Barack Obama's decision to devote around 40 percent of his stimulus package to tax cuts has caused some consternation among those of us who think, dollar for dollar, infrastructure investments would do more to help the economy. But not everybody sees it that way. While I was canvassing the opinion of some experts yesterday, I got in touch with Henry Aaron, the economist from Brookings. He always has provocative things to say and yesterday was no exception. Here's what he wrote me:
We should all be worrying less about tax cuts, and more about the content of the direct spending.
The rap on tax cuts is that not all of them are instantly spent and that, therefore, they do not pack as much punch as direct spending does. True enough, if one looks, say, three months ahead. Perhaps a third is spent almost immediately, a third more within about nine months, and the rest is spread out over a very long period—at least that is the prevailing view as I understand it. Well, that is a sizeable kick and it is fast.
Transfers to states, for Medicaid and UI, can also spend out quickly and are desperately needed; indeed, they would be my highest priority. But I think a lot of the talk about public works is loose commentary based on anecdote.
Sure, there are a few projects that are "shovel ready." (That term seems to come from the same lexicon based on wishful thinking as "clean coal"; both are evocative but refer to something that is mostly myth.) But the great majority of projects will take a lot of time to get underway.
That may not be a bad thing if (a) the slowdown lasts as long as some suppose and b) if the projects are well selected. I think that there is doubt on both scores, but especially on the second.
We look back to the WPA [Works Progress Administration] and all the terrific buildings and lovely art that it sponsored as illustrative of what is possible. But those were simpler times, in the sense that the capacity of various groups and interests to lobby on behalf of projects less valuable than those undertaken by the WPA were embryonic or nonexistent.
I worry a lot about the public works that will emerge from this enterprise. Yes, there are some bridges and highways that need fixing. But let me be clear, the good guys may be the bad guys in this case. What the hell is investment in "green jobs"? A lot of money will be wasted, for example, in the pursuit of alternative energy projects that have about as much real substance as "clean coal."
Furthermore, even if every project is just great and is worth every penny, contracting for them and spending the money will take years. Yes, some--I’d be surprised if one could get anywhere near $100 billion--will spend out within a year; but most of it, if done right, will take two to five years, or possibly even more, to spend out.
So, as far as stimulus is concerned, I’d emphasize support to the states and temporary tax cuts and be extremely careful of the public works side of the package. Every mayor and governor has a list of projects that didn’t make the cut, but that will be impossible to turn down with someone else paying for them.
For what it's worth, I'm far less skeptical about the possibility for green jobs. This report, from the Center for American Progress, outlines what looks to me like a pretty good investment plan. On the other hand, Aaron knows a lot more about economics than I do, so it's worth taking his criticisms seriously.
--Jonathan Cohn