- The Washington Times - Sunday, December 7, 2008

Top economists say that President-elect Barack Obama‘s plan to jump-start the economy with a big spending program to rebuild the nation’s infrastructure, among other initiatives, is doomed to fail, because of the long time such projects need to inject money into America’s economic bloodstream.

That is the view of Mr. Obama’s conservative critics, who favor tax cuts for businesses and investors to pull the economy out of its recession. But even some supporters of his stimulus plan have voiced doubts about whether a huge spending package, possibly in the $500 billion range, can be spent quickly enough to have an impact on the economy, and some of them fear it may merely result in more wasteful pork-barrel spending.

Mr. Obama’s advisers are working on a giant stimulus plan that will focus on a large infrastructure-rebuilding effort to provide needed jobs and incomes for the unemployed.

In his weekly radio and Web address to the nation Saturday, Mr. Obama reiterated his commitment to “create or save” 2.5 million jobs, largely by “making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s.”

But in a paper in January that studied the effectiveness of various economic-stimulus bills, Mr. Obama’s chief economic adviser, Jason Furman, said infrastructure spending was among the “less-effective options” for breathing new life into the economy.

Spending bills aimed at rebuilding highways, bridges, rail lines and other public infrastructure projects were “likely to be less effective in spurring economic activity,” he said, because “they do not provide well-timed stimulus or because there is considerable economic and administrative uncertainty about how they might work,” Mr. Furman said.

Public-works spending bills “might provide an important boost to long-term growth,” he said, but he doubted they “would generate significant short-term stimulus,” because all too often in the past the money was not spent “until after the economy had recovered.”

Interviews with other economists drew similar doubts about stimulus spending bills that poured money into public works projects and other state social service programs.

“I don’t believe it will work. Infrastructure spending has not proven to be an effective way to jump-start an economy in recession,” said John Cogan, an economic and public policy analyst at the Hoover Institution at Stanford University.

“It takes considerable time for government agencies to evaluate alternative projects, put in place the required controls to ensure that the money is properly spent, and sign the contracts. The larger the amount of money to be spent, the longer it takes,” said Mr. Cogan, who has been a top fiscal adviser in both the Reagan and George H.W. Bush administrations.

“Moreover, the spending tends to be wasteful. Projects funded under a ‘stimulus’ banner are often those that can’t be justified on their own merits,” he said.

Supporters of Mr. Obama’s stimulus plan acknowledged that much of the money wouldn’t have time to get into the economy’s spending pipeline if the recession was short, but argued that it would if the downturn lasts longer than expected.

“If this thing turns out to be not a big downturn, we wasted some money, but it’s not the end of the world,” said economist William G. Gale, vice president of the Brookings Institution and head of its Economic Studies Program. “If this recession turns out to be huge, and we don’t take action, we could find ourselves in a deep hole.”

“Right now, the problem is, we are in an extremely sluggish economy, and as Barack Obama says, we need a big ‘jolt,’” Mr. Gale said.

“I have not been a big fan of stimulus packages, especially ones enacted in this decade. I think they open the door to a lot of political chicanery. But this is a very different situation, things are much more potentially severe. Tax cuts are not what’s called for here. I think spending proposals deliver more bang for the buck, though I fully expect tax cuts to be part of the package,” he said.

Still, Mr. Gale questioned whether such a potentially large spending stimulus can be disbursed quickly enough to have an immediate impact and he worries about the tendency of Congress to produce “Christmas tree” bills loaded down with dubious spending.

“It can’t be all infrastructure spending. But it’s hard to figure out how they are going to spend $500 billion or $700 billion and how they are going to spend it quickly,” Mr. Gale said.

“There’s an enormous potential for [spending] abuse once there’s a decision to go forward with a stimulus bill. The Obama administration will have to be disciplined in what they do, and this is where Obama’s promises to prune the budget come in. There’s a lot of ‘bridges to nowhere’ that we do not want to do, for which there will be a lot of political pressure,” he said.

Dean Baker, co-director of the liberal Center for Economic and Policy Research, isn’t bothered by the size of the package Mr. Obama wants to sign when he is sworn into office next month.

“It is important that the spending package be focused on infrastructure and that it be big. If you spent $500 billion, you have a much better shot at turning things around. To have an influence on the economy in a period of growing unemployment, it is going to take a lot of money,” Mr. Baker said.

But in a study of past stimulus bills last month, Brian Riedl, the Heritage Foundation’s chief budget analyst, found that massive public works spending increases have not delivered on their promises to grow the economy.

“In a throwback to the 1930s and 1970s, Democratic lawmakers are betting that America’s economic ills can be cured by an extraordinary expansion of government. This tired approach has already failed repeatedly in the past year,” Mr. Riedl said.

Over this period, annual federal spending shot up by 11 percent to nearly $3 trillion, as it enacted $333 billion in “emergency” spending, $105 billion in tax rebates, and pushed the budget deficit to $455 billion “in the name of stimulus,” he said.

“Every one of these policies failed to increase economic growth,” he said. “Now, in addition to passing a $700 billion financial-sector rescue package, lawmakers have decided to double down on these failed spending policies” by proposing yet another stimulus bill, he said.

But that will fail, too, because the money the government pumps into the economy “must first be taxed or borrowed out of the economy,” he said. “No new spending power is created. It is merely redistributed from one group of people to another.”

Economist Bruce Bartlett, who voices similar criticism of stimulus spending bills, says that tax rebates along the lines that Mr. Obama has proposed also do not have much of a stimulative effect.

“Rebates don’t work because people save the money. We’ve done this several times - in 1974, 2001 and earlier this year. There is just zero evidence that rebates stimulate. The bang for the buck is very small,” Mr. Bartlett said.

What would get the economy going? “At this point, I’m at a loss to say. I don’t know of any fiscal experience anywhere that could shovel the money out fast enough under current circumstances,” he said.

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