Wednesday, April 22, 2009

Investment and Deficit Spending

There has been a lot of attention and press given to deficit spending, borrowing money, and taxation recently, especially concerning infrastructure investment. Generally, you hear from two camps:
  1. people who feel that government should only spend money when they have a surplus
  2. people who feel that government must spend money during an economic recession
The first theory follows the logic that since the United States is a representative democracy, we are the government. Obviously, you don't want Uncle Sam signing notes in your name and then using the funds to bet on lame get-rich-quick schemes. Deficit spending might be the worst thing to do. Therefore the correct thing to do is cut all spending so we can manage the budget and not overextend ourselves.

The second theory contends that to prevent a recession from becoming a depression the federal government must continue to spend, and indeed spend even more. As long as money is flowing and jobs are created, then the government will act to stabilize and grow the economy. So we can dispense with any concern for utility and, as Keynes suggested, bury money in jars underground and watch a thriving money mining operation employ everyone. Sounds good, right?

Of course, both of these approaches ignore common sense. If the federal government is entirely elastic, swelling and contracting in step with the economy then it will just amplify the boom/bust cycles. On the other hand, borrowing money to reduce taxes or purchasing military toys is plain stupid. There is no free lunch, after all.

In my opinion, the government has two roles to play in the economy:
  1. Providing a stable economic environment that is fair and certain
  2. Finding the best way to meet the needs of the citizenry
Notice there is no requirement to tax or spend minimally, only wisely.

So if you were the mayor of a hypothetical SimCity, what would you consider "wise"? Tax rebates to everyone? Returning 100% of taxes would not generate additional revenue, no matter what those silly economic multiplier studies would have you believe. How about establishing new agencies and programs with huge budgets and paying people much higher salaries than their services are worth? It's not much different than the first option, actually. Here's an article by the New York Times on deficit spending that has some ideas about how to do it right, and how to do it wrong:
In 1929, President Herbert Hoover thought that the best response to a collapsing economy was to balance the federal budget. With incomes and tax receipts falling sharply, that meant cutting federal spending. But as almost all economists now recognize, President Hoover was profoundly mistaken.

If we simply use the money to buy bigger houses and cars, deficits make us unambiguously worse off in the long run. That’s why the explosive increase in the national debt during the Bush administration was a grave misstep.
Instead of band-aid solutions in times of crisis, government must create mechanisms for individuals to produce value. Infrastructure investment is a great way to do this. For example, lowering the costs for people to do business can be much more effective than lowering taxes, because you are providing jobs during the infrastructure work and maintaining a competitive advantage for future work. Highways, Canals, and Railroads have always been an expensive investment, but a lot of times they can "grow the economy" and so the money borrowed to do the work pays off quite handsomely. Our entire society can benefit.

We have a great opportunity in this country right now; construction costs and the cost of borrowing money are at historical lows. Check out this Wall Street Journal article on lowered construction costs. If you have checked the return on federal bonds recently, you'll see the yield is almost nil (and has been negative at times). People are so worried about company stock values they are willing to make almost nothing on a guaranteed investment, and at times have been willing to pay the US govt to hold their money. That's rare, eh?

In any case, if people all over the world are ready to give the US a very inexpensive loan, construction costs are down, and we need to remake the entire US economy operate more efficiently with lower cost input, then I say we take advantage of our good fortune! The time is right. Let's build a competitive high speed rail system. Let's expand our walkable neighborhoods. Let's invest in urban communities that have been sliced apart by Interstate highways. Let's reconfigure our entire energy grid to take advantage of renewable opportunities. And let's get started today!

But please, ASCE, no "sky is falling" nonsense...

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Anonymous Peter Topperwien said...

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April 23, 2009 1:25 AM  
Blogger Graeme said...

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April 23, 2009 9:13 AM  

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