Roadwork paves way to U.S. economic recovery - Fed paper

CHICAGO Mon Nov 26, 2012 12:59pm EST

CHICAGO Nov 26 (Reuters) - Public spending on roadwork boosts economic activity in both the short and medium term, giving a bigger bang for the buck than many other forms of fiscal stimulus, an analysis published on Monday by the San Francisco Federal Reserve Bank showed.

For each dollar of federal highway grants received by a state, state economic output rises by at least two dollars, according to the study published in the regional Fed bank's latest Economic Letter.

Most fiscal stimulus delivers an extra 50 cents to $1.50 of output for each dollar of government spending, the researchers found.

The study comes against a backdrop of fiscal tightening, not stimulus, as U.S. lawmakers debate how best to trim the ballooning federal debt without hurting a tentative economic recovery.

Absent a deal in Congress, a slew of spending cuts and tax increases are set to go into effect starting on Jan. 1 that would slash the budget deficit nearly in half but would also likely trigger a new recession.

In their paper, San Francisco Fed research advisor Sylvain Leduc and senior economist Daniel Wilson made no direct reference to the current debate on the so-called fiscal cliff.

But they did argue that surprise increases in federal spending on roads - like the $27.5 billion increase in federal highway grants to states made in 2009 - can have positive effects on gross state product.

"Highway spending can be effective during periods of very high economic slack, particularly when spending is structured to reduce the usual implementation lags," they wrote.