In Washington, a great debate has broken out. The Republicans want to keep the Bush tax cuts in place, saying that it’s a good stimulant for the economy. Others are saying direct funding by states in infrastructure and schools is a much better form of stimulus and growth. A new study by Jeff Thompson of the PERI Institute says research proves investment in infrastructure is the best way to create jobs. The headline is the study shows that the social gain from taxing the affluent and investing in schools and infrastructure is more than the effect of any loss in their purchasing power. Below is my recent interview with Thompson.
JAY: So what does your study show? You focused mostly on the New England states, but you think your data applies more or less across the country. What have you proved?
THOMPSON: What I’ve done is I’ve reviewed a large number of studies looking at the relative payoff of different approaches to economic development. And what we find is that when states take effort to invest in education and build their infrastructure, the payoff in terms of short-term job creation and long-term economic growth far outweighs alternative approaches which focus on giving tax cuts to corporations.
JAY: Well, in your study, one of the things you state is this, and I’ll quote: “Each additional dollar spent on public infrastructure benefits businesses and households by as much as $1.37.” So how do you come to that number?
THOMPSON: That’s a finding from a researcher in Michigan who looks at the national evidence, state-level data across the country, and looks at the benefits that people derive from infrastructure projects, looks at the benefits that businesses derive from those infrastructure projects, and finds that the economic value overall outweighs the cost.
JAY: So in your study you break down several examples of what public infrastructure spending might be and what the consequences would be. So start with the issue of elementary school size, which is one of the big debates that came out of this recent vote in the House.
THOMPSON: There were some interesting experimental projects done in Tennessee looking at reducing class size and finding out-tracking the students who benefited by having smaller class sizes, and found out that over the long haul, those students were more able to find jobs, found better jobs, were more successful in school, graduated more. And so the researchers looking at those particular findings and seeing what the implications were of a large-scale investment of that size found that there were large and beneficial impacts in the economy far outweighing the costs of reducing class size.
JAY: Well, you come to a number of $66,000 benefit over a 20-year period. How do you come to a calculation like that? Because part of what happens in these debates is people don’t understand methodology, so when they hear numbers, I don’t know how seriously they take them.
THOMPSON: Sure. No, that’s a good point. I mean, in this particular case, the researchers tracked the students over many years, and they also tried to do a comprehensive assessment of what the costs of delivering the experiment were, what the costs of actually lowering class sizes were, and then they stretched that out over 20 years and said, over a 20-year period what are the benefits we-adding up all the benefits that accrue from the improved economic success, improved academic success of students, and then looking at what the comparative alternative uses of that funding would have been, and essentially calculated what’s-in economics terms is the net present value of that program over a 20-year period, and found out that over a long period the benefits outweigh the costs.
JAY: So 25-just as simple as 25 students per class getting down to 15 students per class has this kind of a benefit, $66,000 over 20 years.
THOMPSON: That’s right.
JAY: Alright. Let’s take another one. You talk about comprehensive high school reforms. First of all, what do you mean by “comprehensive high school reforms”? And you’re saying comprehensive high school reform efforts raise the long-term earnings of graduates 17 percent, boost attendance, reading, and math scores, and generate net social benefits that exceed program costs by nearly $150,000 per student over 20 years.
THOMPSON: Yeah. In that instance, there are a couple of different approaches to what can broadly be called comprehensive reform, educational reform, at the high school level. In the report, we talk about the experimental findings from two different approaches. One is called “first things first”. And these different approaches essentially involve small class sizes, but they also have the teachers remain with the students for a period of several years. They have fairly intensive mentoring and counseling services. And the school was able to operate in a different way from your typical school: smaller size, closer contact. In one of the instances, the reform initiative has an explicit career focus, exposing the high school students to contact with employers, helping them get on-the-job experience, mentorships, internships, things of that nature. And the intensive involvement and the intensive improvement of the educational environment overall has dramatic effects, and they were able to see that in an experimental context. So some students were randomly assigned to this sort of educational experience, and other students were left in your traditional educational approach. And they found that tracking of those students over a long period, that they were more likely to graduate, and the jobs they got were paid better, and they were more likely to go on to higher education. So, again, it’s a long-term analysis of how these students perform relative to students that didn’t get exposed to that sort of an intensive educational experience. And the payoff in the numbers that you quoted from the study are fairly dramatic. When you add up the benefits year in, year out over a 20-year period and compare that to the cost of delivering that service, you know, the gains are dramatic.
JAY: Now, you’re also recommending state investment in infrastructure projects and talk about the relationship of that to more employment. I’ll quote another piece of your study. “As infrastructure investments have declined, the list of critical infrastructure in need of replacement and repair has grown. Between one-quarter and two-thirds of major roads in New England are in poor or mediocre condition, and 40 percent of bridges are structurally deficient or functionally obsolete. Over the next twenty years New England needs nearly $13 billion in additional investment in drinking water infrastructure. Transit systems and school facilities in the region also need millions of dollars of investments just to maintain current capacity.” But if that’s the state of New England infrastructure, first of all, is that typical across the country?
THOMPSON: Unfortunately, yes, it is typical. There aren’t too many areas where New England stands far above or far below (depending on your perspective) the infrastructure needs in the rest of the country. You know, in New England you’ve got 17,000 bridges, and 14 percent of them are structurally deficient. Forty percent are either structurally deficient or functionally obsolete. Nationwide, that figure is 25 percent. So things might be a little bit worse on bridges in New England, but still, across the country there are countless numbers of bridges, I mean, there are scores of bridges that need repair. The same is true for roads and drinking water infrastructure. So the entire country is in need of a boost in its infrastructure spending. And what we’ve seen is that the payoff in terms of immediate employment, or at least over the course of several months after a project is initiated, is an important source of employment. And it also boosts an area’s long-term economic growth.
JAY: What did you find about that? Because that’s the debate. The right wing on this issue, or the Republicans and people who think like they do, say, maybe you get some quick short-term benefits, but the real effect in the private sector isn’t there. What is the relationship of public spending on bridges and roads and jobs in the private sector?
THOMPSON: Well, at the end of the day, which I think is the most important detail to focus on, private sector businesses do appreciate the improved transportation when you improve the bridges and the roads. And they also-to function, they need smooth sewer and water access. They need it to be affordable and functioning. So at the end of the day, private sector businesses do benefit. And the research shows that it does have an overall effect on economic growth and that it lowers the costs that businesses face. So I think that in terms of valuing the end product of infrastructure improvement, businesses do benefit and the overall economy benefits. The only source of real disagreement, I think, has to do with how those projects are funded. And there is a debate over taxation, how these projects will be paid for.
JAY: Yeah, when I look at-the elections signs are starting to go up for November, and the sign I’m seeing on many lawns or corners is lower taxes, more job
THOMPSON: There is certainly an element of truth to that idea at the federal level. The federal government can engage in deficit spending, which is stimulative to the economy. So that’s absolutely true. At the state level, that lesson certainly does not apply.
JAY: Hang on one sec, because most of the candidates that are saying lower taxes, more jobs are also saying no deficit spending.
THOMPSON: Yeah. So there is no small amount of inconsistency in terms of concern over levels of deficits and wanting to cut taxes as well. It’s hard to deal with someone with that sort of inconsistency. But the important lessons, I think, are that at the federal level, when the federal government engages in deficit spending, it is stimulative of the economy over the short-term. We have to be able to separate our understanding of long-term fiscal management. And if you have uncontrolled, out-of-control deficits looking as far as the eye can see, that is not sustainable. But that’s not the course we’re on. The course we’re on is that over the-currently and in the next year or two, the share of the total deficit the country faces is made up about a third of the stimulus efforts over the last couple of years. The rest of it is because of the bad economy and the Bush tax cuts and the cost of the war. When you look 10 years down the road into the long-term deficit picture, the costs of these economic stimulus efforts are almost entirely phased out. Over the long run, our concerns over the deficit are almost exclusively about the Bush tax cuts and about the costs of paying for a couple of the wars. So if you’re truly concerned about deficits, it’s not about the short-term economic stimulus efforts.
JAY: So if I understand your study correctly, you’re telling people that even if at the federal level things are now somewhat paralyzed politically, it’s still worth it for states to raise state taxes on the affluent in order to pay for this infrastructure spending, because the net benefit socially is worth it. Is that the main argument?
THOMPSON: That is the main argument. When affluent households face tax increase at the state level, they do reduce their level of spending, but that reduction is far outstripped by the job gains from investments in education, investments in infrastructure that really are going to benefit the entire state.
To watch my interview with Jeff Thompson click here.