Thursday, October 13, 2011

Infrastructure investments are NOT a cure for recessions.

Every time there is a recession, sure as night follows day, infrastructure investments are cited as a cure for the problem. Unfortunately this idea gets a fair amount of support from senior members of the economics profession, e.g. Brad DeLong, Ann Pettifor, Nouriel Roubini (p.4).

Just in case these individuals think they are advocating something original, Pericles in ancient Athens, 2,400 years ago, advocated public sector projects as a means of providing work for the unemployed.

There are a string of problems involved in the above alleged cure for recessions, as follows.

1. Infrastructure investments, like any other form of economic activity requires SPECIFIC TYPES OF LABOUR. In the case of typical infrastructure investments (e.g. road, rail, bridge, school, and sewer construction), it’s electricians, carpenters, civil engineers, architects, people with experience of working with concrete, bricklayers, plumbers etc that are needed.

No doubt during a typical recession there is a decent supply of the latter skills to be found amongst the unemployed. But no more so than the skills suitable to other forms of economic activity. And as regards the current recession, it might seem that there is likely to be a super-abundance of unemployed and experienced construction workers. Unfortunately, the evidence is that former construction workers have found no more difficulty finding alternative work than members of other professions, thus it is not entirely clear that the above “super-abundance” exists. See here and see near bottom here.

To put the above point another way, if we HAVE TO concentrate on creating jobs via the public sector during a recession, there is no reason to concentrate on infrastructure rather than other forms of public spending. In particular, in the US, thousands of teachers, police, etc have been sacked as a result of the crunch. To have these people work on infrastructure projects rather than employ the skills they already have is absurd.

2. One big attraction of concentrating on the public sector in a recession is that effects of this spending are more certain than the effects of channelling more money to the private sector: the private sector multiplier is always uncertain.

However, requiring people to change the type of job they do involves costs: re-training, and time taken to learn profession specific or firm specific skills. If the distortion involved in expanding the public sector during a recession is unwound come the recovery, then further costs are involved as another lot of people have to change jobs and/or profession.

3. What proportion of infrastructure projects are “shovel ready”? In the UK it takes a minimum of about a year to get planning permission for any significant infrastructure project, like a bridge.


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