Transportation Investments in Response to Economic Downturns

Posted by Content Coordinator on Wednesday, March 5th, 2014



After the U.S. economy entered a severe recession in 2007, the federal government forcefully intervened to reduce the costs of the recession and speed recovery. Congress enacted spending programs and tax relief, and the Federal Reserve acted to sustain financial markets and reduce interest rates. Among these measures, the American Recovery and Reinvestment Act of 2009 (ARRA) provided $831 billion in new spending and tax relief. ARRA appropriated $48.1 billion to be administered by the U.S. Department of Transportation (USDOT), mainly for grants to state and local governments for capital expenditures for roads, transit, airports, and passenger rail. The act also funded other state and local government infrastructure and supported public infrastructure projects through a bond subsidy program.

The rationale for public infrastructure spending as stimulus (that is, to aid recovery from a recession) is (a) that it directly provides employment on construction projects and in supplier industries and (b) that during times of high unemployment, construction and supply industry workers spending their wages will induce further hiring. The stimulus benefit of infrastructure spending (i.e., the resulting increase in economywide employment) weakens as the economy moves toward full employment because the directly employed workers and equipment are largely diverted from other applications. Separately from stimulus effects, infrastructure investment, during a recession as during normal times, can produce benefits over many years in the form of improved public services and increased productivity.

The experience of the ARRA transportation program provides an opportunity to learn how to structure a program of government purchases intended as fiscal stimulus. To take advantage of this, the National Cooperative Highway Research Program and the Transportation Research Board sponsored the study described in this report. The committee responsible for the study was asked to provide guidance on three related policy questions. First, if the federal government undertakes a future fiscal stimulus program, should transportation spending be part of the package? Second, if transportation is a part of a future stimulus package, how should the spending be structured and managed so as to optimize its stimulus impact? Finally, should practices of the established federal and state transportation programs be modified to make transportation spending more useful as an instrument for counteracting economic downturns (without compromising these programs’ primary long-term objective of improving mobility and productivity)?

The committee’s conclusions concern the effectiveness of stimulus spending, the role of transportation in a stimulus program, and management of a transportation spending stimulus program. Recommendations propose changes in established transportation programs, design features for any future transportation stimulus program, and methods for evaluating projects in a transportation stimulus program.


Effectiveness of Stimulus Spending

The correct share of transportation spending within a stimulus program like ARRA depends on the overall effectiveness of stimulus spending in aiding recovery from a recession, because allocating the available funds within a stimulus package will involve trade-offs between shortterm (stimulus) and long-term benefits (e.g., mobility benefits and improved productivity over the lifetime of a transportation facility), which differ according to the type of spending.

Estimates of the magnitude of the effects of stimulus spending vary over a wide range. However, the preponderance of studies support the conclusion that federal stimulus spending, during a recession or period of high unemployment and when monetary policy is maintaining low interest rates, leads to an increase in gross domestic product (GDP) and in employment, at least in the short term (within 1 or 2 years after the spending).

The estimates of output multipliers (the ratio of change in GDP to the amount of the stimulus spending) that the Congressional Budget Office (CBO) used in its reports on the effects of ARRA are indicative of the uncertainty in empirical findings. The low and high CBO estimates are 0.4 and 2.2 for federal transfers to state and local governments for infrastructure, and they are similar for federal purchases and for payments to individuals. Research based on experience since 2008 tends to support values of the multiplier above 1 as applicable when unemployment is severe and interest rates are being held near zero.

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About the Transportation Research Board
“The mission of the Transportation Research Board is to provide leadership in transportation innovation and progress through research and information exchange, conducted within a setting that is objective, interdisciplinary, and multimodal.”

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