Out of Control Policy Blog

The Dump Truck Stimulus

On Tuesday, construction equipment company Caterpillar released numbers and projections for its most recent and coming business. The firm is bullish about the future, according to The Wall Street Journal:

The company said it was preparing for a recovery that could be "rapid" after cutting costs to match the slide in demand for its earth-moving and construction equipment.

A Caterpillar earthmover works in the quarry area of the Lucky Cement plant in Karachi, Pakistan.
Caterpillar forecast global gross-domestic-product growth of 3% in 2010, led by 5% growth in the developing economies that drove sales during the prolonged commodity-led boom.

The interesting thing is why Caterpillar thinks their business will be back soon. Yes, the economy is no longer sliding towards Hades. And, yes, there will likely be a resurgance of some kind in the housing market come 2010, helping sales. But the stimulus package has a lot to do with it too.

The stimulus set aside $48 billion for transportation and infrastructure project. Those projects have been slow to take off, and will hit their peak in 2010.

Caterpillar's outlook is more bullish than many in the manufacturing sector, relying in part on the impact of government stimulus programs peaking in the first half of next year, with the prospect of additional support measures and a recovery in the U.S. housing market.

What would Caterpillar's financial situation be without the stimulus provided business? Pro-stimulus advocates would argue that this was the point of the spending. You give more business to Caterpillar and you save jobs at the company that otherwise would be lost.

But what about the jobs and companies that might have been created had Caterpillar's business shrunk? It is unlikely that Caterpillar would have gone bankrupt without the stimulus provided business, but the projects are certainly providing relief for the firm that might have over extended itself and didn't adjust to the housing market appropriately. Had the firm taken a harder hit, it would have made the market more open to new firms entering the industry to compete, maybe with new ideas or ways of designing construction equipment that we'll never see.

Setting aside the whole issue of redistributing wealth to pay for the projects in the first place, there are some tangible, short-term benefits to public spending like the stimulus. But it there are also intangible losses. We are not letting our economy grown naturally, and that is part of the reason I think unemployment continues to climb.

Anthony Randazzo is Director of Economic Research


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