Are Infrastructure Projects the Answer to America's Jobs Problem?

Disappointing stimulus package gives ammunition to the policy's opponents.

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Infrastructure spending is expected to be one of the chief components of the jobs plan that President Obama will unveil in September. The idea of spending on public works projects like road-building as economic stimulus has been a mainstay of jobs proposals from both congressional Democrats and the White House in recent years. But opponents question its efficiency at creating jobs—and its cost.

According to data from Moody's Analytics, which performs economic analysis and forecasting, infrastructure spending is more effective, dollar for dollar, than many forms of tax cuts at boosting jobs growth. But after passing legislation, going through the appropriations process, identifying projects, planning, and hiring workers, the time it takes the federal government bureaucracy to get that money out the door can mean delayed or even diminished economic impact. Add to that a particularly slow-moving Congress with a propensity for partisan divides that slow or halt much legislation—and the current climate of budget-cutting—and a potentially promising policy move could be greatly undercut or never enacted.

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Many Republican lawmakers have in the past decried spending on infrastructure. When President Obama introduced the idea of a national infrastructure bank in September 2010, Representative Eric Cantor called it "yet another government stimulus effort" and House Speaker John Boehner called it "more of the same failed 'stimulus' spending," alluding to the 2009 American Recovery and Reinvestment Act that the president introduced to counteract the Great Recession. That $787-billion stimulus package created far fewer jobs than the White House had initially predicted, a point that stimulus critics often make. But not all Republicans are opposed to infrastructure spending; Texas Senator Kay Bailey Hutchison, for example, co-sponsored a bill with Massachusetts Democrat John Kerry in March, proposing an infrastructure bank.

The theory behind infrastructure spending is the multiplier effect: the idea that every dollar in government expenditures can increase GDP by more than one dollar by starting economic chain reactions: the government pays firms for goods and services and those firms then pay employees who then spend their paychecks.

Moody's Analytics estimates that the multiplier effect for increases in government spending is generally larger than the multiplier for tax cuts. Any additional dollar spent on permanent tax cuts adds to GDP by significantly less than a dollar. Making the Bush tax cuts permanent, for example, would add to GDP by $0.29 for every dollar of revenue reduction, according to calculations from Moody's. Infrastructure spending would add by $1.59 for every dollar spent, while extending unemployment insurance and temporarily increasing food stamps would add even more.

The mitigating factor, then, is the speed (or lack thereof) with which infrastructure spending works. In past recessions, infrastructure projects have taken so long to get off the ground that their effects were only felt after recovery had begun, says Alan Viard, resident scholar at the American Enterprise Institute, a conservative think tank. "Dollar for dollar, [tax cuts and direct government payments] may not stimulate the economy as much as infrastructure spending, but they can be timed effectively. ... If we expect [economic weakness] to last long enough for new infrastructure spending to come online, we've really got pretty serious problems."

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"Under normal conditions, I would say that that's fair," says Gus Faucher, director of macroeconomics at Moody's Analytics. "But now we're dealing with an unemployment rate that's 9.1 percent. Employment is still down by 7.5 million, 7 million from its peak in 2008. It is a long-term concern," says Faucher. Indeed, the Federal Reserve has predicted a slow recovery, and plans to keep interest rates low through 2013 as a way to boost the economy.