Let me get this out of the way first: I completely agree with what Professor Greg Mankiw wrote about high yield public investments. He said it perfectly, http://gregmankiw.blogspot.com/2008/12/passing-buck.html
One thing all economists agree on: If there are public investment projects that pay a high rate of return, those are worth paying for, even if it means more borrowing. But that is always true. Even if we were at full employment and there were no possible employment effects of fiscal stimulus, we should undertake public investments that pass a cost-benefit test.
In this regard, two observations come to mind. First, since most infrastructure is used locally, the proper level of spending is best determined by state and local governments rather than by the federal government. Earlier, I suggested that fiscal stimulus could be decentralized. Each state governor could be allowed to determine whether to take federal money as state aid or have it paid directly to his or her state's citizens as tax relief. I still think that makes sense.
Second, more public projects would pass a cost-benefit test if we repealed the Davis-Bacon Act. This law requires contractors on these public projects to pay "prevailing wages," which are typically union wages well in excess of what would occur in a free market. If the government paid market-determined wages for infrastructure projects, we could have both more infrastructure and less government debt. Without doubt, that legacy would benefit future generations.
I asked Professor Mankiw about income inequality earlier this year and he was gracious enough to respond. Professor, if by some odd chance you reading this – thank you so much, you are an inspiration! He told me that the problem with income inequality is the gap between skilled workers and unskilled workers. The highly skilled workers get good jobs, keep them, and have high wages. The unskilled workers don’t get good jobs at the same rate as skilled workers, have trouble keeping them, and their real wages are either stagnant, barely rising with inflation, or decreasing. The problem is that our educational system is not producing enough skilled workers, or to say it a different way, our education system is not properly “skilling” our workers. (And here I thought they made Kosher laws to cover that)!
So here is my humble idea. Instead of throwing money at bridges to nowhere, or to bailout states that have been fiscally irresponsible, why not address the stimulus package to reform/strengthen the American educational system?
Here is how it would work. Create regional (I have not figured out the right size and number of institutions but for now my idea is as follows) massive hybrid technical and liberal arts universities. These universities work with corporations, small businesses, entrepreneurs, etc, to figure out what jobs are in the region, who is hiring, and most importantly what they what, skill wise, out of workers. Any donation to the school from a corporation, or person is 100% tax deductible… The universities also coordinate internship opportunities on a greater scale than what we are accustomed to or have seen. Government is supposed to serve the people – this is a way of helping the market get what it wants and at the same time create massive stimulus through hiring professors, instructors, creating new buildings, new roads, sales of technology etc. Everyone gets helped. You could also use the stimulus to help people pay for enrollment. Now… the problem is how do you fund these institutions in the long run?
So far in this plan we have already made any donations completely tax deductible. I would also suggest letting corporations take a tax deduction for any individual’s education they pay for or sponsor. Lastly, perhaps you could lower the corporate income tax and the small business income tax (I know two different categories) by 8% (or some other number), and allocate 2% of the corporate tax and business tax (I know it is IIT) income to pay for the schools. This way businesses have extra money to hire the workers they are partially paying for to train. You could also fund these programs through some sort of low rate consumption tax…
I’m not a Keynesian but I think this is an interesting idea that might work for three reasons: 1) it addresses long term growth and short term stimulus, 2) it creates market transparency, and 3) I think it would pass a cost – benefit test.