On the Job Training: Can Obama's Huge Infrastructure Program Really Work?Published: January 07, 2009 in Knowledge@Wharton
Anyone looking for an indication of how dramatically the American political landscape has changed since September 2008, when the global economy slid into its meltdown, should consider this: The proposal floated recently by President-elect Barack Obama to spend at least $675 billion over just two years to stimulate the moribund economy -- with the largest share of the money slated for infrastructure projects aimed at repairing crumbling roads, bridges, sewers and the like -- is drawing no serious political opposition, even from conservatives who not long ago would have railed against such a massive spending increase. To win even broader support for the proposal, Obama advisors announced a plan this week to include about $300 billion in tax cuts for workers and businesses.
To be sure, Obama's infrastructure plan has drawn considerable debate, but mostly over the details -- the size of the stimulus program, how to structure the plan to create the most jobs in the shortest time, and how to administer such a large program to limit corruption and pork-barrel projects.
Indeed, two Wharton professors have prepared congressional testimony or launched new academic research on how to best provide meaningful oversight for government spending on an economic stimulus plan -- an issue that has assumed greater importance amid news accounts that there has been virtually no transparency in the recent doling out of $350 billion in federal bailout dollars to banks and other financial institutions.
"It's not at all obvious how this thing is going to work -- they're talking about projects that are shovel-ready. But if [they are] shovel-ready, that means the state has already put aside money to do them," notes Wharton finance professor Robert Inman. He has just begun a research project with the Federal Reserve Bank of Philadelphia that seeks to better quantify the true job-creation value of an economic stimulus package like the one Obama is proposing.
In interviews with a half-dozen Wharton faculty about the Obama stimulus plan -- which has been outlined only in broad strokes, with more details to come as the January 20 inauguration draws closer -- no one was opposed to the concept of a large economic stimulus package to jolt the economy. Wharton professor of insurance and risk management Kent Smetters, who voiced concern during and after the election that an Obama administration would impose new tax burdens on corporations, agrees that a massive infrastructure program could help bring a speedier end to the recession here in America, assuming the money is spent productively.
"I think the most persuasive evidence is that very basic infrastructure projects like roads and bridges actually do have a big impact on productivity, so it's good," says Smetters, citing economic research conducted in the 1990s. His biggest concern about the Obama proposal is that too much money will be devoted to less productive types of job creation -- as Smetters argues happened with some of the public works projects championed during Franklin Roosevelt's New Deal in the 1930s. If so, that could actually slow the recovery.
The new, more heavily Democratic Congress is expected to quickly approve some version of the economic stimulus package that Obama outlined in a radio address to the nation on December 6, when he pledged to "create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s." He said that basic infrastructure work is at the core of his drive to create some three million new jobs (revised upward from the original figure of 2.5 million) that his economic team believes will be needed to pull through the worst downturn since the Great Depression. He warned state officials that his program's motto will be "use it, or lose it" -- that to receive the money, projects will need to be ready to begin hiring workers right away.
The initial cost of the plan -- based upon discussions between the Obama transition team and congressional leaders -- is reportedly in the range of $675 billion to $775 billion, but some have estimated the overall cost will grow if the recession deepens, to $850 billion or more. Not all of the proposed dollars are for basic infrastructure such as roads and bridges. Several economists have been urging a plan as large as $1 trillion -- an idea that has been seconded by cash-strapped state governors as well as the struggling American steel industry.
Some of the additional spending, according to news accounts, would include a major push for improved energy efficiency -- such as funding to spur the creation of a national power grid that could better harness wind and solar power, money for the weatherization of government buildings and critical facilities, and other so-called "green jobs" in renewable energy. Other spending proposals would target education -- including construction of new schools as well as teacher training and lowering college tuition costs -- or healthcare, where the incoming Obama administration has proposed a kind of technology infrastructure program that would help healthcare facilities better computerize their records.
Then there are aspects of the Obama plan, as it takes shape, that would steer very little toward long-term bricks-and-mortar-type projects -- such as helping recession-battered state and local governments close the growing gaps on their accounting sheets (which must be balanced, unlike the federal budget), extending unemployment benefits and providing as much as $150 billion in tax relief for low- and middle-income families. With so many bold programs likely to be pushed through in such a short timeframe -- especially by government standards -- it is easy to see why some are so worried about oversight.
"We're spending money like drunken sailors," warns Wharton management professor Lawrence G. Hrebiniak, author of The Mismanagement of America, Inc. "Look at the TARP [the Troubled Assets Relief Program]," he adds, referring to an Associated Press report that banks receiving the federal bailout dollars approved in October are declining to account for how the money is being spent. Traditionally, infrastructure programs are even more prone to political abuse, he notes, and he expresses concern that the new Democratic White House will promise pork projects for Republican districts in return for supporting liberal goals such as higher taxes on the top income bracket.
"We need sound management," Hrebiniak says. "If we're going to provide stimulus of close to $1 trillion, we need to know how that money is being used -- and how [administrators] plan to make up for the shortfall in revenue.... There needs to be transparency."
Wharton management professor Witold J. Henisz agrees that as the Obama administration and congressional leaders draw up the program, too much attention may be focused on where the money will be spent and not enough on how the program will be governed. He suggests that Congress could remove the potential taint of political-horse trading from the economic stimulus package by establishing a panel modeled after the Congressional Base Closing Commission, which helped to reduce the size of the nation's military, devoid of pressure from the affected districts.
"We should focus more on governance, which could give rise to people saying that we need to be timely and not offer excuses for inaction," says Henisz, who recently prepared testimony for a Congressional committee looking into the oversight for a new stimulus plan. "There could be put into place a relatively simple framework that particularly addresses these political problems."
At the same time, Henisz acknowledges the need for quick action, adding that he concurs with a letter that was sent out this fall by Stanford University's Collaboratory for Research on Global Projects listing an estimated $15 billion to $20 billion in approved infrastructure projects that could be ready for financing within 30 days. He cites a number of large projects that have been approved on a state or local level that can move forward with some extra federal assistance -- such as a $10 billion bond issue approved by California voters for a high-speed rail system from San Diego to San Francisco. However, there has already been some controversy over another more comprehensive list of projects prepared by the U.S. Conference of Mayors, which listed 11,391 projects that are ready to begin work immediately. Critics seized on the fact that the list included a new ride at a water park as well as a polar bear exhibit and even an anti-prostitution program -- projects they claimed had little to do with job creation.
When $100 Is Really $50
Indeed, concern over whether the federal government can target the money to the right programs without substantial waste is motivating Wharton's Inman to work with the Philadelphia Fed on research into how money from past stimulus packages has been spent, especially direct federal aid to states. When states have infrastructure projects that are "shovel-ready" for work to commence immediately, it means the funds for the project have already been allocated, he says. The new federal dollars really end up going for other state and local purposes, such as balancing the budget, that do not lead to direct job creation.
"Everybody has in the back of their head this idea that you have a bunch of unemployed guys standing on the side of the road with shovels and that if you give the state of Pennsylvania $100, then suddenly these unemployed guys go to work," Inman notes. But the evidence shows that economic stimulus doesn't operate that way, he says, adding that Pennsylvania Gov. Ed Rendell has indicated the state would use up to $400 million of $1.2 billion in federal stimulus aid to balance the state budget and meet other fixed expenses.
"So we're trying to do the math" to show what percentage of federal stimulus money allocated to states is actually used to stimulate the economy. The key issue, he says, is that "much of that money goes into things that wouldn't have happened otherwise. It might be $100, but it might be only $50. There's a big difference in the marginal effect on jobs between a dollar that goes into a company that hires guys who are unemployed and a dollar that goes into an unemployed guy's back pocket." The money that goes into the state government coffers may prevent a tax hike, "but the economic impact of that is more difficult to measure," Inman says.
Another critical debate regarding the stimulus plan is whether it includes too many programs -- especially in the area of so-called "green jobs" that involve public alternative energy projects or conservation -- that may be experimental and which lack the job-creation power of more basic public works projects such as new highways.
According to Smetters, the evidence is that a large government role in translational research -- work that takes critical discoveries in basic science and converts the findings into projects such as, in the case of energy, new fuel cells for cars or wind turbines -- is a highly inefficient use of taxpayer money. He notes that while it is important for the government to help pay for basic research through its agencies such as the National Science Foundation, commercialization of new discoveries works better when financed by private enterprise. "If the government is paying for it,you have to ask why the private sector isn't."
But Eric W. Orts, a Wharton professor of legal studies and business ethics who helped provide energy and environmental policy advice to the Obama campaign, takes a different view. He sees several types of programs that could create a number of new jobs while aiding the environment at the same time. In particular, he cites federal block grants to states that would help them pay for energy efficiency programs such as retrofitting and insulating existing buildings, as well as work on mass transit programs such as high-speed rail, which could reduce carbon pollution from automobiles.
"It's very encouraging that they're going to subsidize new technologies," Orts says. "It's a signal that we will invest in what are viable technologies and that it's going to be targeted and reasonably done." Orts argues that investments in areas that will make the United States more economically competitive down the road -- not just in energy but also in education, for example -- are a much more productive way to incur debt than, for example, the massive cost of waging a long-term war in Iraq.
What About Rebates?
But Wharton finance professor Jeremy Siegel wonders if the easiest way to stimulate the American economy would be to simply issue instant tax rebate checks. That was the course elected in early 2008 by President Bush and Congress; $168 billion was distributed to taxpayers in the form of rebate checks of $600 to $1,200. The program was criticized by some as too little too late to halt the U.S. economy from sliding into the current recession.
Siegel, however, cites research showing that consumers spent approximately 60% of the money they received from the program. Even if consumers used a new round of checks to mostly pay off debts, they would nevertheless speed up the eventual recovery, Siegel argues. "Something for the recovery that will reduce all that credit card debt isn't all that bad," he suggests, adding that debt-laden consumers are unlikely to spend at levels needed to help trigger a recovery.
Their support of a stimulus package aside, several Wharton faculty members remain concerned about its affect on the federal government's long-term debt, which was on track to surpass the $10 trillion mark even without the additional deficit spending envisioned by the Obama infrastructure plan. For that reason, several professors urge that any short-term increase in government spending come attached to long-term measures that might address the looming explosion of red ink for federal spending on Social Security and Medicare. Some experts believe these entitlement programs will bring debt as high as $56 trillion, which would dwarf the impact of any stimulus package.
"If it was just the infrastructure debt, we wouldn't have to worry about that," Smetters says. "But add that to almost $8 trillion in commitments and guarantees for the sub-prime mortgage mess or the ARM mess that won't even hit the fan until .... With more and more debt, the day of reckoning is coming, whether we add this $1 trillion or not."