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.