How To Speed up Job Growth 101

by pdxblake

With the economy still stuck in a low growth period following the 2007-2009 recession, it should be incumbent on the government to avoid thinking about things that slow growth (spending cuts, in particular) and focus on areas that can spur the economy.  And so, the next time you drive over a pothole, you should remember that fixing that pothole would be a good use of government money, never mind the deficit (since the government can borrow at extraordinarily low rates).  A recent paper (ht Mark Thoma) tries to estimate the multiplier effect of greater highway spending (a proxy for infrastructure spending of all kinds) and estimates that the economic benefit is about 2:1.  For every $1 spent on highway funds, it leads to a $2 increase in GDP.

The mechanism for the higher growth in GDP than the amount spent is because the additional income it creates (remember, the government’s spending becomes income for someone) leads to more spending, again and again with a diminishing effect (of the first dollar spent, some share is spent on buying more goods, and of that percentage, another percentage is spent).

The way the authors try to find the impact of the additional spending is by looking at the impact on a state of receiving a 1% unexpected (i.e. not in the original budget) increase in their highway funds.

The chart above tracks out the increases in the GDP as a result of a 1% increase over a 10 year period.  The shaded areas are the margin of error, so any time the shaded area is above zero, the increased GDP is a result of the additional spending, rather than just statistical noise.

There are two times when the multiplier affects are the strongest: when the funding is given (year 0-1) and later, once the projects are complete (between years 6 and 8.  This makes sense too.  The stimulative effect is strongest right at the outset when people are hired to design and build the infrastructure, and then again when it is finished and can be used.

The important period for the purposes of ending the slow growth period is the first year when the benefits show up because that GDP growth doesn’t come because someone put the money in their bank account, but because they use it to hire people (engineers, construction workers, etc), and that causes the economy to grow, and it creates direct employment (jobs for people).

The spending doesn’t have to just be spent on highways, but  in order to get the boost down the road, it should be spent on useful infrastructure (roads, bridges, bike bridges, schools).  However, even that short boost will provide some benefit, which is why John Maynard Keynes suggested during the depression that the government should find infrastructure projects to fund, and even if it couldn’t do that, it should take bags of money and bury them in abandoned mineshafts because people would start digging, and hiring people to try to find it, which would have the same short-term effect (though not the later boost to GDP from having functional bridges, roads and schools).

Obama proposed to do something like this, through the American Jobs Act , which included funding for infrastructure (and the creation of a national infrastructure bank to bring private funds alongside government funding for infrastructure projects).  However, at the time it was dead in the water thanks to Republican obstructionism that they hoped would win them the presidency in 2012.  Now that their strategy didn’t work, maybe it’s a good time to look at it again.