Stimulus vs Public Investment

A column by Stiglitz in the Financial Times makes what I think is an important point.

The current debate over fiscal policy for the US, Europe and Canada is often characterized in the media as one between advocates of  higher deficits from Keynesian style stimulus measures,  and advocates of lower deficits through public sector austerity.  Within this frame, the advocates of austerity are, of course, generally portrayed as “fiscally responsible.”

While progressive economists in the current context of very weak recovery certainly favour measures to create jobs and expand demand which may entail increases in short-term deficits,  the real need is  for a sustained public investment led recovery.  Beyond jobs now, we also need investments to boost medium and long term potential growth. Higher growth will reduce debt in a far more positive way than up front spending cuts.

New public investments can also be financed through fiscal measures, notably progressive tax reform,  which have a neutral impact on the deficit, but positive impacts on output and jobs.

Stiglitz writes:

“(t)he real answer, at least for countries such as the US that can borrow at low rates, is simple: use the money to make high-return investments. This will both promote growth and generate tax revenues, lowering debt to gross domestic product ratios in the medium term and increasing debt sustainability. Even given the same budget situation, restructuring spending and taxes towards growth – by lowering payroll taxes, increasing taxes on the rich, as well as lowering taxes for corporations that invest and raising them on those that do not – can improve debt sustainability.”

In my presentation to the PEF sessions at the recent CEA meetings I spoke to three major areas of public investment that could significantly boost potential output, generate high rates of return, and be close to self- financing for governments. These are investments in basic transportation infrastructure; in mass transit, and in child care and early learning. High returns are indicated by the mainstream economics literature. Other examples could be added.

It is fiscally irresponsible not to make major public investments which can be financed at record low interest rates, would generate immediate jobs, would boost our medium-term growth prospects, and which would lower rather than increase public debt.

7 comments

  • given our history during the 20th century austerity should have been historically nailed to the cross as the antithesis of growth.

    And given all this history and destruction it just does not add up logically how austerity is portrayed as fiscally responsible. Short, medium term and long terms opportunity costs of forgone spending during times of declining revenue from an social and economic asset base that needs replenishing situated amongst all the idled assets that could be performing this renewal so that revenues grow, is apprehensively irresponsible.

    And they wonder why the shooting of a black man in London can bring the whole system to its knees. It was the bullet that burst the damn holding up all those layers of contradictions. However and idled and alienated workerforce filled with creativity and desires are not the same as an idled alienated bull dozer. However even the bulldozer rusts, despite its inner design logic and longing to build and renew.

  • And they wonder why the shooting of a black man in London can bring the whole system to its knees. It was the bullet that burst the damn holding up all those layers of contradictions. An idled and alienated workforce filled with creativity and desires are not the same as an idled alienated bull dozer. Yet, even an idle bulldozer rusts, despite its inner design logic and longing to build and renew.

  • Forgive the poor non-economist, but I always thought Keynesianism was counter-cyclic in nature, designed to smooth out the bumps in the economic cycle of boom and bust:

    I.e., in strong economic times, surpluses are built up to cool the economic engines so they won’t overheat, I believe the more precise term is so that capital utilization to capacity won’t cause inflation–and hurt, not the rentiers or the capitalists, of course, but the rest of us, particularly those of us making less than than $50,000–yours truly.

    And during bust, the accumulated surplus would be spent in stimulus–on what Andrew has recommended, and other worthy uses.

    But, as I remember, Chretien-Martin spent down the $100 billion surplus accumulated those the leveling of the Canadian welfare state to the wealthy and corporations.

    By the time Harper got in, he gave away points of the GST–and got good value for that/NOT!.

    So, the stimulus spending both here and Obama’s mostly TAX CUTS stimulus, (the Clinton surplus had been frittered away by Bush) was what I would term faux Keynesianism.

    Now, everyone can use the idea that Keynesianism failed, so now we HAVE to cut, only austerity will work.

    Krugman’s “confidence fairy” and “bond vigilantes” come into play here.

    I really do not understand how progressives play into the hands of the reactionary right by supporting their narratives: that none of the progressive solutions work, see, we tried them, at the end of history only austerity, repression (and riots) work.

  • My letter in today’s Financial Post calls for “public investment” not “stimulus.”

  • I actually noted that before writing the post, Erin.

  • A call for public investment to spur job growth ignores the key failing of counter-cyclic policy, identified by Keynes himself: Timing. Keynes gave up on the idea of counter-cyclical stimulus because large public expenditures happen too slowly to be timed into a recession.

    Canada is already out of recession. We are creating jobs at 5X -10X the U.S. rate. Any ‘investment’ would have to make its way through the government, be signed into law, then feasibility for projects would have to start. Before you can break ground, there are legal issues, environmental challenges, staffing hurdles, and other issues.

    By the time the ‘investment’ makes it into the economy, it’s just as likely to contribute to the next bubble than to help escape from the current downturn.

    If you’re not talking about infrastructure but rather ‘investment’ that takes the form of pumping more money into public sector salaries and growing the bureaucracy, the term ‘investment’ is misguided. In that case, all you are doing is borrowing from your children’s future so that your constituents can be more comfortable today. That’s not only counter to growth, it’s rather morally repugnant.

    Additional stimulus (Or ‘investment’ if you prefer) injected into an economy that is already growing is not Keynesianism. It’s just borrowing and spending.

    It also assumes that low growth today is a result of the lack of ‘investments’ that, once made, will result in faster growth so that the investments can be paid back. But if in fact the low growth is due to larger systemic factors such a world full of governments, including our main trading partner, up to their eyeballs in red ink an a destabilized world financial system, then there’s no path to higher sustainable growth other than to wait for the world to clear its balance sheets and confidence to come back.

    Therefore, borrowing and spending more now will just result in lower growth in the future due to the drag of additional debt servicing costs.

  • “But if in fact the low growth is due to larger systemic factors such a world full of governments, including our main trading partner, up to their eyeballs in red ink an a destabilized world financial system”

    No, the low growth is because of consumer debt and unemployment, not government debt.

    If government debt where actually a problem the interest rate on their bonds wouldn’t be so low.

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