September 12, 2011

Would More Infrastructure Spending Stimulate the Economy?

Key materials

Four years into the deepest recession since World War II, the U.S. economy expanded at a rate of only 0.7 percent in the first half of 2011. This means that the economy is growing at a slower pace than the population and that capita output continues to fall.  In response, the president has announced a plan for yet more deficit-financed stimulus spending.

There are three problems with this approach.

First, despite the claims of stimulus proponents, the evidence is not at all clear that more stimulus would be helpful right now.

Second, even if one adheres to the idea that more government spending can jolt the economy, spending—particularly infrastructure spending—cannot be implemented in the way Keynesians say it ought to be. This greatly undermines its stimulative effect.

Third, while no one disputes the value of good infrastructure, this type of spending typically suffers from massive cost overruns, waste, fraud, and abuse. This makes it a particularly bad vehicle for stimulus. In sum, further stimulus would be a risky short-term gamble with near-certain negative consequences in the long term.