Pure Pedantry

Health-infrastructure, information technology, and science research spending are clearly related to the success of our economy. They represent investments into intellectual property and human capital that increase productivity and create long-term growth. For this reason, I don’t object to the government spending money on them as a matter of policy.

But Gary Becker makes an interesting point with respect to the economic stimulus package. While such spending may be important for long-term growth, it’s effectiveness as a short-term growth measure may be limited:

The stimulus package’s plans for spending on “infrastructure” clearly illustrate both concerns. I put this word in quotation marks because of the many definitions of what is included in the concept of infrastructure. Promoters of various stimulus packages- such as the just released House Committee on Appropriations $825 billion stimulus plan- include in infrastructure not only the traditional categories of roads, highways, harbors, and airports. They also include spending on broadband, school buildings, computers for school children, modern technologies, research and development, converter boxes for the transition to digital TV, phone service to rural areas, sewage treatment plants, computerized medical records and other health expenditures, and many other activities as well.



Some of this infrastructure spending may be very worthwhile-I return to this issue a bit later- but however merited, it is difficult to believe that they would provide much of a stimulus to the economy. Expansion of the health sector, for example, will add jobs to this sector, but it will do this mainly by drawing people into the health care sector who are presently employed in jobs outside this sector. This is because unemployment rates among health care workers are quite low, and most of the unemployed who had worked in construction, finance, or manufacturing are unlikely to qualify as health care workers without considerable additional training. This same conclusion applies to spending on expanding broadband, to make the energy used greener, to encourage new technologies and more research, and to improve teaching. (Emphasis mine.)

His argument is that in occupations that have low unemployment rates already and require a lot of training to enter — take science or health care, for instance — government spending is less effective as a short-term measure. A random person off the street cannot answer a help-wanted ad in a science lab or a hospital. Likewise the people who produce the machines that we buy — MRIs, microscopes, biologicals, etc. — only got their jobs after considerable training. Highly technical industries also have inelastic labor supply over the short-run.

Becker also makes the argument that money will crowd out private funds and that there will be problems with waste, but this labor inelasticity issue is, I think, his strongest.

These observations are not meant to impugn the long-term effectiveness of these measures. Over time, appropriated funds will be spent, the labor market in these industries will clear, and productivity will increase. But that process is unlikely to be quick.

I think that research and infrastructure spending are important as a long-term growth measures, but there may be significant impediments to its effectiveness as short-term growth measures. I am happy that the government has decided to spend money on these important areas, but it is intellectually dishonest to suggest that it will immediate translate into higher growth and a cessation of the recession. If the public is going to pay, then I think they should know what they are getting into.

My two cents: if the government wants to rapidly appropriate and spend money for fiscal stimulus, it should do so by paying down state debts. Such spending will immediately be infused into the economy. Tax cuts are likely to be saved or used to pay down credit card debt, and infrastructure projects have problems with timing and waste.

Comments

  1. #1 Sarah O'Neill
    January 23, 2009

    Broadband penetration is so important not just for the US and our economy but for our standing in the global community. But if people won’t use it, there’s only so much good it can do. There’s an interesting article about why people don’t use broadband or the Internet at all here.

  2. #2 Rob
    January 23, 2009

    WTF? I remember your podcast! I enjoyed all 4 episodes or whatever it was. A quick google search of a funny Obama pic pointing at the camera and here we are…..

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