President-elect Obama plans to use fiscal policy to put the brakes on the economic slump. He intends to do that through infrastructure spending. And figures as high as $500 billion to $1 trillion have been mentioned. Does this make sense? How would the money be spent? How many jobs would it create?
At this point, infrastructure spending does make sense. That's because the first line of defense against an economic contraction is to cut interest rates. But the Fed is pretty much out of bullets since short-term rates are near zero. It will try to lower longer-term rates, but the economy has not responded to efforts to get people to borrow more money to fix a problem created by too much borrowing. Government spending is the next line of defense and it could increase aggregate demand which would help.
The money would be spent on different projects to strengthen U.S. infrastructure; make it more energy efficient and improve internet access. Such projects include building or repairing roads, bridges, schools, sewer systems, and other public utilities. Obama also proposes to "make government buildings more energy efficient, modernize school classrooms and libraries with computers, expand access to broadband Internet service and upgrade information technology in hospitals and doctors' offices," according to the New York Times.
To get some idea of the relationship between spending and new jobs, it's useful to look at what U.S. governors have up their sleeves. They believe that $136 billion worth of already-approved road, bridge and other projects could create 40,000 jobs for every billion spent if the governors got the money -- that's 5.4 million jobs.
Since Obama wants to create 2.5 million jobs by 2010, he should fund these projects since they would get America to twice that level. I don't know whether that 40,000 jobs per billion spent estimate is accurate -- but even if it is too big by a factor of two, those projects would generate 2.7 million jobs and they sound worth doing to me.