Thursday, August 2, 2012

On Investment Now

The criticism about Keynesian responses to the economic doldrums relies on the premise that piling on more government debt will actually be harmful.  How is not clear, debt is a bad thing say critics and this will lead to higher borrowing costs a la Greece and Spain. But the US faces vanishingly low interest rates for borrowing money at the moment despite the run up in debt.  Yes, structural budget problems are a concern, but fiscal stimulus is not about introducing new entitlements. Bob Frank in his New York Times column recently did, as is his wont, a very nice job making the case for investment now in elegant simplicity:
Some people object to the additional government debt that infrastructure repairs would require. As austerity proponents like to say, governments can’t spend beyond their means indefinitely, any more than businesses or families can. It’s a fair statement if we’re talking about the long run. But in the short run, it’s utterly false. When prudent investment opportunities arise, families, businesses, and governments can and should spend more than they take in.

Consider an indebted family that must decide whether to borrow $5,000 to install additional insulation in its attic, a project that would reduce its utility bills by an average of $100 a month and require loan payments of $50 a month. In the short run, obviously, the project would increase the family’s indebtedness. But can there be any doubt that the family would be better off, in both the short and the long run, by going ahead with it? Even while making payments on the loan, it would have $50 more each month. And once the loan was paid off, it would have $100 a month more. What possible argument could be offered against this project?

The same logic applies to overdue infrastructure investments. Yes, paying for them requires more government debt. And while austerity advocates fret that such projects will impoverish our grandchildren, they concede that the investments can’t be postponed indefinitely, and that they’ll become much more expensive the longer we wait.
My only gripe is that it is not at all clear that we have the infrastructure projects ready to go to invest in, it seems we have done a pretty good job getting the shovel-ready projects going the first time around.  But block grants tot the states would be a good place to start so that we can invest in educating our kids and that is an investment that pays off in spades...

1 comment:

Unknown said...

Major infrastructure projects take large chunks of time. The first round of stimulus was not just projects that were shovel-ready, they were projects that could be completed within two or three years. There is plenty of other work that can and should be done, but they are larger scale projects that required more time than was allowed under ARRA. We have many refurbished recreation facilities across the country as a result, but few new bridges.