Wednesday, July 8, 2009

An Ill-Timed and Ill-Targeted Stimulus

Copyright, The New York Times Company

Last week’s disappointing employment report has raised the question of whether the stimulus package is working. Construction data over the last couple of years supports the view that federal spending would never provide much “stimulus,” in part because it was doomed to be ill-timed and ill-targeted.

The chart below graphs monthly construction spending, from 2003-2009, for three sectors: private residential, private nonresidential and public (of which residential is negligible). In order to adjust for the inflation and economic trends of the period, each spending series is expressed as a percentage of personal income less transfers.

Hindsight shows that housing construction sharply reversed trend in early 2006. Hindsight also shows that the housing boom used up significant numbers of workers and equipment, and the housing crash freed up those resources. That created opportunities for non-residential construction projects in the private and public sectors.

Although private construction did not significantly respond to these opportunities during 2006, private non-residential construction ramped up throughout 2007. That private non-residential activity remained high, and perhaps increased further, throughout 2008.

Meanwhile, the public sector still kept its construction activity at the low level that prevailed throughout the housing boom. Unlike the private sector, it did essentially nothing to put unemployed workers and equipment to work.

In January 2009, Congress passed a stimulus bill that was supposed to put some of the unemployed back to work. But January 2009 was almost three years after the spending opportunity presented itself, and two years after many projects were under way by those in the private sector who saw these opportunities.

Moreover, typing and signing a bill is not the same as doing construction work. The public construction series shown in the chart goes through May 2009 — four months after the bill became law — and shows only a tiny increase by that time. We are told that we will actually notice stimulus bill spending sometime in 2010.

One might argue that the housing crash presented the public sector with little opportunity because residential construction workers and equipment are not useful for the kinds of transportation construction that dominate public construction spending. That is at most partly true, because some housing workers have responded to the housing crash by re-qualifying for highway work.

More importantly, that argument (if correct) only provides another reason public spending cannot both put unemployed housing resources back to work and provide value to the public: The housing resources are ill-suited for public sector work.

The public sector — especially at the federal level — is not known for its agile and effective responses to market conditions. In authoring the stimulus bill, Congress and the president relied too much on federal spending and too little on the private sector.

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