Transportation in a Stimulus Package, Part Two

Debate about an economic stimulus package continues to dominate the news. Obama recently called for a plan that will save or create 2.5 million jobs by January of 2011. It is unclear how large this package would be and how it would be spent, but he has indicated that a substantial portion of it would go towards rebuilding transportation infrastructure. Some people disagree about whether transportation should be part of a stimulus, while others disagree about what types of projects should be funded if transportation is part of a stimulus. These questions are best illuminated with data, so let’s get into the figures.

The Federal Highway Administration’s most recent 2008 estimate is that $1.25 billion in highway capital investment supports (not creates) 34,779 one-year jobs. As other scholars and government agencies have pointed out though, these figures must be treated with caution. There are several important caveats to transportation spending, among them: 1) federal deficits to fund spending can “crowd out” private investment, causing job losses in other economic sectors (Ronald Utt at the Heritage Foundation articulates this point); 2) the FHWA cautions that only short-term resurfacing and preservation projects spend funds quickly in the first year and thus have a timely impact; 3) unless there is excess unemployment, job demand for construction will merely be met by shifting workers from other sectors.

In short, it is very difficult to be certain about how many jobs will be created from increased transportation spending in the short term. Nevertheless, it might be a good time to invest in transportation. For instance, data from the Bureau of Labor Statistics indicates that there have been significant job losses in the construction industry in the past year (although there is significant variation between states/regions), meaning that highway construction jobs might bring people back to work without substitution. With regards to the immediacy of transportation spending, our system is in such a poor state of repair that now is an opportune time to focus on fixing what we have, which fits nicely with a fast stimulus. Perhaps the most important caveat, however, is the fundamental proposition that government spending in one sector inherently stifles growth in other sectors. This is a classic economic question, and we will leave it to more sophisticated economists. For two contrasting opinions compare the views of Brian Riedl and Paul Krugman. Riedl, of the Heritage Foundation, argues that stimulus fails because “every dollar Congress ‘injects’ into the economy must first be taxed or borrowed out of the economy. No new spending power is created.” Krugman, a New York Times columnist and Nobel prize winning economist, makes the case in a series of columns that increased government spending, on infrastructure instead of rebate checks, can play a decisive and vital role in restarting a stalled economy.

While the short-term impact of transportation spending is perhaps unclear, it is more broadly accepted that government investment in areas like infrastructure and education can pay greater dividends in the long-run. These investments increase productivity by improving human and physical capital – and the private sector generally under-invests in these public areas because it cannot fully capture the gains.

It seems increasingly inevitable that transportation will be part of a stimulus package. Although we may lack a perfect understanding of the exact benefits of transportation spending in the short-run, there is some understanding about the most valuable transportation investments overall, like system preservation. An effective stimulus package should focus on the most valuable and timely transportation investments, and this need not conflict with a broader view on promoting long-term prosperity.

-Daniel Lewis