The LP Goes to Harvard

Well, we didn’t actually go to Harvard.

In doing some background research on Obama’s plans for the biggest public works project since the 1950s, we talked to Harvard economist Dr. Jeffrey Miron about what this means for the economy. Here’s what he said:

LP: Does it make much sense, in terms of stimulating the economy, for the government to invest in public works programs that, when built, produces nothing further?

Miron: Overall, no.  The argument is that the beneficial effects of stimulus on overall activity are worthwhile, even if from a microeconomic consideration the projects do not make good cost/benefit sense.  Thus, in the extreme form, the standard Keynesian position would say it makes sense to have the government hire people to dig ditches and fill them back up.

The theory that underlies this view is not stupid, but not compelling either. 

At a minimum, any stimulus should be on things we would want even if they were not needed for a stimulus.  I am personally not persuaded there are many things in that category given the levels of current spending.

LP: Is there a high chance of damage to the economy by implementing a public works program such as that proposed by Obama?

M: There is certainly the possibility of adverse effects.  New programs tend to last and have bad effects on incentives and efficiency. 

LP: What do you predict to happen should Obama’s proposal be implemented?

M: I think the economy will recover in 6-12 months, with or without the stimulus.

LP: Is the best prescription for economic recovery keeping the government out of the economy?

M: In my view, yes. 

Miron brings up a great point about the lasting effects of new government programs.  In fact, it was a program of the New Deal that was at the center of the latest economic troubles: Fannie Mae.

Additionally, the idea that government can, quite literally, dig itself out of this current economic trough is patently absurd.  In doing so, the government often makes things much worse for the economy.  You might say that the government pays to dig its own grave–or, at least one for the taxpayers. 

There are several major problems with Obama’s public works plan, aside from the fact that government is making a mistake by even trying to take a hands-on role in the market. 

  • Cost/Benefit Ratio – It is not a guarantee that construction projects will continue to bring any economic benefit upon completion, and "building for the sake of building"–as is Obama’s objective–is an invitation for wholesale government waste.  This is like what Miron referred to as "government hir[ing] people to dig ditches and fill them back up." Public works projects that benefit the economy more than the cost of production may be pursued for this reason (at least by those that agree with government intervention, as clearly the Libertarian Party does not); however, no public works program should be undertaken for the sake of simply creating jobs.  Some economists, like Economic historian Price Fishback, predict that "such public-works spending would crowd out a significant amount of private construction," on top of being a waste of taxpayer money.
  • Limited Scope – Public works programs benefit one specific industry, and even a smaller amount of those in that industry.  Not every construction firm is able to handle the renovations of a bridge, or the construction of a new school.  Most of those that would benefit from a large-scale public works program would be large and specialized firms.  As such, a construction-based stimulus would have no demonstrative benefit outside of the construction industry.  These types of plans "suffer from a common problem–they will end up generating employment for highly specialized businesses and workers, rather than stimulating economic activity more broadly," say economists Susan Woodward and Robert Hall. "Thus a program that funnels money to construction firms and their workers mainly raises their incomes and employment levels and has relatively little effect elsewhere."
  • Too Slow For Impact – One main element of any economic stimulus plan is rapid and immediate relief. Relief plans that take too long to implement often kick-in after they are needed. This is a major complaint with most stimulus packages that are proposed, and large-scale public works programs are one the best examples of this delay. Many of these projects will take too long to get from legislation, to planning, to approval, and finally to the actual construction phase in order to have their intended impact.  What we will eventually have is massive construction spending during a time where an economic stimulus is not needed.
  • Magic Money – One of the oft cited objections with Bush’s economic policies was his penchant for massive government spending without any plans to offset this spending with cuts in other areas.  As a result, trillions have been added to an already exploding national debt.  A huge problem with Obama’s public works program is that it will add at least $700 billion (and most likely more, in the end) to our national debt, and Obama has stated no plans on how he hopes to address the deficit.  Most Keynesians will overlook this fiscal imbalance, but when the spending appears to have no real economic benefit (should it fail the preestablished cost/benefit test), then Keynesians must even wonder if there is a point to the spending.

Overall, the moral of the story is this: Obama’s public works plans carry no attestable benefit, and much unknown risk.  On top of this, there are several other better options for economic recovery; namely, keeping government out of the economy, and letting it work itself out. 

In this economic crisis, the best options for economic stimulus are ones of less government action–not more government action.  If government wishes to do anything, we suggest it simply cut taxes.  Tax cuts are always a good thing, and their economic impact much more proven. 

This way, taxpayers benefit, the economy rebounds and government still gets that warm-fuzzy feeling inside like it did something good.