Thursday, October 15, 2015

Thoughts on Shovel-Ready Infrastructure

When the economy slows down, there's often a call for increased infrastructure spending to give employment and output a jump-start. This idea is far from new, but it seems difficult to implement.

As one example of this idea from the past, L.W. Wallace published an article back in 1927 called "A Federal Department of Public Works and Domain: Its Planning, Activities and Influence in Leveling the Business Cycle," which appeared in the Proceedings of the Academy of Political Science in the City of New York (Vol. 12, No. 3, Jul., 1927, pp. 102-110, available through JSTOR). Wallace quoted a recent speech by President Calvin Coolidge, who said:

The idea of utilizing construction, particularly of public works, as a stabilizing factor in the business and employment situation has long been a plan of perfection among students of these problems. If in periods of great business activity the work of construction might be somewhat relaxed; and if in periods of business depression and slack employment those works might be expanded to provide occupation for workers otherwise idle, the result would be a stabilization and equalization which would moderate the alternations of employment and unemployment. This in turn would tend to favorable modification of the economic cycle. ... The first and easiest application of such a regulation is in connection with public works; the construction program which involves public buildings, highways, public utilities, and the like. Most forms of Government construction could be handled in conformity to such a policy, once it was definitely established.... This applies not only to the construction activities of the Federal Government, but to those of states, counties and cities.
More than this, the economies possible under such a plan are apparent. When everybody wants to do the same thing at the same time, it becomes unduly expensive. Every element of costs, in every direction, tends to expand. These conditions reverse themselves in times of slack employment and subnormal activity, with the result that important economies are possible.
I am convinced that if the Government units would generally adopt such a policy, and if, having adopted it, they would give the fullest publicity to the resultant savings, the showing would have a compelling influence upon business generally. Quasi-public concerns, such as railroads and other public utilities, and the great corporations whose requirements can be quite accurately anticipated and charted, would be impressed that their interest could be served by a like procedure
One example of infrastructure spending being used to stabilize the economy arose in the 1950s, when President Dwight Eisenhower viewed the interstate highway system along these lines. Raymond J. Saulnier  offers some explanation in his 1991 book Constructive Years: The U.S. Economy Under Eisenhower, describing how the authorization of the Interstate Highway system in 1956 was envisioned both for its own benefits, and also as a tool of economic stabilization. Saulnier writes (p. 74, and p. 233):
"And although Eisenhower's interest in having authority to develop an Interstate Highway System was primarily for what it would accomplish  toward improving the nation's infrastructure, he viewed it from the beginning (as he viewed all construction projects over which the Executive Branch had control) as a program that could be used to help stabilize the economy."  ... The undertaking--40,000 miles in its original format, to be built over 13 years--was the largest single U.S. public works project to that time or since. It as of immense interest to Eisenhower for what it would mean to national security (military experience had underlined the importance of transport) and, equally important, for what it would mean to the nation's economic development. He was acutely sensitive, also, to the possibility that its construction could if necessary be scheduled to help stabilize the economy." 
A later Congressional Budget Office report on "Highway Assistance Programs:A Historical Perspective," described in February 1978 how the federal highway legislation was soon used for countercyclical spending (p. 6 and pp. 30-31):

The Federal-Aid Highway Act of 1944 provided greatly expanded funding and established separate, proportional authorizations for three categories of highways—the primary system, the secondary system, and the urban extensions of the primary system—which became known as the ABC programs. ... The Federal-Aid Highway Act of 1958, which was put forward as an antirecession measure, suspended the Byrd Amendment for 1959 and 1960, allowing apportionments to be made for the full amount authorized even though Trust Fund revenues were not expected to be sufficient. Thus, the "pay-as-you-build" principle established in the 1956 act was almost immediately suspended, albeit only temporarily. Additional authorizations were also made for 1959, and the funds were made available immediately (the original 1959 authorization had already been apportioned). For these additional funds, which were primarily countercyclical in nature, the regulations regarding the proportion of funds allocated to each of the ABC systems were suspended and the federal share was temporarily increased to two-thirds. The decision not only to continue Interstate authorizations but also to raise the levels was based on two reasons. First, it was argued that a general economic stimulus would derive from the increased authorizations. Second, much was made of the Congressional intent expressed in 1956 regarding the "acceleration and prompt completion of the Interstate System."
However, the most recent US experience with trying to use infrastructure spending to stimulate the economy was at best a partial success, because even after such spending was authorized, it took so long to actually get underway that the recession had ended. President Barack Obama made this point in an interview with New York Times in October 2010, where he said:
Infrastructure has the benefit of for every dollar you spend on infrastructure, you get a dollar and a half in stimulus because there are ripple effects from building roads or bridges or sewer lines. But the problem is, is that spending it out takes a long time, because there’s really nothing -- there’s no such thing as shovel-ready projects.
If we are going to take seriously the notion of using infrastructure, here are some thoughts.

1) You need to have a detailed plan of projects that really are shovel-ready, like the federal highways in the 1950s. Otherwise, it's just too slow to get such project underway when a recession hits. Perhaps the ideal approach is to have a long-term project happening on an ongoing basis, with the possibility for speeding it up if a recession hits.

2) Government is often focused on the infrastructure that it owns directly: like roads, bridges, and sewer lines. These areas matter, of course. But the future of the US economy will rely on a lot of other kinds of infrastructure, many of which are either privately owned or are some form of public-private partnership: including phone and cable lines, electricity generation and transmission, pipelines for oil and gas, railroad tracks, airport and seaport capacity, and water reservoirs and pipes. A broader focus on infrastructure would think about ongoing efforts to build infrastructure in these areas, and how some form of government support might accelerate them during a recession, too.

3) Pretty much everyone favors infrastructure in theory, but in practice, there are often some hard issues to work out. How does one focus on infrastructure that has the largest payoff, rather than just spreading out the spending to favored state and congressional districts, or contracts to favored political interests? How does one make sure the best deals get negotiated for the use of taxpayer support? Many kinds of infrastructure involve a mixture of user payments and taxpayer money, and how should those user payments be structured? Finally, how do we balance the need to give opponents of infrastructure projects a fair hearing, but also not give opponents an unfettered ability to use "lawfare" to block infrastructure projects?