Postrel responds

Virginia Postrel has responded

to my post of last week,

on the subject of her take on federal highway spending. Basically, she doesn’t

believe the numbers being bandied around Washington on the subject of how many

jobs are created when roads are built. Here’s the heart of her argument:

This story is supposedly about net new jobs, not merely leaving

people in other industries unemployed in order to hire the politically favored.

The money has to come from somewhere, and if you’re simply moving it around,

some folks are going to lose their jobs.

Essentially, she seems to be saying, spending money is a zero-sum game, and

every $1 billion spent on building roads is $1 billion not spent building factories,

say, or something else entirely. In order to find the number of net new jobs

created by a road-building program, you need to subtract the number of jobs

that the same amount of money would create elsewhere.

I don’t buy it. Remember, this is federal government expenditure, and it’s

not the federal government’s job to build factories. If a new factory is a good

economic proposition, then the private sector can raise the funds to build it

– interest rates are still low, if not as low as they were a few months

ago. The choice, here, is not between public investment and private investment:

it’s between the government building roads and the government not building roads.

Let’s suppose that no new roads are built, or no new roads beyond the $256

billion that everyone seems to be OK with. This would be a great outcome: it

would reduce government pork-barrel spending, reduce the deficit, save the environment

from the impact of road-building projects, and reduce the total number of cars

on the road at any given time. But it would also, quite clearly, reduce the

number of jobs created by federal road-building projects, and also reduce the

total number of jobs in the economy.

To see why, you just need to ask yourself where the extra money would come

from. As a federal expenditure, the funds would come out of the federal budget,

and the budget deficit would thereby be that much larger – no one’s proposing

any tax hikes to pay for all this. The marginal spending on roads will be financed

by federal borrowing. And who lends money to the federal government? Asian central

banks, to a large degree, and other investors who are much more interested in

safety than they are in total return. It is simply not the case that those Asian

central banks, deprived of being able to invest their money in Treasury bills,

would fund venture-capital projects instead.

Now, there is a small "crowding-out" effect, as economists like to

put it. As US government borrowing goes up, interest rates do too. (The Wall

Street Journal and other right-wingers dispute even this, I might add.) The

higher that interest rates go, the less likely that borrowing money is a prudent

way of funding a business. And so some businesses which can only expand with

very low interest rates might be hurt if federal spending continues to rise.

But there is certainly no credit crunch in the US economy: pretty much anybody

who wants to borrow money still can. Federal road building doesn’t stop anybody

from pursuing their own economically productive activities: indeed, at the margin,

it probably facilitates the business plans of people who need more or better

roads in order to succeed, like those who want to build factories in rural areas

off the present highway system.

In other words, I see no evidence that federal expenditure automatically reduces

jobs in areas far removed from where the money is being spent, as Postrel implies.

If the US economy was closed, and the budget deficit weren’t largely funded

from abroad, I might be more persuadable. And if there was some kind of limit

to wealth creation – if the total size of the economy were somehow capped,

and the money for road-building came out of the pockets of US citizens and businesses

– then I would also be more likely to agree. But it’s not today’s Americans

who are paying for these roads, it’s tomorrow’s. Today’s Americans simply see

the budget deficit increase, along with their chances of getting work building

a new highway.

Quickly addressing Postrel’s other points: I have no idea what she means when

she says that "construction workers are pretty fully employed". Does

she mean that a very large proportion of people who work in construction are

working in construction? Seems tautological to me. I’m sure that if the government

spent more money on road building, then more construction workers would be created.

And as for diminishing returns, I have no idea. But road-building is usually

a very local industry; if the first $1 billion is spent in North Carolina and

the 300th $1 billion is spent in Alaska, I should imagine that the returns,

in terms of jobs created, won’t have diminished all that much. But that’s a

question for Arthur Jacoby, the man in charge of creating the input-output models,

and not for me.

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4 Responses to Postrel responds

  1. Stefan Geens says:

    But it’s not today’s Americans who are paying for these roads, it’s tomorrow’s. Today’s Americans simply see the budget deficit increase, along with their chances of getting work building a new highway.

    So, instead of arguing that an extra $1 bln in highway spending takes X jobs away from other sectors of today’s economy, Virginia could argue that it is taking Y jobs away from a future economy, when all of today’s profligate spending is being atoned for. If it is profligate — it’s also possible that the jobs create enough tax revenues in the future to cover the extra federal spending now.

    Also bear in mind that you lure workers to road construction from another sector by offering them a better wage. That’s inherently inflationary, especially in an economy running at full steam.

    So, basically, the only thing you and Virginia differ on is when the diminishing returns set in, and now both of you have just admitted that you have no clue at what point in a spending spree that might occur.

    Truth be told, neither do I. But it shouldn’t keep us from arguing about it.

  2. Felix says:

    Offering someone a better wage building roads than he’s currently earning flipping burgers is not any more “inherently inflationary” than offering the same person a job as CEO of a major listed company. Road building pays well: this is a good thing.

    And Postrel and I disagree on a lot more than diminishing returns. She says that road-building programs don’t create jobs, and I say they do. That’s the real disagreement.

  3. Actually, I don’t make the general statement that “road building programs don’t create jobs.” I say that *under current circumstances* the road building programs being proposed will not create jobs. Productivity enhancing highway programs do create jobs, by boosting economic growth, and that’s the argument that sophisticated advocates of more infrastructure spending make these days.

    The issue in this calculation, however, is not productivity but whether unproductive spending creates jobs. To get that calculation to work, you need a very specific model of current economic conditions.

    You cannot simply ignore, as Felix does, the question of whether the economy is in fact in a Keynesian-style disequilibrium when you evaluate models based on the premise that it is. And even if you believe that we are in a disequilibrium that could be remedied by government spending (or tax cuts designed to boost short-term consumption), you also cannot simply ignore the question of whether spending on low productivity roads is the best way, or even a good way, to address the problem. Leaving aside the question of public benefits, unemployment is, in fact, quite low in the construction industry. Federal road construction jobs are a) skilled b) union, and are not open to random hamburger flippers. You might raise the wages of construction workers currently building houses, but you’re not going to help the Wal-Mart clerk or the guy who’s been laid off from some factory.

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