Is the Implementation Lag for Infrastructure Investment a Problem?

There’s been a lot of discussion about how the lack of “shovel-ready” infrastructure projects puts a constraint on government investment spending as a mode for delivering stimulus, since most infrastructure projects take a long time to plan and build. But what if the negative output gap is going to be deep and long-lived? Is this concern so pertinent? I don’t think so.


Here’s the latest plot of GDP, estimated potential GDP (according to the CBO), and the mean forecast GDP from the Wall Street Journal survey, taken on 8 January.


potgdp1.gif

Figure 1: Log real GDP, from 23 Dec 08 release (blue), potential GDP (black), WSJ mean forecast from January survey (red). Source: BEA NIPA release [link], CBO estimates of 7 Jan 09 [xls], WSJ survey of forecasters from January [link].

The output gap is predicted to be 6 ppts of GDP by 2009Q4 (in log terms).


But wait — the CBO projects output under current law and potential out to 2019.


potgdp2.gif

GDP and CBO’s Estimate of Potential GDP,
2000 to 2019. Source: CBO.

Output does not revert to potential until 2014! This suggests to me that concerns about the time lags involved with investment projects are perhaps not as relevant as in the usual business cycle downturn.


Hence, critics who interpret the Romer and Romer paper as a critique of all fiscal policy due to the difficulties in “timing” (e.g., this article) will have their arguments undermined. With a good 5 years worth of a substantial negative output gap, when the spending comes on-stream is not so critical. (More critiques of stimulus plans here.)


This also means that there is no need to “rush” the choice and planning of the investment projects, such that there is a fear of “waste” due to haste. Certainly, my prior is that there would be less waste than would be involved in a typical KBR contract.


Update 11:25am Pacific Since some questions about the timing of the impacts have arisen in the comments, I present below the impacts at different horizon for increases in government consumption, or reductions in wage/salary taxes equal to one percentage point of GDP. The impacts are expressed in percentage points of GDP, relative to baseline.


potgdp3.gif

Figure 3: Multipliers at horizons of N = {1,2,3,4,5} years after implementation, expressed as the ratio of change in GDP relative to baseline to one percentage point of GDP change in X, where X= {government consumption spending, wage/salary taxes}. Source: Dalsgard, Andre and Richardson (2001).

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32 thoughts on “Is the Implementation Lag for Infrastructure Investment a Problem?

  1. Anonymous

    The idea that we can’t possibly find work for people to do is preposterous. Even if we just paid people to do chores for their neighbors we would be productively stimulating the economy.
    Everyone get your “shovel” ready.

  2. Babinich

    Anonymous at January 9, 2009 10:54 PM says:

    “The idea that we can’t possibly find work for people to do is preposterous. Even if we just paid people to do chores for their neighbors we would be productively stimulating the economy.
    Everyone get your ‘shovel’ ready.”

    To hell with shovels give ‘em spoons.

    “There’s been a lot of discussion about how the lack of ‘shovel-ready’ infrastructure projects puts a constraint on government investment spending as a mode for delivering stimulus, since most infrastructure projects take a long time to plan and build.”

    A long time to plan and build but rather easy to start no matter the findings of the past history of projects cited in this CBO report: http://www.cbo.gov/ftpdocs/89xx/doc8916/01-15-Econ_Stimulus.pdf.

    The employment gained through public works construction is not as high as is commonly accepted. It is not very labor-intensive (maybe if we give them spoons?), the unemployed don’t generally have the required skills, and construction projects don’t necessarily exist in places where unemployment is high.

    So now we’re talking about definite retraining and possible relocation.

    When it comes to government adrenaline being used to create jobs isn’t important to ask how public works spending negatively impacts doesn’t displace private spending?

    I’d also like to look at how state and local governments are reacting to the largess coming their way. Why spend state and local dollars for infrastructure projects when the federal government will foot the bill?

    Will political intrigue determine which areas of the country receive federal largess?

    So, all of these government interventions sound good and necessary in order to save us from disaster.

    Let it be said when it comes to these plans and interventions that “God is in the details”.

  3. DoctoRx

    The idea that CBO, which did not foresee either the housing bubble, the credit bubble, the recession, etc., can reliably predict the economy several years out is risible.
    More to the point, in a free economy with a well-functioning system of money and enough credit for trade, the concept of an output gap is itself ridiculous. Soviet-style central planning, anyone?
    The last thing we need is Government resurrecting construction to a position of economic primacy once again. Haven’t we suffered enough from too much housing and commercial construction? Where I have lived, New York and Miami, highway construction is a bad joke: it never gets completed. Dr. Chinn and CBO have economic models, and I am not an economist, but I can tell them one thing: this construction proposal is going to infected with corruption.
    What about 21st Century knowledge-based industries such as health to goose up the economy in a way that can help our long-term balance of trade?
    If Mr. Obama can turn his attention to immediate crises such as the effective insolvency of Citigroup and possibly BofA and JP Morgan, and puts forth an effective program to directly assist those who have been made homeless by the housing bust, he will have done plenty.

  4. Ben Ross

    The post & Babinich’s comment are closely related to the hotly debated issue of whether transportation stimulus money should go to new roads or road repair and new transit. Rail transit construction is more labor intensive than highway building, uses the skills of people out of work from the construction crash (electricians, cement masons, etc.) and of course has the long-term effect of substituting domestic operating labor for imported oil.
    The problem is a lack of shovel-ready big transit projects. The Bush administration has discouraged transit investment by creating a byzantine approval process that impedes projects from progressing toward final design. And the engineering simply takes more time than highways (due to complexity, the same reason the projects are more labor intensive).
    If you are looking for a 3-4 year stimulus, fast-tracking the Federal Transit Administration approval process could get quite a few major rail transit projects under construction within that time frame.

  5. CoRev

    Menzie, am i reading you correctly? If we are willing to accept that recession will be extended for 4-5 years then we should embrace infrastructure spending as an alternative or primary stimulus because it matches the time frame?
    I remember the infrastructure spending versus tax cut wars during the Bush stimulus discussions, and this argument [if I am correctly interpreting your meaning] seems to confirm the tax cut strategy as a better short term solution.
    To me the argument should be what gets us out of this as soon as possible? And, we do have a recent history of short term effect.
    Since most recessions are confidence based, maybe a tax package that got us a couple or few improved quarters would help us more than waiting the years needed for infrastructure stimulus to kick in. Certainly a hybrid, as proposed, might be beneficial. Waiting, watching.

  6. aaron

    It’s a problem, but not a no-go. Problem is we’ve been focusing on financial, or purely paper, growth for many years. We haven’t been focusing on actual economic growth or productivity. That stuff takes time, especially increasing productivity. Our finances were growing faster than the real economy. That lead to missed expectations and bad decisions.

  7. beezer

    Our long term infrastructure problems dwarf the current financial intermediary problems. We are facing a decade of work in order just to avoid complete economic collapse created by keeping a whole host of legacy infrastructures that have no hope, abolutely none, of supporting our economy going forward.
    Forget the housing issues. People will find places to reside because there’s way too much capacity. If they’re underwater on their mortgage, mail in the keys! Cut your losses and move.
    And forget private investment because it has nowhere to go, and won’t until the government dollar gives it somewhere to invest that’s meaningful.
    Our problems go far beyond Wall Street banks. We have more than 10,000 banks and that industry will survive, probably better than most now believe, if the big, bloated ones are allowed to go into the history books.
    Timing? Heck it’s taken us 70 years to dig this big polluted hole. Ten years is nothing.

  8. MikeR

    Leave it to Minzie to try to discuss a legitimate economic issue, but then take a stab at partisan politics by ridiculing KBR which is associated with Haliburton and thus Dick Cheney. I agree with privatizing government services. The problem is that there are very few companies in the world willing and able to do what KBR does everyday.
    Perhaps next time we need a company to serve food to the troops in Afganistan, we can hire Obama’s Acorn. They certainly did a good job of collecting signatures for him. Or maybe NASA could do it cheaper or Charley Rangel’s son, or Blago the clown… get the point?

  9. Buzzcut

    My read of the R&R paper supports giving everyone a payroll tax holiday, not spending on pork.
    Seriously Menzie. Come down from your glass tower a minute and look at the details of what if being asked for by the Mayors. My Mayor sent in his wish list, which included solar panels and a wind turbine for city hall. It was the silliest thing I ever read. It is not “infrastrucutre” in the strict sense of the word.
    I could support infrastrucutre spending if it was actually targeted at debottlenecking our interstate system. That is not what is going to happen.
    And as we have been educated so well the last few weeks, the money that is spent is going to be treated in a “pay to play” fashion. The Blagojeviches and Richardsons and their ilk are in charge!

  10. DickF

    Menzie wrote:
    This also means that there is no need to “rush” the choice and planning of the investment projects, such that there is a fear of “waste” due to haste.
    Menzie,
    This sentence confuses me concerning your economic philosophy. I thought it did not matter what the government spent the money on as long as they got it into the economy to stimulate something. Here you are saying that we must not haste to “waste.” Now you did put “waste” in quotes so I assume there is some qualification here, but if there is actually the possibility of government spending leading to waste it would seem that we have a lot more analysis that should be done before spending almost $15,000 per person – almost 40% of GDP when federal, state and local spending are considered – on “stimulation.”
    Ultimately any spending that is not priority as determined by a majority of the people (the market) has a large element of waste in it by definition. This would seem to call into question the whole foundation of your econonmic philosophy of demand side stimulation through government largess.
    That then leads us back to your heading to question not the lag time but the stimulation itself.

  11. Menzie Chinn

    Babinich: You were worried about retraining to match the employment needs associated with infrastructure. When I last checked, I seemed to recall elevated levels of unemployment in the ocnstruction sector.

    DoctoRx: You don’t believe in such a thing as a output gap (sounds like a RBC’er to me) but think that the trade balance is a problem. In the absence of a formal model, I don’t know what to say, except that the viewpoint seems internally inconsistent at first glance.

    MikeR: Since people are constantly complaining about waste in government, I thought it only fair to highlight one (big!) instance where there is widespread agreement (by agencies such as GAO) that outsourcing to KBR led to substantial waste/overcharging.

    Buzzcut: Glass tower? I don’t even merit an ivory one? Ouch. Actally, my “tower” is a pretty prosaic 4-story brick building built in 1961.

    DickF: I think that we might as well get as much out of our stimulus package as possible, so if we can do things that increase potential GDP at the same time as stimulating aggregate demand, so much the better.

  12. Menzie Chinn

    CoRev: No, I don’t think you’re reading me correctly. The output gap, in the absence of any changes in tax/spending plans (recall, it’s a projection under current law), will shrink to near zero in 2014. In order to shrink that gap more rapidly, we need stimulus as short and long horizons. Hence, there is a role for stimulus with long gestation lags.

  13. Babinich

    Menzie says:

    “Babinich: You were worried about retraining to match the employment needs associated with infrastructure. When I last checked, I seemed to recall elevated levels of unemployment in the ocnstruction sector.”

    How silly of me… The skills required to building homes port over without a hitch to tasks such as building bridges, roads, & schools.

  14. Menzie Chinn

    Babinich: If you hadn’t noticed, the data suggest a downturn in commercial real estate (CRE) investment (e.g., [1]) and hence construction employment. This type of labor is more substitutable with the type used in some forms of infrastructure investment.

  15. Anonymous

    Menzie says: “If you hadn’t noticed”

    I have noticed; I’ve experienced it.

    Construction on homes differs from infrastructure construction: safety, materials, and equipment.

    Have you ever worked in construction? Don’t write about it; do it.

  16. Babinich

    Menzie, Anon was me…

    CRE construction and public works (road and bridge building) are different. These people will need to be trained in the areas I mentioned before. In addition to this fact, infrastructure jobs is often used when describing green jobs.

    In general, the unemployed don’t have the required skills, and construction projects don’t necessarily exist in places where unemployment is high. These are issues that need to be addressed not dismissed.

  17. Phillip Huggan

    “In general, the unemployed don’t have the required skills, and construction projects don’t necessarily exist in places where unemployment is high”
    I’ll point out if there was high speed rail the transportation problem for skilled unemployees would be partially solved. Doesn’t help this time around outside a few European and Japanese cities…

  18. Phillip Huggan

    The lack of project specifics shouldn’t avert some preproduct consumption, which is beneficial. If a “road refurbishing company” is debating whether or not to expand, knowledge of a stimulus a year or two away may be enough to commence expansion. Some level of time delay will be needed to weed out corrupt projects and determine sector specific employee shortages.

  19. Menzie Chinn

    Babinich: I didn’t dismiss the concern; you’re the one that mentioned “homes”, which misrepresented what I had written. That’s why I indicated the substitutability was higher, not infinite. In addition, while your concern is important for the impact effect of spending, it is not for the second, third, fourth, etc. rounds of recirculation of spending via the Keynesian multiplier.

  20. Anonymous

    Well, if there’s no rush in choosing and planning investment projects, then there really needn’t be a rush in funding them either. I mean, what’s the harm in waiting until we have legitimate projects ready to go before we start dishing out the billions?

  21. Richard H. Serlin

    Very important and excellent post.
    Note that even Martin Feldstein said the shortage of “shovel ready” projects should not be a deterrent in a recession that is likely to last long enough to plan and execute new projects.

  22. Richard H. Serlin

    So let’s stimulate the economy with things that will make us much wealthier over the long run like investment in infrastructure, alternative energy, education, advanced broadband, and basic scientific and medical research, rather than doing it the Republican way of tax cuts predominantly for the wealthy, and then encouraging people to spend frivolously on short term consumption of little or no lasting investment value.

    It’s far better to stimulate the economy by spending on alternative energy and education than on new fashions, yachts, and vacations. Spending on those things make us far poorer over the long than spending on high-return investments of the kind the pure free market will grossly underprovide due to well established in economics market problems like externalities, inability to patent, etc., etc.

  23. MikeR

    What a surprise that most of the stories are from the NY Times… all the news that Jayson Blair finds fit to print.
    Menzie, why not do a google search on Charlie Rangel’s son work for the government? Or the NASA inspector general, or the interest rate Chirs Dodd paid on his countrywide home loan? or search the Chicago Tribune for the reason why Rod Blogavich raised pharmaceutical payments from illinois state medicaid programs (hint, its because he got campaign donations from a pharmacist lobbyist)… the vast majority of government spending is less efficient than private sector spending.

  24. Anonymous

    But if we have deficit spending before a recession, deficit spending during the recession, and then deficit spending after the recession, where is the counter-cyclical fiscal plan? Surely Keynes didn’t mean that we should have perpetual deficits, and surely he didn’t think that deficit spending **after** returning to positive growth was stimulating.

  25. guest

    Why would I post something to my blog when this one gets more trafic?
    Of course KBR contracts are overpriced… doesn’t everyone who works for the government overcharge? Isn’t that the rational thing to do? What was the name of that WC Fields movie?
    Here is the article about Blago I was refering to. It shows how corupt he was back in 2003, when Obama, Rohm Emanuel and David Axelrod were working for him.
    http://archives.chicagotribune.com/2007/oct/16/news/chi-blago_16oct16

  26. MikeR

    Minzie, the previous posts were from me. I wanted to get back to you about UW Madison. The only courses I took in the econ department were the econometics sequence. I have a masters in finance. I know the econ department is highly respected and individually, I liked the faculty I came across, but I always felt the liberal culture of Madison biased school.

  27. Ed

    I think the strength of the US is the ability to innovate and get products to market quickly. We can take an idea and run with it. Look at Google, Ebay, Cell phones, etc. Putting money into our strengths is the best way for a long term stable economy. Historically venture capitalists would invest money in these ideas hoping for a share of the profits. Right now we don’t have anyone who is willing to take a risk after losing so much money in the stock market.
    Unfortunately, we have a system (economy) which is no longer in equilibrium. In systems that are not in equilibrium they behave erratically and swing from extremes quickly, bubble to bust in short amounts of time. If we don’t take care and just throw money at the problem, then we may reach an equilibrium of a decreasing economy.
    I think dumping money into infrastructure should be done not to stimulate the economy but to bring the infrastructure up to a basic standard. The real stimulus would come from innovation. If the government would put money into R&D and research universities then in short order many new products/industries would develop and encourage a better economic environment. However, when we do this we need to diversify. Don’t dump all the money into one are but several areas. Maybe one is green tech, maybe some into health care, maybe some into nanotech, etc. Historically many of these innovations came from DOD contracts. Instead of funneling the money through DOD put it out in the marketplace.

  28. Anonymous

    I agree with the last post’s views on infrastructure spending.
    But going back to the original topic of this post (the issue of timing), we still have the question of what to do with the first two quarters of 2009.
    When we look at it with open eyes, the short-run outlook looks extremely bleak. Last quarter of 2008 already saw about 1.5 percent plunge in the level of GDP. Public’s expectations for a timely recovery is LOW. It seems we’ll continue losing jobs at the rate of $500k/month if not faster (in the absence of a really good stimulus package, which the proposed one may not be).
    But such free fall could be prevented. Unfortunately, while I believe infrastucture spending is a great solution, the limited shovel-readiness of infrastructure spending means that it may not be the right tool for the next few months.
    Meanwhile, it is possible to come up with a plan that maintains the overall emphasis on infrastructure, but yet does not sacrifice the next 6 months.
    (For example, the stimulus could have an initial large tax-cut component, but with the condition that it would be the component to be reduced first if and when things start to improve.)
    The proposed plan seems to have chosen to forgo the first half of 2009 (not fully but in part).
    That really is an unnecessary waste. Given that the last half of 2008 was also largely wasted (in terms of the lack of policy action), it looks like a full year’s growth will have been effectively thrown out in trash.
    But that is sort of an incompetence (on the part of US macro policymaking) because we really have all the necessary tools to fix the problems.
    Consider for example the risk of deflation that sometimes comes up and seems to be soon realized. If you think about it, the PROBLEM OF DEFLATION is almost an oxymoron: it is not only very easy to fix, but it is also FUN to fix !! (Just pump money. For example, through tax cuts.)
    Once we open our eyes to that obvious point, it becomes clear that the problem of deflation is analogous to the problem of an attractive girl in a bootcamp of 16 year old boys, wondering about how she can solve her problem of virginity.
    Going back to the issue of timing, the point I am trying to make is, again:
    Obama’s team could drop its posture against tax cuts and embrace them for the very short-term, without sacrificing the emphasis on infrastructure spending.

  29. Anonymous

    The discussion re: difference in skills required for home, CRE, infrastructure jobs is rather silly. We don’t expect an unskilled worker to go straight to a high-skill job right away. It’ll be a shift; someone in a CRE job with previous experience in infrastructure moving on to a bridge building job, whose job is filled by someone in residential RE with CRE experience, and so on. Labor pool is dynamic/flexible. Most of us has skills we’re not using on the current job (with possible exception of academic economist).

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