History Lessons

By Huw Thomas, Editor

President Obama’s American Recovery and Reinvestment Act promises a major boost for infrastructure funding. But does it go far enough and what can the response to an earlier crisis tell us about the likely outcome? Huw Thomas investigates.

“If the figures are anywhere near accurate, then the ARRA is little more than a band-aid on a wound that requires surgery, at least from an infrastructure perspective”

“When you’re in a hole, stop digging.” It’s a piece of advice as old as the hills, and one that will be familiar to anyone who has had to manage a crisis. However, the events of recent years have seriously devalued the currency of received wisdom, just as they have so many other formerly precious assets. In response to the worst economic conditions the US has witnessed in a generation, President Obama’s new administration announced the American Recovery and Reinvestment Act. Providing a huge chunk of government money, a portion of which will be going to infrastructure, the administration aims to tackle unemployment and stimulate the economy. Faced with a huge hole in the nation’s finances, the government is planning to spend its way out of trouble. Splashing the cash in a period of record deficits might seem counterintuitive at first, but there are notable precedents.

The last time America faced such grave economic challenges was during the Great Depression, when unemployment hit a quarter of all workers and the stock market dropped by 90 percent. Though we have yet to plumb such depths in the current crisis, there are remain a number of parallels between the thirties and the noughties. Both situations were precipitated by colossal failings in the financial sector, with banks collapsing and personal fortunes being wiped out. Both had a catastrophic impact on industry, the administration’s bailout of the ailing General Motors just the latest example of today’s troubles. Though unemployment levels have yet to hit Depression-era lows, the current rate of 9.4 percent is the worst in a quarter of a century.

Given the superficial similarities, it is unsurprising that comparisons are being made between now and 70-odd years ago. It’s also no shock that Obama’s American Recovery and Reinvestment Act is being depicted as a 21st century version of Franklin Delano Roosevelt’s New Deal, both by its supporters and its detractors.

FDR’s New Deal contained a vast package of programs and initiatives intended to stimulate a failing economy, from reforms of banking and farming to massive public works projects designed to both modernize the country and reduce unemployment. Using deficit spending, the New Deal saw the creation of institutions such as the Public Works Administration and the Civilian Construction Corps, which tackled the numerous building projects. The New Deal’s lifetime saw the creation of roads, bridges, dams and other items of infrastructure that remain in use today. Though exact figures are hard to come by, it is thought that initiative’s programs accounted for about 2.5 percent of GDP for around a decade.

21st  Century breakdown
Today, the ARRA offers a total of $787 billion to be spent on everything from tax relief to healthcare to education. It’s a headline-grabbing figure, particularly in the wake of the billions of dollars that have been pumped into the shattered financial system over recent years. Infrastructure will get something in the region of $100 billion of this money, which will be doled out only to projects that are ‘shovel-ready’ and able to get moving without delay. This speed of action is key to providing the immediate stimulus the US so desperately requires.

But there are those that argue that the amount of money earmarked for infrastructure projects is insufficient, given the nation’s pressing needs. In its 2009 Report Card for American Infrastructure, the American Society of Civil Engineers was scathing in its assessment. The US, it contends, is a D student when it comes to the state of its infrastructure. According to the ASCE, $2.2 trillion dollars needs to be spent over the next five years to remedy this situation. Even allowing for the fact that the ASCE would be one of the main beneficiaries of all this funding, the amount of clear air between what it says we need and what the government is proposing to spend is striking. Taking ARRA money and regular spending into account, the shortfall is somewhere in the region of $1.1 trillion over the next half decade. If this is figure is anywhere near accurate, then the ARRA is little more than a band-aid on a wound that requires surgery, at least from an infrastructure perspective.

In addition, the way the money is being made available has also come in for some criticism. Dr. Peter Morici, Professor of Economics at the University of Maryland, believes the program could have been far more effective. “I would have spent less than $787 billion, but I would have spent more than $100 billion on infrastructure,” he says. “I would have spent something like a couple of hundred billion a year for four years.” 

Morici envisages a system of staggered payments with strict deadlines; if the money isn’t spent, it is lost. The pressure to make use of funds would give local and state legislatures all the motivation they would need to get projects moving quickly, Morici contends. In addition, the way the payments would be structured would have a far greater long-term impact, both from an economic and infrastructure perspective. “If you sent the money down to the mayors and said told them they had until 1 January to spend it, they would spend the money,” Morici continues. “But you don’t send them $300 billion that way. You send them $100 billion the first year, $200 billion the second year, and say this money is use or lose. People will get it done. They’ll learn how to streamline processes.”

But this need for speed brings problems of its own. A key concern for critics of the ARRA has been its focus on projects that are shovel-ready. While getting work underway quickly is vital from the perspective of tackling unemployment and stimulating the economy, for those tasked with actually carrying out these projects it can present major challenges. With the stipulation that work be able to get underway within 120 days, there is precious little time for States to come up with truly ambitious plans. Therefore much of the ARRA funding will go to projects that were previously overlooked due to either a lack of cash or a lack of interest. While FDR’s New Deal money went into remaking America with dams, highways and airports, Obama’s equivalent could end up paying for works that won’t really create a huge change in the country.  This is not to say that today’s projects are not necessary. It’s just that repairing roads and patching up crumbling bridges seems somewhat at odds with the administration’s claims that the Recovery Act can revolutionize in the long-term. No innovative energy project or paradigm-shifting piece of construction is going to be able to get moving in the narrow window allowed, rendering the ARRA something of a missed opportunity.

Despite the strict time limits placed upon ARRA infrastructure funding, fears remain that the wheels of government will grind too slowly for the act to be truly effective. Ron Utt Research Fellow at the Heritage Foundation, certainly believes that this system is too cumbersome to provide quick results. “The money is going to be spent extremely slowly,” he says. “The new program requires somebody to sit down and write the regulations as to who’s eligible. How you submit a bid, what sorts of things are acceptable, what we’re looking for, how will rewards be granted, and then give everybody a chance to response to these. So, three months later the regulations for that program have finally been written. I’m assuming that state DOTs and cities will have – let’s say 60 days, to submit their proposals.  Then it’ll probably take another 60 or 90 days to evaluate the proposals and award money.”

Looking back
Perhaps efforts to paint President Obama’s Recovery Act as a modern day equivalent of Roosevelt’s New Deal gloss over the faults of FDR’s efforts. Many feel curiously nostalgic about this period, when government and population pulled together to struggle through a time of great hardship. Consequently there is a danger that the New Deal’s success can be overstated. True, it left America with billions of dollars worth of glittering new infrastructure, but it’s impact on the economy and the people it was designed to help are less certain. “The New Deal and the Great Depression have been actively and avidly debated,” says Utt. “Many skeptics of the program note that by 1938, ten years after the beginning of the recession, the economy was still in terrible shape. This suggests that while the New Deal became a charming and interesting social and historic event, in terms of providing meaningful relief to people who were desperate for it, it didn’t have much kick. Also, if you look at the Civilian Conservation Corps, it was mostly young men from all over, living in tents, eating in cafeterias or open-air pavilions and doing fairly hard manual labor for a relatively tiny amount of money,” Utt continues. “Essentially, what they did get was room and board and some change to take back. A lot of jobs only lasted three or four months and then they were back to where they came from.”

In the end, it isn’t so much government action that caused the economy to rebound, but rather the coming of World War II. As mixed blessings go, it’s pretty huge, but the move to a wartime footing had a dramatic effect on levels of both employment and economic activity. When the government began spending heavily on the military and drafting young men in anticipation of the coming conflict, millions of the previously unemployed found themselves very much in demand. The sheer number of people required to drive the war effort went some way towards alleviating the problems of the Depression, though it naturally brought plenty of fresh challenges of it own. It is to be hoped that we won’t require a global conflagration to dig us out of our current hole.

But regardless of the strengths and weaknesses of the administration’s response to the economic crisis, the stimulus funds do represent a considerable opportunity to strengthen the nation’s infrastructure. As a result of the huge bank losses and previous government bailouts, we have become increasingly blasé about figures that seemed almost too big to comprehend just a few years ago. However you slice it, $100 billion is a fair chunk of change. Even if it only allows us to clear the overdue backlog of projects already on the books, it should help to put us in a position to invest in truly innovative ideas once the economic dust has settled. The American Recovery and Reinvestment Act may not leave a legacy quite as impressive as that of the New Deal. Perhaps we should stop worrying about ancient history and starting making our own.

Then…
Franklin Delano Roosevelt outlines the New Deal’s National Recovery Administration on 24 July 1933

“It was a vital necessity to restore purchasing power by reducing the debt and interest charges upon our people, but while we were helping people to save their credit it was at the same time absolutely essential to do something about the physical needs of hundreds of thousands who were in dire straits at that very moment. Municipal and State aid were being stretched to the limit. We appropriated half a billion dollars to supplement their efforts and in addition, as you know, we have put 300,000 young men into practical and useful work in our forests and to prevent flood and soil erosion. The wages they earn are going in greater part to the support of the nearly one million people who constitute their families.

In this same classification we can properly place the great public works program running to a total of over Three Billion Dollars – to be used for highways and ships and flood prevention and inland navigation and thousands of self-sustaining state and municipal improvements. Two points should be made clear in the allotting and administration of these projects – first, we are using the utmost care to choose labor creating quick-acting, useful projects, avoiding the smell of the pork barrel; and secondly, we are hoping that at least half of the money will come back to the government from projects which will pay for themselves over a period of years.

I cannot guarantee the success of this nationwide plan, but the people of this country can guarantee its success. I have no faith in " cure-alls" but I believe that we can greatly influence economic forces. I have no sympathy with the professional economists who insist that things must run their course and that human agencies can have no influence on economic ills. One reason is that I happen to know that professional economists have changed their definition of economic laws every five or ten years for a very long time, but I do have faith, and retain faith, in the strength of common purpose, and in the strength of unified action taken by the American people.”

…and now
Barack Obama announces the American Recovery and Reinvestment Act on 8 January 2009

“Throughout America's history, there have been some years that simply rolled into the next without much notice or fanfare. Then there are the years that come along once in a generation – the kind that mark a clean break from a troubled past, and set a new course for our nation. This is one of those years.

We start 2009 in the midst of a crisis unlike any we have seen in our lifetime – a crisis that has only deepened over the last few weeks. Manufacturing has hit a twenty-eight year low. Many businesses cannot borrow or make payroll. Many families cannot pay their bills or their mortgage. Many workers are watching their life savings disappear. And many, many Americans are both anxious and uncertain of what the future will hold.

That is why I have moved quickly to work with my economic team and leaders of both parties on an American Recovery and Reinvestment Plan that will immediately jumpstart job creation and long-term growth.

It is not just another public works program. It's a plan that recognizes both the paradox and the promise of this moment – the fact that there are millions of Americans trying to find work, even as, all around the country, there is so much work to be done. That's why we'll invest in priorities like energy and education; health care and a new infrastructure that are necessary to keep us strong and competitive in the 21st century. That's why the overwhelming majority of the jobs created will be in the private sector, while our plan will save the public sector jobs of teachers, cops, firefighters and others who provide vital services.

To build an economy that can lead this future, we will begin to rebuild America. Yes, we'll put people to work repairing crumbling roads, bridges, and schools by eliminating the backlog of well-planned, worthy and needed infrastructure projects.

If we are able to look out for one another, and listen to one another, and do our part for our nation and for posterity, then I have no doubt that years from now, we will look back on 2009 as one of those years that marked another new and hopeful beginning for the United States of America.”