How Effective Was The 2009 Stimulus Program?

So the stimulus — the so-called American Recovery and Reinvestment Act of 2009 or ARRA — is starting to wind down. What are the results?

Depends on whom you ask, of course. Conservatives will say unemployment is near double-digits and growth is slow, so clearly it didn’t work. Liberals will say yes, unemployment is too high but that’s just a sign the stimulus wasn’t big enough. It worked when you think about how much higher unemployment would have been without it. And, come to think of it, we need more stimulus. Each side can find facts and models to fit its worldview.

The debate over whether stimulus worked or didn’t is too abstract to be of much help. It’s a better use of time to look at some specific stimulus programs and projects and see how they did.

Take stimulus funds for broadband. President Obama campaigned on expanding access to broadband Internet, and the stimulus afforded him an occasion for doling out federal dollars to that end.

No one is against expanded access to broadband. And in rural areas especially, where there might be less market incentive to provide access, maybe there’s a role for government to play. The question for prudent policymakers is how much such a project should cost and who should bear the cost. Surely there is some price that’s too high to justify expanding access.

In an important and eye-opening new paper, Jeffrey Eisenach and Kevin Caves of Navigant Economics, a consulting firm, recently examined ARRA’s subsidization of rural broadband. The ARRA stimulus funds for broadband constitute “the largest Federal subsidies ever provided for broadband construction in the U.S.” An explicit goal of the program was to extend broadband access to homes currently without it.

Eisenach and Caves looked at three areas that received stimulus funds, in the form of loans and direct grants, to expand broadband access in Southwestern Montana, Northwestern Kansas, and Northeastern Minnesota. The median household income in these areas is between $40,100 and $50,900.  The median home prices are between $94,400 and $189,000.

So how much did it cost per unserved household to get them broadband access?  A whopping $349,234, or many multiples of household income, and significantly more than the cost of a home itself.

Sadly, it’s actually worse than that. Take the Montana project. The area is not in any meaningful sense unserved or even underserved. As many as seven broadband providers, including wireless, operate in the area. Only 1.5% of all households in the region had no wireline access. And if you include 3G wireless, there were only seven households in the Montana region that could be considered without access. So the cost of extending access in the Montana case comes to about $7 million for each additional household served.

Back in the 1980s there was an uproar over wasteful Pentagon spending. The Air Force spent $7,622 on a coffee maker and the Navy spent $640 per toilet seat. That’s extremely wasteful, but at least the Pentagon arguably needed coffee makers and toilet seats. The seven households in Montana for whom taxpayers just spent $7 million each to extend broadband access probably don’t even want it.

The Pentagon is a massive bureaucracy and so it’s hardly surprising to find overpayment and waste from time to time. But to get to the truly extreme level of wasteful spending on rural broadband, you need something else entirely — an ideology.  The best expression of that ideology can be found in the following quote:

If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

That’s from John Maynard Keynes in his General Theory and it is the best encapsulation of the logic of stimulus spending.

No doubt that there were some worthy ARRA projects, and some dollars that were well-spent. But when a bureaucracy and political culture so thoroughly internalize the idea that spending, any spending, is “better than nothing,” the result is broadband lines at $7 million a pop.

Nick Schulz is DeWitt Wallace fellow at the American Enterprise Institute and editor of American.com.  The co-author of “From Poverty to Prosperity,” he writes the Economics 2.0 column for Forbes.com.

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