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The Fiscal Stimulus: Lessons from Katrina, Iraq, and the Big Dig
Linda Bilmes presented an interesting paper (not online) at the AEAs looking at the fiscal stimulus in light of Katrina, Iraq and the Big Dig. Here are some key grafs:
A good play to start looking for lessons is by analyzing the three biggest recent examples of heavy government spending on infrastructure: the Iraqi reconstruction effort, Hurricane Katrina reconstruction, and the Big Dig artery construction in Boston. Let me start by pointing out that all of these were plagued by a number of serious problems.
Iraqi reconstruction: [T]he Special Inspector General for Reconstruction, Stuart Bowen,...has found that the effort has been riddled with cost overruns, project delays, fraud, failed projects and wasteful expenditures...even though the first tranche of $19 billion in Iraqi reconstruction money became available in October 2003, the Defense Department did not issue the first requests for proposals for this money until 10 months later...
Hurricane Katrina: ...the US has appropriated, over $100 billion in short and long term reconstruction grants, loan subsidies [etc]...GAO found that FEMA made over $1 billion--or 16% of the total in this particular category--in fraudulent payments...items like professional football tickets and Caribbean vacations.
The Big Dig: ...the largest single infrastructure project in the US...many lessons on how not to run a project...officially launched in 1982, but it did not break ground until 1991, due to environmental impact statements, technical difficulties and jurisdictional squabbles...not "completed" until 2007.
Bilmes is the co-author with Joseph Stiglitz of The Three Trillion Dollar War.
Posted by Alex Tabarrok on January 19, 2009 at 07:05 AM in Economics | Permalink
Comments
Oh good, and I thought Monday was gonna start with bad news!
"GAO found that FEMA made over $1 billion--or 16% of the total in this particular category--in fraudulent payments"
But, don't ya' get it, in a recession, waste and fraud is a feature!
Where better to put it to good use than Louisiana? Let me be the first to propose the New Orleans reconstruction project. Concrete will be used to raise New Orleans up a level like how they built Disney World.
Posted by: Andrew at Jan 19, 2009 7:32:26 AM
fine, but why do people assume that private industry is without these kinds of colossal failures, extreme inefficiencies, etc?
Posted by: babar at Jan 19, 2009 8:16:38 AM
A wasteful government policy can continue indefinitely. A wasteful business eventually goes out of business, unless it becomes an example of the former.
Posted by: Cyrus at Jan 19, 2009 8:49:17 AM
Actually, Sam Antar, the former CFO of the Crazy Eddie fraud, details how he things these frauds will be carried out.
http://www.bizop.ca/blog2/due-diligence/bait-and-switch-from-obama.html
Posted by: michael webster at Jan 19, 2009 9:28:41 AM
Babar: The difference is accountability. The assumptions are that a company which does those kinds of things will suffer eventually and die off; and that the bankruptcy of such a company will not cause, say, the entire country to collapse. When, and how, does a government declare bankruptcy and file for reorganization? On the other hand, how does the "colossal failure" of a single business entity in a competitive landscape compare with the colossal failure of the monopoly/monopsony of central Federal government? Enron is gone, long live energy trading companies. IBM is gone, long live Microsoft. (Or google if you like).
Posted by: J.V. at Jan 19, 2009 9:42:04 AM
On strict Krugmanian terms, the waste and fraud only matter if the swindlers have a lower propensity to consume than the capitalists buying Treasury bonds, right?
Posted by: Bob Murphy at Jan 19, 2009 10:08:43 AM
what's the problem? Only 4% of the stimulus Congress passed is about big transportation programs anyway.
Posted by: allison at Jan 19, 2009 10:59:22 AM
Katrina and the Iraq reconstruction are two excellent examples of how to mismanage a spending programme. They demonstrate that it was highly unlikely that the GW Bush administration would have managed a stimulus spending programme usefully. Boston's BigDig was more a case of plain misgovernment. These are all ways of manging which should not be copied. Toyota will understand. They did not copy GM.
If all Federal spending programmes had been managed the way Katrina and Iraq Reconstruction were run, the USA would not be the world's super power. We can (and must) do better.
Posted by: D iversity at Jan 19, 2009 11:11:50 AM
The problems, overruns, and waste described above are probably present in small-scale projects as well, but those small-scale projects simply aren't as visible and thus don't get the coverage of hurricanes or Iraq.
Alternately, those projects that don't have such problems are probably heavily supervised. You can read about some of the ways the government might logistically distribute money—and how some of those ways might be gamed—in our post Getting Your Piece of the Infrastructure Pie: A How-To Guide for the Perplexed. It quotes a recent WSJ article, Mayors Struggle to Get Piece of Stimulus involving proposals to block grant the stimulus to the states. The L.A. mayor says:
"They take 15-20% straight off the top," Mr. Villaraigosa said, "and then all of the sudden you have a complete dilution."
If every level of government takes a bunch of cash from the top of any money and uses part of that for oversight, they'll not get problems like those in big projects. But you can probably see the alternative problems that will occur. As Paul Graham says in "The Other Half of Artists Ship:"
The gradual accumulation of checks in an organization is a kind of learning, based on disasters that have happened to it or others like it. After giving a contract to a supplier who goes bankrupt and fails to deliver, for example, a company might require all suppliers to prove they're solvent before submitting bids.As companies grow they invariably get more such checks, either in response to disasters they've suffered, or (probably more often) by hiring people from bigger companies who bring with them customs for protecting against new types of disasters.
It's natural for organizations to learn from mistakes. The problem is, people who propose new checks almost never consider that the check itself has a cost.
Choose your poison: a looser project that'll result in more money that disappears into a black hole or a tighter process that results in more lost in overhead. It's not dissimilar to the struggles around running evaluations, which we discuss in Studying Programs is Hard to Do: Why It’s Difficult to Write a Compelling Evaluation. You face trade-offs no one wants to make and the easiest side wins. For projects that get $1M or less, no one notices. For $700B infrastructure projects, people notice, journalists investigate, and then they wonder why the process looks more like something out of William Kennedy's Roscoe than the twinkling dreams of legislators.
Posted by: Jake at Jan 19, 2009 11:41:18 AM
Bob Murphy beat me to it, but so did Andrew with the first comment.
Posted by: Yancey Ward at Jan 19, 2009 12:38:48 PM
You left out $15 billion to expand O'Hare Airport when $5 billion would have built a whole new airport.
And don't forget the $16 billion Chicago needs for the 2016 Olympics. That includes $10 billion to rebuild the Chicago Transit Authority lines.
Why do anything yourself when you have a sugar daddy in Washington?
Posted by: jorod at Jan 19, 2009 1:06:54 PM
Private projects do have cost overruns and delays etc., and indeed probably some of the money is spent on what are really perks, like Caribbean vacations. And that could actually be efficient: if a football ticket or a Caribbean vacation is what it takes to recruit a good staffer, it might be worth it.
The real problem is that there isn't *ex post* feedback from the market about the value created by the project. For that reason, accountability tends to have to focus on inputs-- costs, schedules, etc.-- rather than outputs. In a sense, this method of evaluating projects is itself a symptom of the problem, but an inevitable one, because output data is so poor that scrutinizing inputs is the only accountability we have.
Failed projects could be a good sign, a sign of taking risks. If all your projects succeed, you're probably being too cautious. And yet it's hard to apply this reasoning in bureaucracies.
All this is sort of an application of Mises's calculation argument.
Posted by: Nathanael Smith at Jan 19, 2009 1:15:21 PM
The largest single engineering project always runs into trouble, in any engineering discipline. Then we learn how to solve the process and management problems that arise at that scale, and future projects of that size work better.
Posted by: g at Jan 19, 2009 3:52:57 PM
To make Obama's infrastructure projects more efficient, he should suspend minority set-aside requirements on all of them.
Posted by: Steve Sailer at Jan 19, 2009 4:45:14 PM
Katrina and Iraq reconstruction were big new projects that had to be developed on the fly to respond to a sudden need. There was not much time beforehand for planning and preparations. And because there was an acute need for specific types of programs, contracts for a program would get assigned to someone even if nobody knew how to make the program work.
The stimulus infrastructure spending is designed to not be like that. The money is going towards projects that have already been planned and seem ready to go, not to new projects that need to be developed on the spot. And the projects don't need to meet any specific needs, so we don't need to fund a program that doesn't seem promising just to have some program dealing with that issue.
The stimulus infrastructure spending should be a lot more similar to normal infrastructure spending than to these big special infrastructure projects, except presumably it will fund somewhat less effective or valuable projects since it is going towards the marginal projects that otherwise wouldn't quite make the cut. (If our government is normally relatively inefficient at deciding which infrastructure projects to fund, then the value of the stimulus projects might actually be closer to the value of normal infrastructure spending, since that would mean that our failure to fund these projects before is less indicative of them being lower quality projects.)
Posted by: Dan at Jan 19, 2009 8:39:13 PM
At least in the case of Katrina and Iraq, this assumes that all administrations will be as incompetent as this one. Iraq in particular also suffered from a number of externalities that escalated costs explosively.
Posted by: SC at Jan 19, 2009 9:47:10 PM
There are going to be lots of articles like this over the next few years.
We should not forget that we are spending a few trillion propping up capitalism when these articles appear, and not really getting anything for it. We could have avoided lots of this waste with proper regulation. Almost any regulation on leverage in the mortgage securitization markets would have prevented this mess.
Invariably, there will be huge amounts of waste in large societies, no matter who is doing the spending. We need to be vigilant about monitoring and minimizing this waste, but in the end, we all waste lots of resources and time. Tyler recently stated he wastes 40% of his time. If our best are are wasting this much time, how can we as a large and complex society expect to be an order of magnitude better on projects thousands of times larger than Tylers time?
I think we cannot avoid the waste. We can and should attempt to minimize it. As adults, we need to understand that this waste is simply part of the total cost of doing any project, much less huge projects that have no template to follow.
As for the argument, "well companies go out of business, but bureaucracies cannot.", governments do go out of business. Last I checked, the U.S.S.R no longer exists. I will argue that the governments of the U.K. went out of business. Additionally, the government changes over time, both in composition and in its programs. These changes are slower than capitalism, and for good reason. Society needs stability, and slowly changing governments with rare turnover are a good counterbalance to the rapid, dynamic, but potentially unstable capitalistic economy.
Please put this comments section into the "waste" bin for me. It was a waste of time reading it for most people, as we 15-20 people in this room have essentially zero impact on where and what the spending will be on. We could at least be drinking beer somewhere while bitching about government waste.
Posted by: mickslam at Jan 19, 2009 10:01:50 PM
Can someone give me an example of fiscal stimulus (other than military spending as ww2 is the big example) that actually worked? This is an honest question, as I can't think of one and there has to be one, otherwise why would everyone clamor for one.
Posted by: Doc Merlin at Jan 20, 2009 8:33:55 AM
I suggest that you look to the management of Minnesotta's highways for an example of great public management. Why, to avoid raising taxes, the state turned I-35 into an Interstate to nowhere.
The response was a half billion dollar earmark request from Bush, passed by Congress, and then spent to build a bridge that wasn't shovel ready.
I wonder why none of the tax payers who got to keep their money to spend more wisely than government didn't invest in a new bridge, or at least repairs to a bridge years before classified as deficient. Why no charities raising money to fix the bridge? Does that mean that citizens don't care if they are killed while driving over a bridge?
But in any case, the I-35W bridge was not a shovel ready project, but the new bridge was in use less than 15 months after the old one collapsed, and given the depressed construction market, the bridge came in well under the estimate, and that was when picking the highest bidder.
Posted by: mulp at Jan 20, 2009 11:48:28 PM
Doc: Fiscal stimulus was regularly successful in ameliorating the Great Depression -- and a return to austerity in 1937 had brutal consequences. Fiscal policy only works when the economy is in very bad shape, but it's very important then.
I feel strongly that the real reason fiscal policy is most successful in very bad times is that the government is not taking the place of the economy -- it is taking the place of the banks. Banks' primary role is to select good capital projects and reject bad ones. When banks fail, there is no money for good capital projects (not to mention no money for bridge loans, etc). Government spending doesn't crowd out anything, because the capital markets are badly damaged. So if we buy things like infrastructure, those increase future tax revenues (due to improved productivity) and act as a holdover until new banks can be formed or expanded into economically damaged areas.
But, again, this is not a discussion that's relevant to a 3-year recession. It's only a colossal bank failure associated with a possible depression that this is relevant to. The 70s were a time when this mattered, but the spike in oil prices meant that stimulus was accompanied by nasty inflation that depressed investment (by raising risk) and undid much of the good it could do. That's not relevant in this case.
The big thing is not to throw good money after bad. The big banks are going to fail. We might want to prop them up for a little while so they can fail in an orderly fashion, but that's about it. In the meantime, the government can act as the capital markets until new, better banks are formed up and/or expanded.
Posted by: Punditus Maximus at Jan 21, 2009 4:17:55 PM
Sorry, "not taking the place of the consumer." Thanks.
Posted by: Punditus Maximus at Jan 21, 2009 4:19:20 PM
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