How building bridges can help the economy – or not
Prime Minister Justin Trudeau announced yesterday that his government will fast-track $700 million in previously-announced infrastructure funding to help the beleaguered Alberta economy.
READ MORE: Trudeau agrees Alberta needs help
That’s not the only infrastructure money promised by the Trudeau Liberals. During the election, they proposed new spending of up to $5 billion on infrastructure over the next two years.
Sounds great. But how does building roads and bridges help the economy?
Global News asked two economists to explain: Bill Scarth, a professor emeritus at McMaster University who’s written several economics textbooks, and Stephen Gordon, a professor at Université Laval and a prolific blogger and commentator on economic issues.
How bridges turn into jobs
- The government announces a project.
- A private firm wins the contract for the project.
- That firm uses government money to hire people to work on the project.
- The workers spend some of their new wages on goods.
- Firms selling to the workers then also make money and possibly hire more people, who also get paid and buy things.
- Repeat steps 4 and 5.
The key, of course, is always the toughest to measure: These jobs and this spending need to be jobs and spending that wouldn’t have happened were it not for the governmental cash infusion.
“So by spending one dollar of government money, the government hopes to create several more dollars of income in people’s pockets,” Scarth said.
But the stimulus, if it works, is temporary: Once the bridge is finished, the firm that won the contract could fire its workers.
The hope, Scarth said, is that the rest of the economy will have recovered enough by then that the firm will have enough new business to keep its new workers around, or at least that the workers can find decent-paying jobs elsewhere.
This all assumes though that the problem you’re having is that there’s not enough demand for businesses’ goods – something that Stephen Gordon believes was true in 2008- 2009’s recession, but not now.
The economy is adjusting itself from high oil prices to low ones, and he’s not sure how much governments can help. “There’s a structural readjustment that’s going on, and it’s just going to have to happen,” he said.
Does it matter what you spend it on?
Not really, Scarth said. If all you’re trying to do is pay someone some wages that you hope they’ll spend, “then literally digging holes and then filling them up again is not a crazy thing to do.”
But if you’re spending money, you might as well be creating something useful with it, he said. Better infrastructure could help the economy in the long run by making it more attractive to do business in Canada.
Gordon agrees that new infrastructure can be helpful to the future economy. But, it needs to be deserving of funding on its own merits – not for fiscal stimulus purposes.
He’s very concerned that the government seems to be going about things backwardly: announcing that they’re going to spend billions of dollars, then picking projects to spend it on – especially because they’re saying they’ll get the money out the door in mere months.
“Increased haste reduces the probability that the money will be wisely spent,” he said. If the goal is to just spend money, he worries that it will be spent on the wrong things.
“I’m not against infrastructure. I am against the idea of we have to push the money out the door because we promised that we would spend it.”
Instead, he’d prefer to see a project be proposed, then if everyone agrees it’s a good idea, it get funded.
How far does the money go?
Here’s where there is some disagreement, Scarth said. Most economists, he thinks, are comfortable with a “multiplier” of about 1.5 – every dollar the government spends creates $1.50 in the economy overall.
That’s not a big boost, he said. So governments should really only consider that kind of spending program if the economy is especially bad – especially because they’ll have to pay back any deficits created by the spending program.
It’s also tough, in a global economy, to ensure the money you spend has the ripple effects you desire.
For example, if a worker in Fort McMurray spends her wages on California fruit, that may benefit the grocer she’s buying from but not Canadian farmers.
“The smaller the region that you’re trying to fix up, the higher the propensity to import,” Scarth said, and Gordon agrees.
Scarth also thinks it’s better for the economy for the government to build infrastructure rather than just hand people cheques. While both actions would raise the demand for goods, richer people would be inclined to save more from their cheque, so less money would go into the economy, he thinks. And, building new infrastructure also has the advantage of raising future supply for goods: businesses can ship more if there is a nice, new road. So, it’s an investment in the future.
Should the government spend now?
Scarth thinks so. Usually, he prefers that the market correct itself, or if there’s a problem, that the Bank of Canada lower interest rates to stimulate demand, he said. But the rates are almost at zero already.
Those low interest rates make it cheaper than ever for the government to invest, he said. “Everything’s aligning to say, if you ever want to do this, now is the time.”
Gordon strongly disagrees. “It’s just the wrong instrument for the problem,” he said.
Fiscal stimulus like infrastructure spending is designed to stimulate demand, he explained. But, he doesn’t believe that is the problem the economy is having right now.
“Increasing government spending is not going to offset oil prices falling,” he said.
While some local infrastructure spending in Alberta might be a tool to help that economy, he’s not convinced it’s a particularly good way to address the region’s problems. Spending on EI or job training might be just as helpful – particularly since the benefits are less likely to be leaked away on imports.
Is $5 billion a year enough?
In a paper for the C.D. Howe Institute in 2014, Scarth estimated that running a $10 billion deficit would reduce unemployment by about four tenths of a percentage point from what it would otherwise be. So, he expects that $5 billion would have half that effect.
“Is that enough? For those who want to create a lot of jobs – no. For those who worry about a deficit – yes,” he said.
He says his research indicates that the government will eventually have to run a larger deficit of about $20 billion, so he thinks that the government should spend more. Other economists might disagree.
Gordon is one of them. He’d much rather projects be funded on a case-by-case basis, rather than announcing a dollar figure for spending and accepting bids for a slice of the pie.
“When you set it out like that, it’d be a failure if you don’t spend money, and no, no, no, that’s not a good setup.”
How long until we see any effects?
It usually takes about 18 months after an infrastructure program is announced until shovels hit the ground, said Scarth.
“That’s really discouraging if you think you’re trying to lower the unemployment rate in the next couple of months.”