boomed when government spending shrank and price controls were removed."

John Taylor's Congressional Testimony On The Stimulus

See The 2009 Stimulus Package: Two Years Later. It has some great charts. Excerpts:

"My empirical research during the past two years shows that ARRA did not have a significant impact in stimulating the economy. I do not think this finding should come as a surprise. Earlier research on the discretionary countercyclical Economic Stimulus Act of 2008— enacted three years ago this week—indicates that it too did little to stimulate the economy. Research on the discretionary countercyclical actions in the late 1960s and 1970s—the most recent period of such large interventions prior to this past decade—also shows disappointing results, including high unemployment, high inflation, high interest rates, and frequent recessions;"

"only a tiny slice of ARRA has gone to purchases of goods and services by the federal government."

"But when you look at what state and local governments did with the funds, you find that they did not increase purchases of goods and services or increase infrastructure projects."

"But state and local government purchases have hardly increased at all and they are still below the levels of late 2008 before ARRA grants began."

"What did the states do with the ARRA funds? The data show that they mainly used the funds to reduce their borrowing"

"However, aggregate personal consumption expenditures did not increase by much at the time of these sharp increases in stimulus payments. In general, the overall pattern of personal consumption expenditures seems to move closely with disposable personal income without the addition of the stimulus funds, though the decline in consumption is greater than the decline in either measure of disposable personal income."

"the effect of the temporary stimulus payments on personal consumption expenditures is much smaller than the effect of more permanent income changes and statistically insignificant from zero."

"As in the case of the grants to the states the temporary payments were mainly added to personal saving in the form of reduced net borrowing. In effect the increased borrowing by the federal government to finance ARRA was nearly matched by a decrease in net borrowing by the state and local governments and by persons."

"the percentage contribution of government purchases (federal as well as state and local combined) to the growth of real GDP is negligible. The swing in economic growth during the recession and the recovery seems largely independent of the changes in government purchases."

"The contribution of consumption is larger, but still consistent with the finding that the change in consumption was due to changes in income without the stimulus payments. Note that the largest contribution from consumption comes in the last quarter of 2010 at the time when the agreement to extend existing tax rates likely became anticipated and eventually a reality with increased expectations that they would become permanent."

Why Do Policy Evaluations Differ?

"Why do some argue that ARRA has been more effective than the facts presented here indicate? Many evaluations of the impact of ARRA use economic models in which the answers are built-in, and were built-in before the stimulus package was enacted. The same economic models that said, two years ago, that the impact would be large now show that the impact is in fact large. This is why, for example, the Congressional Budget Office finds larger effects while other researchers using different models find smaller effects. The models disagree so the policy evaluations disagree. The data I examine here place more emphasis on where the funds from ARRA actually went. The approach makes less use of simulations of existing econometric models, although it uses general theories—such as the permanent income theory or similar theories of government behavior—to analyze the data. These data point to some inconsistencies, however, in how model simulations have been conducted. For example, many model simulations assumed that ARRA would have a much larger effect on government infrastructure and other purchases than was actually the case. I believe the simulations should take account of the very small amount of funds that went to government infrastructure and other purchases. If CBO or other groups are still assuming in theirsimulations that a large fraction of grants to the states went to government purchases, then those simulations should be adjusted."

Conclusion

"In sum, the data presented here indicate that the American Recovery and Reinvestment Act was not effective in stimulating the economy. Despite its large size, ARRA did not result in more than an immaterial increase in government infrastructure and other purchases at the federal level. The large grants to the states did not result in an increase in government infrastructure and other purchases at the state and local level. And finally an analysis of the payments that temporarily increased disposable income shows that they did not significantly affect personal consumption expenditures. In contrast changes in private investment and net exports have been much more of a factor in the recovery. Currently, the increased debt caused by ARRA both directly through its deficit financing and indirectly through its de-emphasis on controlling spending—is likely a drag on economic growth."

Brad Schiller: "Stimulus Ineffective"

See Doing the Math on a Jobless Recovery: President Obama has urged us to be patient, but must we wait until 2018 to get back to full employment? From the WSJ, 2-9-11, page A15. He is a professor of economics at the University of Nevada, Reno. The main thing he talks about is how long it will take to get back to full employment at the current rate of job growth given how many people are unemployed and how many enter the labor force each year. He concluded with "The math of joblessness is exceedingly bad news for American workers. It's also a sobering reminder of how ineffective stimulus policies have been."