Can Obama's Infrastructure Program Work?

Wharton management professor Witold J. Henisz agrees that as the Obama administration and congressional leaders draw up the program, too much attention may be focused on where the money will be spent and not enough on how the program will be governed. He suggests that Congress could remove the potential taint of political-horse trading from the economic stimulus package by establishing a panel modeled after the Congressional Base Closing Commission, which helped to reduce the size of the nation's military, devoid of pressure from the affected districts.

"We should focus more on governance, which could give rise to people saying that we need to be timely and not offer excuses for inaction," says Henisz, who recently prepared testimony for a Congressional committee looking into the oversight for a new stimulus plan. "There could be put into place a relatively simple framework that particularly addresses these political problems."

At the same time, Henisz acknowledges the need for quick action, adding that he concurs with a letter that was sent out this fall by Stanford University's Collaboratory for Research on Global Projects listing an estimated $15 billion to $20 billion in approved infrastructure projects that could be ready for financing within 30 days. He cites a number of large projects that have been approved on a state or local level that can move forward with some extra federal assistance -- such as a $10 billion bond issue approved by California voters for a high-speed rail system from San Diego to San Francisco. However, there has already been some controversy over another, more comprehensive list of projects prepared by the U.S. Conference of Mayors, which listed 11,391 projects that are ready to begin work immediately. Critics seized on the fact that the list included a new ride at a water park as well as a polar bear exhibit and even an anti-prostitution program -- projects they claimed had little to do with job creation.

When $100 Is Really $50

Indeed, concern over whether the federal government can target the money to the right programs without substantial waste is motivating Wharton's Inman to work with the Philadelphia Fed on research into how money from past stimulus packages has been spent, especially direct federal aid to states. When states have infrastructure projects that are "shovel-ready" for work to commence immediately, it means the funds for the project have already been allocated, he says. The new federal dollars really end up going for other state and local purposes, such as balancing the budget, that do not lead to direct job creation.

"Everybody has in the back of their head this idea that you have a bunch of unemployed guys standing on the side of the road with shovels and that if you give the state of Pennsylvania $100, then suddenly these unemployed guys go to work," Inman notes. But the evidence shows that economic stimulus doesn't operate that way, he says, adding that Pennsylvania Gov. Ed Rendell has indicated the state would use up to $400 million of $1.2 billion in federal stimulus aid to balance the state budget and meet other fixed expenses.

"So we're trying to do the math" to show what percentage of federal stimulus money allocated to states is actually used to stimulate the economy. The key issue, he says, is that "much of that money goes into things that wouldn't have happened otherwise. It might be $100, but it might be only $50. There's a big difference in the marginal effect on jobs between a dollar that goes into a company that hires guys who are unemployed and a dollar that goes into an unemployed guy's back pocket." The money that goes into the state government coffers may prevent a tax hike, "but the economic impact of that is more difficult to measure," Inman says.