Economic Stimulus and Federal Government and Economic Analysis

Speed is critical to success of stimulus plan

January 12, 2009
I'm not much of a joke teller, but there's a great one about roofers that matches our economic climate.

It goes something like this: Do you know the difference between a young roofer and an old roofer? About halfway through a fall, the old roofer starts looking for a place to land. Not enough to get me on Letterman, but it does tell you a bit about appropriate public policy in a recession.

All the serious talk in Washington for the next few weeks will center on an economic stimulus package. Up to now, the argument has been for an extensive (perhaps a $1 trillion) program. That figure is pretty speculative, and this week the president-elect agreed to a significant tax cut as part of the plan.

What makes this stimulus plan different from others since World War II is the emphasis on infrastructure spending—roads, bridges, rail, telecommunications and the like. Lawrence Summers, the past U.S. Treasury secretary, and leading administration economist offered an eloquent defense of this proposal.

All things being equal, most economists would prefer infrastructure spending in a stimulus plan. I agree. However, in this case, all things are not equal, so there are a few problems looming with the plan.

The first problem facing the new administration is the speed with which the stimulus package can affect the economy. The worst part of the recession will most likely happen between now and early summer—though job losses will almost certainly continue through the end of summer. For a stimulus package to have an effect, it has to create jobs immediately. That's a tall order.

Suppose the bill passes in late January, and authorizes spending to states for highways and bridges. Every state has several dozen projects ready to be bid out to contractors. But even the most efficient government bidding process will add 45 to 90 days to the process. Tack on another 30 to 90 days for the contractor to start work and already it is mid-summer.

If the stimulus plan allows for the construction of public transportation, the lag will be even longer. Several proposals for telecommunications infrastructure have been offered, only one of which can really lead to job creation before the end of winter (full disclosure here—that plan was offered by Ball State's Digital Policy Institute).

There is absolutely no way around a very long implementation lag for this infrastructure bill. That is risky, because it could mean the vast majority of jobs will be created as we move out of the recession. This can lead to significant inflationary pressure, which could stall the recovery.

Increased budget deficits add to inflationary worries. Tax cuts would expedite the stimulus and, given the current environment, would have little inflationary effect.

A phased stimulus plan—not unlike the financial bailout—could ease concerns about over-correcting the economy. Much like the old roofer, it is critical for us to keep an eye out for a landing spot, free of inflationary spikes.

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.
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