Does Transportation Spending Make Good Stimulus?

by Andrew Haughwout, Therese McGuire, and Joseph Morris – Liberty Street Economics, Federal Reserve Bank of New York

On January 14, the Transportation Research Board, an arm of the National Research Council, released a new report, Transportation Investments in Response to Economic Downturns. The report is intended to provide guidance on three important and related policy questions:

1. If the federal government undertakes a future stimulus program, should transportation spending be part of that package?
2. If so, how should the transportation spending be structured and managed?
3. Should established transportation programs be modified to make transportation spending more useful as economic stimulus?

While there have been four stimulus bills since World War II that included at least some public works component, transportation spending had, until 2009’sAmerican Recovery and Reinvestment Act (ARRA), fallen out of favor as a stimulus tool. Economists have described effective stimulus as “timely, targeted, and temporary,” and transportation spending—although it is often well-targeted to employees of the procyclical construction industry—was often thought too slow to reach the economy in time to counteract recessions. In addition, concerns were raised that increased federal aid would simply substitute for state and local spending, allowing those governments to save more and defeating the stimulative purpose of the spending. The committee that wrote the report concluded that ARRA rules on both “maintenance of effort” and the speed with which funds had to be spent vitiated these concerns, particularly given the length of the recent recession and the sluggishness of the recovery.

In addition, other considerations support the inclusion of transportation capital spending in a federal fiscal stimulus:

• Transportation spending produces long-lived investment goods whose benefits at least partially offset the cost of the investment, regardless of the stimulative effect;
• By improving long-term productivity, public investments can raise long-term growth expectations, thus providing additional stimulus relative to nonproductive expenditures;
• Accelerating already planned expenditures, a hallmark of transportation stimulus packages, adds less to public debt than creating entirely new programs;
• Given the wide range of multiplier estimates for various types of spending, a diversified approach is valuable and construction spending can be one component of a diversified portfolio of stimulative measures.

While the committee concluded that transportation spending can be effective fiscal stimulus, the size of such a program will be limited by the existing inventory of worthwhile projects as well as industry and administrative capacity. In addition, the transportation component of ARRA was by no means perfect. In particular, administrative rules intended to ease evaluation and to better target the funds added administrative costs far in excess of their benefits. The decision to distribute most transportation funds according to procedures of established federal aid programs was critical to timely spending.

The committee recommends improving the ability of the transportation delivery system to absorb and effectively use stimulative resources. Measures to stabilize transportation spending over the business cycle and to allow accelerated spending during recessions would benefit the economy overall and the transportation system. Actions for this purpose could include adding to the backlog of projects with completed designs awaiting funding, building balances in federal and state transportation trust funds, and resolving uncertainty over the future of the established federal transportation aid programs. Other recommendations focus on designing and administering future stimulus programs, should they be enacted, and on evaluating their effectiveness.

Of course, not all scholars agree that the preponderance of evidence supports the notion that fiscal stimulus can be effective. As such, the report includes a dissenting view by one member, which was subsequently reviewed positively by John Taylor in his blog.

Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Source: http://libertystreeteconomics.newyorkfed.org/2014/02/just-released-does-transportation-spending-make-good-stimulus.html

About the Authors

Andrew Haughwout is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Therese McGuire is professor of strategy at the Kellogg School of Management, Northwestern University.

Joseph Morris is a senior program officer at the Transportation Research Board.