Is an infrastructure bailout the right move?

Some say injecting hundreds of billions into roads, sewers and public buildings could lead to the next bubble

Is an infrastructure bailout the right move?

The city of Oshawa, just east of Toronto, has suffered its fair share of bad economic news lately. Next month, 700 workers at the General Motors car assembly plant will lose their jobs. This spring, 2,600 more will be out of work when the local truck plant closes. And it’s not just the auto sector that’s suffering. In this corner of Canada’s manufacturing heartland, all has not been well for some time now. From local businesses to municipal governments, everyone is feeling the recession pinch. Roger Anderson is the chair and CEO of Durham Region, which encompasses Oshawa. Few are more keenly aware of the need for some form of boost to get the stalled economy firing on all cylinders again. “If GM ever closed in Durham, I don’t even want to think of the ramifications. The tax base alone from GM and spin-off companies is astronomical,” he says. The cut back in manufacturing is expected to cost Durham $2 million in revenue this year just from the decline in water consumption, he says.

But Anderson also sees a silver lining to these troubles. As far as he’s concerned, there’s never been a better time for governments to start pumping money into long-overdue building projects, like high-speed rail, a new airport and the rebuilding of the Pickering nuclear power plant. “Durham is in an enviable position,” he says. “Those three projects alone would be 10 years of jobs and a lifetime of permanent jobs after that.” Anderson also has a list of $200 million worth of construction projects—for sewers, water pumping stations and incinerators—just waiting to be built. “If they gave me $50 million tomorrow, I could have a contract sent out within 30 days to build one of those facilities.” Show Anderson the money and he’ll show you a bustling local economy.

Compared to the complex financial roots of today’s economic meltdown the solution may be decidedly simple. From France to the U.S. to Canada and Britain, governments are looking to inject hundreds of billions of dollars into building roads, sewers, public buildings and new technologies as means to jolt the economy back to life. But just how effectively this will work is anyone’s guess. Some economists fiercely debate the merits of such a plan, while others worry it might work too well—all this cash dumped into the economy could just inflate the next bubble, complete with labour shortages, inflated prices and stifled private sector investment.

Ultimately, even proponents acknowledge governments will need to move with uncharacteristic speed and efficiency. If they get it right, Wall Street’s crisis could result in the kind of makeover Main Street so badly needs. Do it wrong, and this could be the beginning of the infrastructure boondoggle.

The possibility that this week’s federal budget could be jammed packed with stimulus spending has municipal governments across Canada licking their lips in anticipation. In fact, this month, the Federation of Canadian Municipalities released a list of 1,000 projects that are ready to start should they get the funding. Together, they’d create more than 150,000 new jobs, says the FCM. Today, the government hinted the cities could get what they want, announcing it will set up a $4 billion infrastructure stimulus fund.

But putting shovels in the ground is easier said than done. “The problem is it has to be done in a timely fashion,” says Robin Banarjee, an analyst at the C.D. Howe Institute. To have a meaningful impact, the spending has to start washing through the economy immediately. Too late, and it could become little more than a drain on the public purse. Cities have already been critical of how slowly the existing federal infrastructure program approves projects. One big risk, notes Banarjee, is ending up with badly-planned projects with runaway budgets. “You don’t want to cause more problems than you solve in the short term.”

Critics doubt that governments will ever have the ability to time these projects properly. And even if they do miraculously cut red-tape and get projects rolling by the spring construction season, there are still fundamental questions as to whether the money will really accomplish much anyway. Most critics point to the troubled track record of using stimulus to rescue economies, from the tens of billions of dollars in spending through the Great Depression, to the money poured into the Japanese economy throughout the 90s. Neither injections had the desired results.

Chris Edwards, an economist at the Cato Institute in Washington, D.C., says there are better options. “The government has power to affect private investment by tax incentives and regulations rather than focusing so much on pouring cement on government projects like roads,” he says. Far better to try and promote more long-term private investment and get more bang for your buck, he argues. “The reality is there’s a huge amount of disagreement amongst economists about whether an old fashion Keynesian spending stimulus does anything.” At the end of the day, he argues, “economists don’t know how the short run economy moves up and down.” So why experiment now?

But tax incentives have their own set of pitfalls. Rebates handed out in the U.S. to try and boost consumer spending had little impact on the economy, note economists. “It has been estimated that U.S. consumers spent, on average, at most one-third of each tax dollar rebate, much of it helping to stimulate foreign economies,” says a recent report from TD Bank Financial Group. “Given the higher dependence of Canadian consumption on imported goods, such massive leakages are likely even higher for Canada.”

One fear that proponents and critics alike share is that by pouring hundreds of billions into a few select industries, governments could simply open the door to a host of other painful side effects. “Any fiscal policy can be inflationary,” says Banarjee. “There’s only so many workers who can do these things. There’s only a certain amount of construction material. There will be a crowding out effect.” Look, for instance, at what happened in the rush to build the Alberta oil sands industry, he adds.

But there is still this tantalizing hope that this time around, things could be different. Government’s have acted quickly so far to start planning stimulus plans—much more quickly than during the Great Depression. What’s more, in the U.S., the collapse of the housing market has left a whole lot of room for new spending. The risk of creating job shortages, for instance, is not great. The same is true in Canada, where construction costs are also falling. “This is a good time for government to spend,” says Bill Ferreira, executive director of the Canadian Construction Association.

Precisely what kind of stimulus package the government is planning won’t be clear until tomorrow’s budget. But judging from the plans to run a $64 billion deficit over the next two years, one thing is certain: the government plans to spend on stimulus, and spend big.