Infrastructure Spending

Many currently advocate spending on infrastructure projects in order to recover our economy from the Recession it is in, and to prevent it from getting worse. Traditionally, States and local governments fund most infrastructure projects. I favor such spending by State and local government, often financed by government bonds. However, from a historical perspective, Federal infrastructure spending has not recovered an economy from an economic downturn. The Great Depression provides a classic example of this.

As the Recession started around 1930, the government under President Hoover, started spending more on infrastructure programs such as the Hoover Dam, among others. By 1932, government spending increased by 50%, a huge increase. However, this increased spending did not turn around the Recession, which then became the Great Depression.

When Franklin Roosevelt became President in 1933, he launched many infrastructure projects under various new federal programs. He increased federal spending even higher in an attempt to bring unemployment under control. Even with all that spending, unemployment never fell below around 15% until 1941, well into World War II - a rate we today would find an unacceptable tragedy.

1929 - 3.3% 1930 - 8.9% 1931 - 15.9% 1932 - 23.6% 1933 - 24.9% 1934 - 21.7% 1935 - 20.1% 1936 - 17.0% 1937 - 14.3% 1938 - 19.0% 1939 - 17.2% 1940 - 14.6% 1941 - 9.9% 1942 - 4.7%

There are other examples in history, including Japan in the 1990s which launched massive infrastructure spending to turn around its economy, only to wind up with massive yearly deficits, and an economic doldrum that was called The Lost Decade. There are several reasons why massive infrastructure spending does not turn an economy around. One of them is the lag time for infrastructure projects to get going, and to put money in the economy. The Congressional Budget Office yesterday published a preliminary report about the proposed infrastructure spending, and noted that most of it won't be spent and get into the economy before a recovery is already underway. We should be cautious before generating deep deficit spending using this approach to try to turn the economy around.