"We should not count on any inducement of higher consumption from the infrastructure stimulus "

Woodward and Hall on a Stimulus:

"The Obama administration’s focus on infrastructure spending raises the natural question of the effect of government purchases on total GDP. Does government spending stimulate other categories of spending, especially consumer spending? Or does government spending displace other categories, so GDP rises by less than the amount the government spends?"

I say it marginally helps. Sometimes. Let's see.

"Valerie Ramey has written a paper with the results of her recent work on the question and with a full bibliography of earlier work. Her answer is that consumption and other categories stay about the same when the government spends more. In other words, the increase in GDP is about equal to the increase in govenment spending. To focus on changes in government spending that are not themselves responding to conditions in the economy, she considers military spending. She finds that GDP rises by about the same amount as an increase in military spending."

Now I've got to look at this other paper. Hold on.

"Abstract
Do shocks to government spending raise or lower consumption and real wages? Standard VAR identification approaches show a rise in these variables, where as the Ramey-Shapiro narrative identification approach finds a fall. I show that a key difference in the approaches is the timing. Both professional forecasts and the narrative approach shocks Granger-cause the VAR shocks, implying that the VAR shocks are missing the timing of the news. Simulations from a standard neoclassical model in which government spending is anticipated by several quarters demonstrate that VARs estimated with faulty timing can produce a rise in consumption even when it decreases in the model. Finally, I introduce a new variable that is based on narrative evidence that is much richer than the Ramey-Shapiro simple military dates. Shocks to this variable also lead to declines in consumption and real wages.

The theoretical analysis shows that timing is crucial in determining the response of the economy to news about increases in government spending.

Thus, the composition of government spending appears to matter significantly of the effects of shocks.

The results of the previous sections support the neoclassical model in its predictions about the effects of news of pure government spending shocks on consumption and real wages. A key part of the explanation is that consumers react quickly to news. One might be skeptical, however, that consumers could be so rational.
In fact, the results presented do not require consumers to be “too” Ricardian. After most of the military dates, Business Week talked of either planned tax increases or a delay in a proposed tax cut. The narrative made it clear that most of the public believed that at least part of the increase in spending would be financed by tax increases in the near future.

The graphs show that for both identification schemes, taxes rise after a government spending shock. However, they rise by significantly more after a war date than after a VAR shock. Thus, it is possible that the neoclassical response of consumption could be due to the immediate rise of taxes.

Thus, this evidence supports the notion that consumers can respond very quickly to news.

My theoretical results show how timing can account for all of the difference in the results across the two methods. Because the VAR approach captures the shocks too late, it misses the initial decline in consumption and real wages that occurs as soon as the news is learned.

Moreover, I have argued that for testing between competing theories of the effects of pure government spending shocks, U.S. defense expenditures are the best measure to use. I have shown that most nondefense spending occurs at the state and local level, and that much of it is productive spending. When I substitute defense spending for government spending in the baseline VAR, I show that even standard VAR identification implies that consumption and real wages fall in response to a positive spending shock.

Shocks to this variable produce results that are qualitatively similar to those obtained from the simple war dates variable: in response to an increase in government spending, consumption and real wages fall."

Okay. These are a few quotes to orient me. Let's go on.

"The picture below shows GDP and government military spending during World War II, both adjusted for price changes, detrended, and rescaled to the level of the U.S. economy today. If you think that the Obama administration is ambitious in spending a trillion dollars over several years on infrastructure projects, note that military spending maxed out at $7 trillion per year

during the war, rescaled to the current size of the economy. During the expansion, GDP rose pretty much the same amount as did military spending. Consumption and other components of spending neither rose under the military stimulus nor fell because of displacement by military spending. The two forces offset one another. Notice, however, that when military spending fell after the victory, GDP did not fall nearly as much. Consumption and other components expanded rapidly to take up the resources freed from military activities and there was little sign of adverse effects from the lower military spending.

The second picture shows the same variables for the buildup at the beginning of the Korean war. The story is much the same-equal increases in military spending and GDP.

Although military spending expanded in three other episodes-Viet Nam, the Reagan buildup, and post 9/11-none of these expansions was large enough to give much additional evidence on the response of GDP to increases in military spending

We believe that the one-for-one rule derived from wartime increases in military spending would also apply to increases in infrastructure spending in a stimulus package. We should not count on any inducement of higher consumption from the infrastructure stimulus but we should also not worry that infrastructure spending might displace consumption and other categories of spending."

They are making an assumption about non-defense spending that the paper found that it could not address. However, it does make a case for doubting the stimulating effect of infrastructure spending, other than the infrastructure spending itself. But isn't infrastructure spending supposed to be an investment that will have payoff effects in the future?

Here are my questions:

In the Ramsey Paper, was the amount of defense spending outside the country taken into account?

Is there a difference between spending money on Sea-Tac and McCord Air Force Base, say? In other words, mightn't infrastructure spending have more of an effect on the general economy?