Commentary | Economic Growth

Putting infrastructure spending estimates in context

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On Monday morning, the Congressional Budget Office released a report estimating that infrastructure investments would have a “delayed outlay rate”. According to the CBO report, only 8% of the recovery package money would get spent in what remains of fiscal year 2009 and 40% through fiscal year 2010. Opponents of infrastructure spending seized on this as evidence that such spending is ineffective as economic stimulus. It appears as though the CBO has directly contradicted the argument behind the centerpiece of President Obama’s recovery package. 
The CBO report, however, is partly based on historical spending patterns, which are of limited relevance for a number of reasons. In the past there was no need to get money into the economy quickly; this time around, government agencies have an incentive to speed up the spending. The recovery package will probably also contain a “use-it-or-lose-it” provision, which will give priority to projects that can be started quickly.

There are more reasons that CBO’s estimate probably understates the spending rate. Due to past neglect of the nation’s infrastructure, the number of backlogged projects has risen over the years, providing an opportunity for states to allocate much of the recovery money to projects that are more likely to have cleared approval processes and thus have faster start-up times. Recent budget woes have forced many states to halt on-going construction-California alone has suspended work on nearly $4 billion worth of highway, bridge, and school construction. These projects could be restarted with minimal lag time.

In fact, CBO’s past estimates of infrastructure outlay rates have been much higher: its November outlay estimates were around 27-28% (FY09) and 60-64% (FY10) for Rep. Obey’s and Sen. Byrd’s recovery bills (H.R. 7100 and S. 3689). Averaging these earlier estimates (and applying it to the remaining eight months in the fiscal year) gives us an 18% (FY09) and 62% (FY10) outlay rate, somewhat higher than the CBO’s most recent report suggests. In contrast, Peter Orzag, the former head of CBO who is now director of the Office of Management and Budget, estimates that 75% of the total package, infrastructure included, will be spent by the end of FY10.

Granted, any of the spending outlay rates discussed above would be slower than most tax cuts for individuals. But in this case, speed isn’t everything. As we have previously written (see Pollack 2008), infrastructure spending provides about 20-50% more stimulative benefit than tax cuts, mainly because households are likely to save the extra money rather than spend it back into the economy. Funds should also be spent on projects that provide the most benefits to society rather than just putting people to work, and some of those worthwhile projects will take many years to complete (meaning that some outlays will extend past FY10). Requiring that projects be completed-rather than just started-in a short period of time could also lead to rushed construction, possibly resulting in poor workmanship and even compromised safety.

In fact, continuing outlays past the arbitrary year-and-a-half window is a good thing-otherwise, the economy would suffer a negative fiscal shock as soon as the fiscal spigot is turned off, possibly plunging the economy back into recession. The labor market is expected to remain weak for the next few years at least (CBO projects a 9% unemployment rate in 2010, about two points higher than the current rate), so the economy will surely still need the fiscal stimulus even then.

But even assuming that infrastructure spending will be too slow to provide an effective short-term stimulus and that the recession will be so short-lived that we won’t need fiscal stimulation in a year and a half (highly unlikely), large-scale infrastructure investments would still be justified. According to the American Society of Civil Engineers, the country’s infrastructure is dangerously inadequate and needs $2.2 trillion in new investments over the next five years. These investments have to be made at some point. Now-while the labor market is slack and construction inputs and government debt are cheap-is the perfect time to make them. If anything, the recovery package should include an even a larger down-payment on our infrastructure needs.

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See more work by Ethan Pollack