Chief Economist Jack Wells: Transportation Spending, An Inefficient Way to Create Short-Term Jobs

Whenever the economy hits a rough spot, politicians often say that we need to spend more on transportation infrastructure to create jobs.  They often cite numbers like “47,500 jobs are created for every billion dollars spent on infrastructure.”  The Federal Highway Administration has indeed done estimates of the number of jobs that are supported by spending on highway infrastructure, and the “47,500 jobs” number comes from one such study done in 1997.  But a billion dollars doesn’t buy as much as it used to, in highways as in most things, and, because that billion dollars buys less steel, concrete, and employment-hours, recent updates of those studies have cut the number of jobs supported by a billion dollars in federal highway spending to about 34,800 jobs. 

Moreover, that number is based on a federal investment of $1 billion, assuming that it is matched by $250 million in state spending.  If we calculated the number of jobs supported from $1 billion in total federal and state spending, the jobs created would fall to about 27,800.  Also, it’s really more correct to say that the billion dollars “supports” 27,800 jobs, because the actual number of new jobs created depends on how much unemployment there is when the highway spending starts.  If most people already have jobs when the construction starts, people will just leave their old jobs to take a new job, and there might be very few new jobs created.  The highway construction jobs might be better jobs than people had before, but they won’t all be new jobs.  It’s also important to understand that not all of these jobs are construction jobs.  About half of the jobs are created in the construction industry and in supporting industries like steel and concrete production, but half of the jobs are in industries that produce consumer goods and services that construction workers and highway engineers buy with their increased incomes – everything from movie production to fast-food services. 

Finally, it takes a long time for these jobs to be created.  Infrastructure construction requires a long series of steps to plan, design, get environmental clearance on, and construct infrastructure projects.  Only about 27 percent of the funds, on the average, are actually spent (“outlayed”) in the first year, while another 41 percent are spent in the second year. 

A billion dollars spent on almost anything will create jobs.  John Maynard Keynes used to say that, if necessary, we should bury pound notes in bottles and bury them, so that people could dig them up.  It’s not very useful, but it does create jobs (digging up bottles).  The real question is, if we have a billion dollars to spend, what is the best thing to spend it on – better education?  Better health care?  Better infrastructure?  What will produce the greatest benefits, short-term and long-term, for our economy?  The real question to focus on for transportation infrastructure is what impact it will have on improving the long-run productivity of our economy, and how that compares with alternative uses of those tax dollars, rather than on the short-run impact on jobs.

-- Chief Economist Jack Wells

Comments

[Alan Pisarski]

Jack Wells is of course right about the jobs issue. Building Pyramids creaes jobs. the real point is that what happens after you build the road or transit system that matters -- that makes a contribution to productivity or not. No one justifies building schools because of the jobs it creates. Like transportation it is what happens after that matters. But we have done an abysmal job of making the case for transportation investment outside of the jobs argument. Right on cue the economy will often go into the doldrums right around reauthorization time. Two points are missed here. One is we should calculate the generic job creation of a billion dollars "left on the stump" and determine in short term stimulus or longer term how does transportation investment stack up. but the main point where the jobs argument wins hands down was last week when we were about to severely cut the program due to cash flow issues -- that would have unequivocally destroyed jobs. AEPISARSKI

[IndySniff]

It is easy for a government bureaucrat to say that these expenditures in infrastructure do not really create jobs. As a person that lost my job due to the erosion of the value of the construction dollar in the last 10 years since the Feds last raised the gas tax I say "phooey". I guess this same logic would say that I did not really lose my job, but I was just not permitted to go to work. Your job is a government job and so is the thousands of people in this country that are working to design and build the infrastructure in this country. If Congress and the President do not maintain the funding stream to account for the devaluation of the construction dollar than they are just as responsible for the loss of that job. Congress and this President have failed to act on Highway funding at the last reauthorization when they were told to do it by industry officials at AASHTO and now we are using bandaids. It is like Social Security and Medicare all over again. Leadership is making hard decisions at the right time in the country's interest, not reading polls and hiding behind them. Or hide behind the term limit and leave the mess for the next administration.

[Alexander]

Ah! ...but burying pound notes in bottles - or throwing $150-billion cash stimulous at the American public, has also neither created sustainable employment nor the benefits of any tangible of economic investment.

At least hurling billions at transportation will KEEP thousands from slipping into the ascending unemployment numbers, PROVIDE for badly needed asset management, and PREVENT an aging infrastructure from inducing a loss-of-life and economically-productive hours. Doing nothing, is not an option. Sitting in board-rooms and back-rooms pondering how best to use "those tax dollars" accomplishes nothing of value in the short-term and delivers outcomes that no crystal ball seems capable of forecasting for the long-term.

If "drill here, drill now" is a politically preferrable solution for long term energy supplies (since it can't address near-term demands), then why not "spend here, spend now" to ensure the sustainability of our invalauable transportation assets and the myriad professional and skilled labor required to deliver them?

If, as Mr. Wells point-out, precedent shows these costs will only continue to ascend and fewer jobs and materials will be purchased, why not accelerate the production and retrofit of sorely needed invesment while the getting is good?

[Greg Cohen]

Dr Wells posits an important question:

What impact will transportation investments have on improving the long-run productivity of our economy, and how that compares with alternative uses of those tax dollars?

As Chief Economist of DOT, his answer to his own question would be very valuable to all of us.

My expection is that high-value projects, particularly capacity expansion on the National Highway System (including the interstates) -- particularly in congested areas, would yield tremendous productivity gains. It is unfortunate that FHWA doesn't have easily accessible data on this.

[Fred Williams]

The Hamilton Project is based at the Brookings Institution. In a series of white papers published over time on different topics, the Hamilton Project is proposing a market-centered national economic strategy for the U.S. On July 25, the Hamilton Project hosted a seminar (at Brookings) on “An Economic Strategy for Investing in America’s Infrastructure.” The featured speaker was Lawrence Summers. The most significant message for the present was Professor Summers’ discussion of the conditions under which infrastructure expenditures work best for economic stimulus. He observed that increased (often imported) materials costs (increased 70 percent since 2004) dampen the job creation from infrastructure expenditures. However, a slack labor market resulting from reduced housing construction would increase the number of jobs per dollar of expenditures. Also, at present there are large infrastructure backlogs and unfinished projects that could quickly put new infrastructure dollars to work. Ideally, during economic hard times, infrastructure spending should combine short term stimulus and long term economic value. To achieve this, the U.S. needs better methods for project and program selection, e.g., Benefit Cost Analysis. As I recall, no one at the Brookings seminar calculated the number of jobs per unit of infrastructure spending. In all but one respect that I can see, Mr. Wells' blog is consistent with Mr. Summers' July presentation. Mr. Wells does not appear explicitly to take account of infrastructure projects already far along in the pipeline or under construction.

[Clark Sorensen]

Seems to me there are many current issues beyond building new highways. Efficient mass urban and intra-urban transportation networks. High speed trains linking cities would be far more convienent than flying - ask Japan.
All these alternatives would be "green" compared to current thinking -"Let's build more roads...".
Oh, I left out keeping current infrastructure safe and up to date. We need safe bridges, water and sewer resources, more efficient energy production and distribution. There is plenty of work needing to be done and a $1.5 billion won't scratch the surface...

[William Buechner]

Based on 21 years as senior economist for the Joint Economic Committee of the U.S. Congress and 12 years as chief economist for the American Road and Transportation Builders Association, I would like to comment on three elements of Jack Wells’ blog:

1. Jack’s comment that we should view the ongoing level of federal highway investment as "supporting" rather than “creating” a given number of jobs is well taken. But an increase in federal highway investment, whether temporary or permanent, will create new jobs. If the spending is temporary stimulus, the jobs will be temporary but they will be there while the money is being spent. When the economy is at full employment, increased spending of any kind is not likely to create many jobs. But right now we are far from full employment, with an unemployment rate above 6 percent. At that level of unemployment, highway spending in a stimulus bill will create new jobs, not take workers from other sectors. Workers with appropriate skills will be readily available to fill the new jobs, given the decline in employment in the homebuilding and general building sectors of the industry in the past couple years. And, according to ARTBA’s latest quarterly industry conditions survey, many transportation construction contractors are operating well below capacity and are eager to take on new work. So, at this time, I don't think there is any question that additional federal highway investment as part of an economic stimulus bill will create jobs that would not otherwise exist.

2. The argument in the third paragraph that it takes time for these jobs to be created assumes that highway spending in an economic stimulus bill would focus on the same mix of highway projects as does the federal highway program. But that is clearly not what a stimulus bill would do. A stimulus bill focuses on quick spending which, for a highway component, would be projects ready to go to construction in a very short time. And there appear to be plenty of such projects. Earlier this year, AASHTO surveyed its members and found more than 3,000 highway projects totaling about $18 billion that could be under construction within 60 to 90 days of enactment of stimulus legislation. The spendout would be much faster than the normal highway program spendout formula cited by Jack Wells. The argument that highway projects take a long time to plan and execute simply misunderstands the concept of stimulus spending.

3. The final paragraph describes the kinds of choices Congress does, and should, consider during the regular annual appropriations process, but not in economic stimulus legislation. The purpose of stimulus legislation is to inject quick spending into the economy. One of the strengths of a stimulus spending bill is that, unlike a general tax cut, the spending can be targeted where it will be most effective. Since construction is one of the weak areas of the economy right now, stimulus spending on highways and other infrastructure would help plug that hole. Furthermore, given the current gap between highway investment and needs, the additional spending on highways in an economic stimulus package would certainly be beneficial to the economy in the long run as well.

Finally, it is important to note that most of the jobs created by highway spending in an economic stimulus bill would be located in the U.S. and would employ American workers. Unlike tax cuts which can be spent on imports, transportation investment would create thousands of well-paid on-site construction jobs in every state plus many other U.S. jobs producing the aggregates, construction machinery, cement and numerous other materials used in transportation projects.