You Say That Like It's A Good Thing
Yesterday, the President bragged that highway projects from the Recovery Act were "ahead of schedule and under budget." On the latter, I agree with Krugman:
Ahead of schedule is good. Under budget — well, ordinarily that’s a good thing. But the point of the stimulus is to increase spending! So if we don’t spend as much as expected, that’s less stimulus [...]
Seriously: if the projects really are coming in cheaper than expected, that doesn’t mean we should bank the savings; it means that we need more projects.
As the LA Times story makes pretty clear, the reason the projects are coming in under budget is that contractors are so desperate for work that they're bidding each other down. More than anything, this is the biggest indicator of the true crisis in the economy.
At the same time, several factors have conspired to drive down project costs.
At the top of the list is the searing downturn in residential and commercial real estate construction.
Because the companies that construct highways also tend to build the roads and other infrastructure for housing projects, their business burst along with the housing bubble.
Thousands of workers were jettisoned. Now, state officials say, construction companies are submitting especially aggressive bids in an attempt to win new business.
The massive falloff in construction is also driving down the cost of building materials, while the drop in world oil prices has reduced other costs.
In California, Obama said in his speech, some bids have come in as much as 50% under budget.
Those are fire sale prices. And we're seeing in the concurrent drop in retail sales and prices the risk of a deflationary trap. I certainly hope that the Administration doesn't view this "under budget" stuff as a virtue, but an opportunity to create more infrastructure projects. In addition to using the full appropriation of stimulus money for additional projects, the White House should use the upcoming highway bill to increase spending and create an infrastructure bank to regularize these construction projects.
...Matt Yglesias says that more projects are going to be instituted to ensure that all the money appropriated is spent, and he agrees that the reason everything is coming in under budget is a cause for deep concern.