Monday, August 29, 2011

Thoughts about fiscal stimulus

1. Is swinging hammers and framing houses the same as heavy construction such as road building and bridge repairs? In this case there appears to be an implicit assumption that all construction workers are substitutable within different segments of the industry:

Twenty percent of the people in the country who are doing construction are unemployed, and we're not trying to do something about that, when we have a major demand problem? It just doesn't make any sense.

We have infrastructure in this country -- I mean you can argue whether we need a new high speed rail system or whether we don't need a new high speed rail system. But I don't know what the argument is for letting bridges collapse. I don't know what the argument is.
I mean, and you know, you can say airports aren't that important or whatever. But it is symbolic of an approach to infrastructure that probably never made any sense, and certainly doesn't make any sense when you can borrow money at 2.8 percent and you've got 20 percent of the construction workers unemployed.

When we were at Yellowstone this summer we came across some road building activity. With all the heavy equipment lined up along the roadway my thought was, “What do guys who cut lumber and nail them together think about going to work doing road building? Is this even possible?” Perhaps it is, and it’s certainly worth investigating (i.e. googling).

2. We recently put an addition to our house at $150K. This put about 3 or 4 guys to work (not even full time) for about 2 months. (Perhaps if we count the plumber and electrician’s time then it may come up to full time.) We should have qualified for some subsidy/fiscal stimulus money for this project. (Hey, Obama, it’s not too late - we could use a kitchen remodel!)

But did this really achieve anything? So MR has got this just about right:

For all the talk of a “large stimulus,” you don’t hear much about a “longer stimulus.”

The problem with a “too small” stimulus is that you get an initial economic boost, but when the stimulus expires the economy slumps back down, as indeed happened in mid 2011. Ideally a stimulus employs some idle labor, stops it from depreciating, and tides those workers over until they can look for other jobs in fundamentally better economic conditions. Those last few words are important. If conditions are not improving soon, the ability of the stimulus to “buy time” for those workers isn’t worth much. The workers get laid off from the government projects and their reemployment prospects are no better than to begin with. We end up having spent a lot of money to postpone our adjustment problems, rather than achieving takeoff.

The other thing that is not mentioned is that the housing bubble cause a misallocation of real resources into the construction sector (specifically home building) and do we really want to sustain this artificially high level of investment?

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