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Wednesday, September 8, 2010

Will Infrastructure Repairs Cut Unemployment?

The magic word that wards off opposition.

Whenever the economy is in recession, lots of people claim we can “put America back to work by rebuilding the infrastructure.” So I am not surprised that President Obama has decided to continue the “infrastructure” mantra in his latest economic plan.

According to the Associated Press:

Vowing to find new ways to stimulate the sputtering economy, President Barack Obama will call for long-term investments in the nation’s roads, railways and airports that would cost at least $50 billion, administration officials said.

The infrastructure investments are one part of a package of targeted proposals the White House is expected to announce in hopes of jump-starting the economy ahead of the November election.

The $50 billion in “front-loaded” spending likely means Obama will direct money quickly to those states and congressional districts where the Democratic incumbents are in trouble. Furthermore, since it was a Labor Day announcement, no one should be surprised that this new money is aimed at employing people who are part of organized labor: “In a Labor Day interview on CBS’ ‘Early Show,’ Labor Secretary Hilda Solis said the plan Obama was to unveil Monday would ‘put construction workers, welders, electricians back to work … folks that have been unemployed for a long time.”

While this initiative clearly is political, it is nonetheless important to take a harder look at this whole infrastructure argument. On the surface it seems to make some sense. Good roads, bridges, water, public transportation (including new passenger rail lines), and sewer systems would seem to benefit commerce wherever these things exist. How could these things be malinvestments if they appear useful?

Proponents claim that such aggressive infrastructure programs create win-win scenarios since they create present employment and they leave something useful behind. Only a skinflint (or an Austrian economist) can be against that.

Austrian analysis, however, should prompt us to question such projects, which lead to lower standards of living even as the government claims to create prosperity. Leaving aside whether projects like these should be undertaken by private enterprise, one easily can make a case that, as President Obama conceives them, they are little more than boondoggles that would use scarce resources in wrongheaded ways.

First, as pointed out, the bulk of this new spending would like be aimed at buying votes in districts where incumbent Democrats could lose in the November elections. The projects won’t be selected by economic criteria  — even if they could be. Forcing wealth transfers to create political benefits for others is standard practice with politicians, and this latest initiative seems to be right in that category.

Second, while government-created roads and bridges around the country really are in dangerous disrepair, the economy is not in peril because of that. It is in peril because the government, having created boom-and-bust conditions, now refuses to permit the necessary economic liquidations to occur while piling debt, bloated military spending, and other politically oriented expenses on top of any remaining healthy economic entities. So-called infrastructure spending does not begin to address this very real issue; it only adds to the economic burden.

Furthermore, we have an example of vast sums spent on infrastructure to stave off recession and failing miserably: Japan. The New York Times (whose editorial board, ironically, calls for such programs here) reports:

Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.

Unfortunately, the wrong lessons are being learned. American officials are claiming that Japan’s example is proof that infrastructure funds should be better targeted. Once again we see that those who refuse to learn the lessons of history are doomed to repeat them.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.