Saturday, September 25, 2010

Government Spending

I don't think there are any economists out there who are putting last year's porkulus bill up on a pedestal as a shimmering example of good government spending, and this is partly why:

No one spends money like the federal government. This year alone, it will shovel out $3.7 trillion, which works out to $7 million a minute. So it may surprise you to find out the clearest lesson from the Obama administration's fiscal stimulus program: The government is not very good at spending money.

On the contrary, it's slow and clumsy. Nearly a third of the $787 billion package, signed into law in February 2009, was assigned to infrastructure projects—from fixing roads and building bridges to weatherizing buildings and upgrading electrical grids.

The idea was to simultaneously improve our physical facilities while putting people back to work, which in turn would provide a badly needed surge of adrenaline to the overall economy. But it hasn't quite worked out that way.

The Wall Street Journal reports that 19 months after the plan was approved, federal agencies have managed to use only one-third of the infrastructure money. Federal contracting rules and labor requirements are among the hurdles that have slowed the process down.

This is not entirely unexpected. The Congressional Budget Office said before the program was approved that less than half the infrastructure money would be spent in the first two years.

That's always been one of the big problems with using fiscal policy—changes in spending and taxes—to manage the level of activity in the economy. By the time a policy takes effect, it may be too late to serve the original purpose.

Supporters insist there's no such danger this time, since the economic recovery has been feeble and promises to remain that way. A Bloomberg survey of economists found that most expect the unemployment rate to stay above 9 percent until 2012.

But if that's true, it doesn't say much for the potency of fiscal policy in boosting short-term growth. Obama's program, after all, is the biggest stimulus package, as a share of the economy, in our history. Yet it has landed with the force of a damp sponge.

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