How Infrastructure Fits Into An Economic Stimulus

As the economy worsens, transportation is being linked more directly to economic stimulus packages. Congress and the new administration have indicated a desire to include infrastructure spending as a component of an economic stimulus, and transportation is almost always mentioned as a substantial element of that infrastructure. Now there is also strong support among Democrats for a larger bailout of American Automakers, with President-elect Obama tying such a proposal to cleaner, more energy-efficient vehicles and President Bush insisting upon free trade as a prerequisite.

With complicated issues such as these, it is important to separate goals and actions because they are often confused. There are two goals that seem to be on everyone’s minds – short and long-term economic growth. But these are two different timeframes that necessitate different actions.

For example, a bailout of the auto companies is an action that is likely to be more effective in the short-term. Letting the auto companies fail would cause tremendous short-term hardship for many individuals, with ripples potentially felt across the economic spectrum. However, in the long-term a bailout would have the unintended consequence of rewarding, or at least not allowing the market to punish, an inability to effectively compete in the marketplace. This could mean the stifling of innovation and entrepreneurship, while encouraging entrenched corporate interests, and this could be economically damaging if extended to additional sectors.

By contrast, spending on transportation infrastructure is more likely to have minimal short-term benefits, but many long-term benefits. Assuming that the infrastructure spending is tied to potential benefits in some way, rather than just sent to states with no strings attached, it can have a marked impact on economic competitiveness. However, it can often be years before this impact can be seen, and at least a few months in most cases before people can even be put to work. In the short-term, there are better ways to protect people from an economic downturn.

This leads to the observation that some combination of short and long-term strategies is necessary. This will mean borrowing the best components of the two proposals discussed above so as to maximize the strength of each. The auto bailout, with its potentially dangerous long-term consequences, should be limited to a bailout of the workers and retirees who will be in real trouble as a result of their companies failing. These individuals should not be forced to endure hardship because of the missteps of management. The bankrupt companies can then either retool or be replaced by eager competitors. This would also be a place where the feds could play a role by providing seed money, or rewards, for developing the most fuel-efficient vehicles. Instead of picking winners, the government could instead encourage faster innovation on a level playing field. Such a strategy should be put forward with all due haste.

The stimulus package, on the other hand, should be carefully considered to ensure that it actually will accomplish something. People can be put to work digging a hole and filling it, but this will not create long-term economic growth. Funds to be spent on infrastructure should be tied to performance measures that evaluate whether their proposed use is likely to enhance economic growth in the long-term. Then the federal government should track these funds to find out whether they actually accomplished what they predicted.

-Joshua Schank