Transportation Investments in Response to Economic Downturns (2014) / Chapter Skim
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Pages 33-62
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From page 33... ...
Stimulus spending historically has taken various forms, including purchases by the federal government directly, grants to state and local governments for specific purposes (e.g., for transportation projects) , grants or credit assistance to businesses or individuals for specific purposes (e.g., to subsidize energy efficiency)
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From page 34... ...
should be taken into account for all spending categories in designing the stimu lus package. • In the ARRA transportation programs, some established practices with regard to project selection, spending priorities, and funding sources were superseded in an effort to boost the immediate employ ment impact of the federal funding.
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The impact often is expressed as a multiplier, for example, the change in GDP per dollar of added government spending during a specified period. Most public debate over stimulus spending places the greatest emphasis on job creation, especially on immediate job creation during the recession.
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It interprets the estimates as follows: at full employ ment the short-run government purchases multiplier is zero. With high unemployment but with monetary policy reacting to changes in inflation and GDP by adjusting the short-term interest rate, empiri cal estimates of the multiplier are mostly between 0.5 and 0.7 (Boskin 2011, 10)
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. In summary, these reviews are consistent in concluding that there is evidence that the short-term government spending multiplier is greater than zero, despite varying points of view on modeling methods and on the overall value of stimulus spending or of ARRA.
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The reviews cite research findings contrary to these generalizations and emphasize the uncertainty of the multiplier estimates and the consequent difficulty in providing policy advice to a government planning a stimulus program. In models that predict a small response to stimulus spending, an increase in government purchases crowds out a substantial amount of consumption and investment that would have occurred without the intervention, because government spending bids up interest rates, wages, or prices or because expectations of future higher taxes or slower growth reduce consumption and investment.
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. Impact of ARRA ARRA required CBO to issue quarterly comments on the reports of grant recipients on numbers of jobs supported by ARRA funds (CBO 2012; CBO 2013a)
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The multiplier estimates incorporate CBO's assumptions about the fractions of federal grants to individuals TABLE 2-1 CBO Estimates of Output Multipliers for Provisions of ARRA Estimated Output Multipliers Type of Activity Under ARRA Low High Purchases of goods and services by the federal government 0.5 2.5 Transfer payments to state and local governments for infrastructure 0.4 2.2 Transfer payments to state and local governments for other purposes 0.4 1.8 Transfer payments to individuals 0.4 2.1 One-time payments to retirees 0.2 1.0 Two-year tax cuts for lower- and middle-income people 0.3 1.5 One-year tax cut for higher-income people 0.1 0.6 Extension of first-time home buyer credit 0.2 0.8 Corporate tax provisions primarily affecting cash flow 0 0.4 Note: The output multiplier is the increase in dollars of GDP, cumulatively over several quarters, per dollar of federal spending (or tax reduction) under each type of ARRA provision.
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CBO's estimate of the peak GDP impact of ARRA is an increase of between 0.8 and 4.6 percent in the 2010 second quarter. CBO derives employment impact from the estimated GDP impact.
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assessments are not derived from observation of the effects of ARRA but rather by applying models whose parameters are estimated on the basis of earlier historical data to estimate the effect of the ARRA spending. Research that attempts to measure the actual effects of ARRA is summarized as follows in the paper on stimulus spending commissioned by the committee: Wilson (2012)
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From page 43... ...
Although this aid was not for infrastructure purposes, the evaluation provides an insight into the effect of federal ARRA grants to states on total state government spending and saving. The study concluded that each $100,000 in additional ARRA Medicaid aid received by a state increased state employment by 3.8 person years through June 2010, with most of the increase occurring outside the government and health sectors (Chodorow-Reich et al.
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. Chapter 3 examines grant design questions in the case of the ARRA transportation grants.
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that CBO used for its assessments of ARRA indicate mostly small differences among the multipliers for direct federal purchases, payments to state and local governments for infrastructure and for other purposes, and most categories of payments to individuals. CBO ranked the multipliers for the ARRA tax cuts lower than those for the spending provisions.
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, using state-level data for 1990 to 2010, estimated that the short-term multiplier for state level income for an addition to federal highway grants was between 1.5 and 3 on average but that this multiplier was much larger during
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Similar estimates have been presented to support proposals for spending priorities in a stimulus program and to evaluate the components of ARRA. Impact estimates that are derived according to the standard method of such studies are of limited value in judging the effectiveness of stimulus spending or for comparing transportation spending with alternative forms of stimulus spending.
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From page 48... ...
Yet economic impact evaluations of infrastructure projects and programs frequently are presented that offer pre cise estimates of jobs impacts and compare impacts of narrowly defined alternative expenditures. The following are examples: • The Maryland state government estimated direct employment and total in-state quarterly jobs created by state spending of ARRA funds in each of 13 programs during the period from 2009 to 2012 (State of Maryland n.d.)
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or for infrastructure. They concluded that social service grants generate 24 total jobs per million dollars of federal grants versus 11 jobs per million dollars for infrastructure grants.
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Chapter 3 will describe the rate of spending of ARRA transportation construction funds. The study of differences in multipliers in recessions and expansions cited above found evidence that the size of the multiplier tends to decline quickly as soon as the economy begins to grow following a trough (Auerbach and Gorodnichenko 2012, 11)
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Summary The committee's task was to assess the value of transportation spending as fiscal stimulus. Research results concerning the effects of fiscal policy during recessions that are relevant to this task are those that reduce uncertainty about the effectiveness of fiscal stimulus during a recession, indicate the kind of fiscal stimulus that is most effective, and indicate
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– Form of the federal spending: CBO's estimates of the impact of ARRA assume that direct federal purchases are more effective stimu lus than grants to the states earmarked for similar purchases, presum ably because some substitution of federal funds for state funds by grant recipients is believed to be unavoidable. Research studies rel evant to judging the extent of this fiscal substitution have not yielded consistent results.
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TRANSPORTATION SPENDING AS FISCAL STIMULUS An evaluation to decide the role of transportation spending in a fiscal stimulus program, once the budget of the total program had been determined, ideally would include the following steps: 1. Rate the alternative forms of stimulus actions available according to their relative stimulus impact (e.g., in terms of a multiplier)
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Chapter 3 describes the experience of the ARRA transportation grant program with regard to the timing of spending, impact on total state transportation spending, and project selection.
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The $35.9 billion in highway and transit aid provided by ARRA equals 77 percent of the amount of regular federal highway and transit aid distributed in 2008 and 32 percent of all state and local government highway and transit capital spending in 2008 (FHWA 2010; APTA 2012)
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From page 56... ...
Including transportation invest ment in a stimulus provides a hedge against the possibility that the government expenditure multiplier is smaller than hoped for because the benefits of the facilities constructed may justify the expenditure even if little short-term stimulus benefit is produced. • Transportation investments, unlike consumption expenditures, may tend to restrain price increases and thus reduce the inflationary effects of stimulus spending that would result from increases in demand, because they increase the productive capacity of the economy (Freedman et al.
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Chapter 3 cites evidence that state and local government total capital spending and state and local noncapital transportation spending are procyclical; that is, they tend to accelerate when the economy is growing strongly and to decelerate during downturns. This pattern amplifies business cycles, may delay project completion, and prevents transportation agencies from taking advantage of lower prices during recessions.
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From page 58... ...
Also, if stimulus benefits are substantial, some spending during recessions might be justified for transportation projects that could never be justified solely on the basis of their transportation benefits. However, transportation spending could be a useful part of an antirecessionary stimulus program, and the benefits of making spending countercyclical could be obtained, without increasing long-term total spending on transportation.
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From page 59... ...
REFERENCES Abbreviations APTA American Public Transportation Association CBO Congressional Budget Office CEA Council of Economic Advisers FHWA Federal Highway Administration GAO Government Accountability Office TRB Transportation Research Board UN United Nations 4 Drautzburg and Uhlig (2011) present a calculation of the welfare effects of ARRA that could be applied to assess this short-term versus long-term trade-off in the infrastructure component of a stimulus program.
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2012. The American Recovery and Reinvestment Act.
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2011. Recovery Act: Funding Used for Transportation Infrastructure Projects, but Some Requirements Proved Challenging.
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2010. Highway Construction Job Estimates for ARRA Projects.
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