Treasury: Build When It's Cheap

A blog about business and economics.
March 23 2012 5:23 PM

Treasury: Build When It's Cheap

This is slightly different from multiplier-based arguments about why increasing government purchases (as opposed to transfer payments) during a time of persistently high unemployment and low interest rates is smart, but in a new report the Treasury Department (PDF) argues that it's much cheaper to do it that way:

There are other factors that make current construction especially timely and costs low, translating into lower project costs. This impact on project costs is well-illustrated by the Federal Aviation Administration’s experience awarding $1.1 billion in Recovery Act funds for airport improvements. The money was designated for 300 projects. The winning bids for those projects came in over $200 million below the engineers' estimates. A second round of projects was selected, which also received lower bids than anticipated.  As a result of these cost savings, 367 runway and airport improvement projects were funded with the money that was originally intended to support 300 projects.
Advertisement
The states and transit authorities that selected most of the highway ($26.6 billion) and transit ($8 billion) projects supported by the Recovery Act reported similar experiences, and similar bid savings. Overall, the Department of Transportation (DOT) estimates that more than 2,000 additional airport, highway, bridge, and transit projects were funded because of low bids or projects being completed under budget.

The way an "old school" recession worked was that the Federal Reserve decided that inflation was too high. In response, it would raise interest rates which throws people out of work in rate-sensitive sectors. Construction is the ultimate rate-sensitive sectors, so it takes the hit hardest and first. Then when the Fed wants people to have jobs again, it cuts rates which spurs activity in rate-sensitive sectors—most of all investment in buildings and other physical structures. When a normal policy rule would suggest cutting rates below zero, you find that even at 0% there's still lots of idle resources in the structure-building sector. Consequently, the public sector has the opportunity to invest in structures at cut-rate prices.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.