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Like starving wolves, US states are licking their chops at the billions of dollars of fiscal meat about to be thrown their way by the Obama administration. In December, the Conference of Mayors helpfully listed more than 15,000 projects that were “shovel ready”. For the bargain price of $97bn, 2m jobs could be created over this year and next.
The mayors’ wish-list serves as a useful reminder of the problems of state-controlled capital allocation (also known as fiscal policy). Unsurprisingly, the projects deemed essential for America’s future range from the genuinely needed to the utterly pointless. That leaves the Obama administration in a pickle: either cash is allocated locally – in which case taxpayers could end up funding million-dollar skateboard parks (Arlington) or $400m hotels (Dallas) – or every dime has to be vetted centrally. But the truth is that federal governments, for the most part, lack the framework, expertise or resources to pick between thousands of competing projects.
Still, if there is going to be any degree of accountability, huge fiscal spending decisions must have central oversight. That means the Obama administration will need to apply some strict rules. Here are some suggestions: blowing hundreds of millions on upgrades to city hall buildings (Las Vegas) or convention centres (San Antonio) will not add a basis point to America’s productivity. Neither will licks of paint to fire or police stations.
Officials should heed the reams of academic research calling into question the benefits of additional roads (when users do not have to pay for them, they simply clog up), especially versus a dollar spent on rail or air links. Spending should also favour urban rather than rural areas, where returns on investment would be considerably higher. Finally, it is wrong to mix the admirable goal of helping the environment with the broader quest for boosting short-term growth: going green actually incurs an economic cost. With lobbyists descending on Washington, the Treasury must remain firm – and investors realistic.
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