Would More Infrastructure Spending Stimulate the Economy?

Four years into the deepest recession since World War II, the U.S. economy expanded at a rate of only 0.7 per cent 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, say Veronique de Rugy, a senior research fellow, and Matthew Mitchell, a research fellow, at the Mercatus Center.

In response, the president has announced a plan for yet more deficit-financed stimulus spending. Like the two previous stimulus bills, this one focuses on infrastructure spending. The president's plan is rooted in the belief that stimulus spending and deeper deficits will give the economy the lift it needs to create more jobs. The hope is that, eventually, the economy will grow fast enough to allow the government to begin to pay down the national debt.

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, greatly undermining 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, making 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.

Source: Veronique de Rugy and Matthew Mitchell, Would More Infrastructure Spending Stimulate the Economy? Mercatus Center, September 2011.

For text: http://mercatus.org/sites/default/files/publication/infrastructure_deRugy_WP_9-12-11.pdf

For more on Tax and Spending Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=25

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 28 September 2011