The latest unemployment numbers, released Friday, showed that the economy created a net 18,000 jobs in June, far below the roughly 150,000 needed to keep pace with new job market entrants. The unemployment rate ticked up to 9.2 percent. Since President Obama had not yet been asked directly about June’s unemployment numbers, it was inevitable that the topic be raised in his Monday press conference on the stalled debt limit negotiations with congressional Republicans.
But if the president has learned anything from the apparent failure of his policies to spur job growth, he sure didn’t show it. A central element of his proposed unemployment solution is still the creation of an “infrastructure bank that could put construction workers to work right now rebuilding our roads and our bridges and our vital infrastructure right now.”
All of this despite the preponderance of evidence showing that federal infrastructure spending is not the boon for the economy that Obama claims. In fact, the Congressional Budget Office, the Congressional Research Service, and the Government Accountability Office have all concluded that such spending has at best a marginal impact on employment, and may even yield a net loss in jobs.
In a series of studies in 2000, the Department of Transportation used economic modeling to conclude that each billion dollars in infrastructure spending would create 47,576 job-years. That study was used to tout infrastructure spending in the stimulus package, and to justify such spending thereafter.
But USDOT’s study considered federal spending in the abstract, and thus failed to account for the hidden costs of extracting money from one part of the economy and spending it elsewhere. The Heritage Foundation’s Ronald Utt explained the flawed logic thusly:
In the real world, the additional federal borrowing or taxing needed to provide this additional $1 billion means that $1 billion less is spent or invested elsewhere and that the jobs and products previously employed by that $1 billion thus disappear. Regardless of how the federal government raised the additional $1 billion, it would shift resources from one part of the economy to another, in this case to road building. The only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven…
Because of these inherent limitations, [input/output] models such as the one used by USDOT should be used with great caution, and their limitations and artificial assumptions should be clearly acknowledged. When these conditions are considered, the job-creation potential of any spending scheme will be found to be a small fraction of what such models initially report.
Even some I/O studies have found the benefits of infrastructure spending to be negligible. The aforementioned CRS report, for instance, used I/O models to measure the impact of such spending, and concluded (see link above for details):
To the extent that financing new highways by reducing expenditures on other programs or by deficit finance and its impact on private consumption and investment, the net impact on the economy of highway construction in terms of both output and employment could be nullified or even negative.
Unlike CRS and USDOT, the Government Accountability Office actually studied the track record of an infrastructure project – the Emergency Jobs Act of 1983 – and found similarly unimpressive results. “Funds were spent slowly and relatively few jobs were created when most needed in the economy,” GAO found. The jobs that were created by infrastructure spending “represented less than 1 percent of about 5.8 million jobs created by the economy since the act was passed.”
The Congressional Budget Office took a different approach, and conducted a review of 10 years of academic data on the relationship between federal spending and job creation. On infrastructure spending, the CBO had this to say:
The available information suggests three conclusions: some investments in public infrastructure can be justified by their benefits to the economy, but their supply is limited; some (perhaps substantial) portion of federal spending on infrastructure displaces state and local spending; and on balance, available studies do not support the claim that increases in federal infrastructure spending would increase economic growth.
In short, a variety of studies using very different methodologies suggest that infrastructure spending is not an unemployment solution, and may even make the situation worse. So it should have come as little surprise, nearly a year after the president passed his stimulus package, that “a surge in spending on roads and bridges has had no effect on local unemployment and only barely helped the beleaguered construction industry,” as the Associated Press reported.
But President Obama continues to cling to the notion that unemployment can be solved by simply spending more federal dollars on construction projects. As long as he continues pursuing policies shown time and again to be ineffective, unemployment will likely remain a problem.