Monday, January 07, 2013

Why the multiplier doesn't matter



OK, incendiary title. What I mean is: the "pure" or theoretical Keynesian fiscal multiplier doesn't matter, in the United States, at this time.

Why not? Because right now, the U.S. should be investing in infrastructure whether "pure" Keynesian stimulus works or not.

When economists like Paul Krugman debate "the multiplier" in public, what they're actually talking about is the theoretical multiplier in a Keynesian-type model. That is an interesting theoretical debate, but it is of limited use when making real policy, because there is lots of real-world stuff that those models leave out. For example, as many of the neo-monetarist types like Scott Sumner and David Beckworth have pointed out, the multipliers that come out of those models assume that the Fed doesn't react to neutralize the effects of fiscal policy.

But another important thing that Keynesian theory leaves out is public goods. If there are certain kinds of goods that only government can or will provide, and if these goods are complements to private business activity, then government spending could have huge effects even if the "pure" Keynesian multiplier is zero! For example, take the famous paper of Baxter & King (1993), in which there is "government capital" that complements private capital and labor. In that sort of a world, government spending on "government capital" is efficient even without any aggregate demand deficiencies at all. Efficient, that is, as long as the current amount of "government capital" is below the optimal amount - in other words, as long as the country has recently been underinvesting in things like infrastructure.

It is pretty clear that "government capital" really exists. There is no country in the world that has produced a world-class network of roads, bridges, and ports without large amounts of government funding. Infrastructure isn't the kind of "pure public good" often discussed in the theoretical literature, but it's clearly something that we need government to do.

Now, in a Baxter & King type world, if infrastructure is underinvested, then government investment will generate a big apparent "multiplier" even without Keynesian effects. And indeed, the evidence shows that government investment generates much bigger "apparent multipliers" than government consumption. Here's part of a table from an NBER working paper by Alan Auerbach and Yuriy Gorodnichenko:



The apparent multiplier for government investment is almost twice as big as the multiplier for government consumption! And only the multiplier for government investment is more than one standard deviation above 1 - meaning that only government investment will clearly and obviously pay for itself.

Also, note that while the apparent multiplier for government consumption is essentially zero in good economic times (probably because interest rates aren't near the Zero Lower Bound), the government investment multiplier is actually higher in an expansion than in a recession.

You can think of government consumption as the "pure" Keynesian multiplier - the thing that Krugman talks about a lot. The observed "multiplier" on government investment includes other stuff, like public goods effects of the type postulated by Baxter & King.

Now, note that this estimation was done using only data for the United States. For other countries, like Japan, that do a lot more infrastructure investing, government investment may not be such a free lunch - witness Japan's wasteful public works spending binge in the 1990s. But the United States is in a far different situation right now; our infrastructure is in woeful shape, and is estimated to require over $2 trillion to repair.

In other words, at this moment in time, the United States has a below-efficient amount of government capital. So we need to be spending a lot on repairing our infrastructure, whether or not Keynesianism is right. If infrastructure is falling apart, then infrastructure spending is supply-side policy. That is why John Cochrane, a well-known skeptic of Keynesian theory, writes:
[About] "infrastructure" or other genuine investments...If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn't justify all "infrastructure" roads and rails to nowhere, of course.
This is why I'm mildly annoyed about the whole public debate about Keynesian theory. The focus on Keynesian ideas has given a lot of people - even a lot of economists! - the idea that Keynesian multipliers are the only justification for increased government spending in a recession. And so people who are skeptical of Keynesianism have opposed increased government spending, completely ignoring the very real and pressing problem of our decaying infrastructure.

The truth is, the "pure" Keynesian multiplier may be low, or it may be high, but it doesn't really matter for the United States right now. Increased government spending on infrastructure, especially infrasatructure repair, is a no-brainer.

Update: I want to issue a pre-emptive rebuttal to anyone who pooh-poohs infrastructure spending as merely a "now more than ever" policy instead of a countercylical, recession-fighting, "now is the time" policy. Infrastructure spending's benefits may be the same in good times and bad, but the costs are most certainly not. In recessions, interest rates are low. Governments can borrow cheaply to finance infrastructure. Just like any investment, you want government to build infrastructure when its cost of capital is low. This means that recessions, not booms, are the best time to make big infrastructure investments.

Update 2: Also, don't interpret this blog post as me saying "Krugman doesn't get public goods," because he obviously does, and he obviously knows that infrastructure spending generates a whole lot more bang for the buck than other kinds of stimulus. Where this blog post takes issue with Krugman is that he has focused so much on convincing the public that Keynesian theory is right, that he may have inadvertently convinced people that the entire case for countercylical government spending is based on Keynesian theory being right. So now a lot of people may be going around thinking (incorrectly) that infrastructure spending only works through pure Keynesian effects.

Update 3: OK, I have a new hypothesis. Maybe Krugman and other Keynesians are cleverer at public relations than I thought. If you come out and say "Hey, now is the time to repair the roads!", then you get a lot of pushback from knee-jerk anti-government types, who trot out all the derpy old arguments about why "infrastructure isn't really a public good" (yes it is), and "we should privatize infrastructure, road owners can just charge tolls" (no), and "the government can't do anything right" (derp!). But Keynesian theory is actually too hard for most knee-jerk anti-government types to understand, so keeping the discussion about aggregate demand and multipliers is a way to keep the Hordes of Derp from swarming all over sensible policy proposals and drowning them in faith-based ideological opposition. Smart, Krugman, very smart.

106 comments:

  1. As in your other recent post, let me rejoice, thanks for seeing the light! All this debate about the Keynesian multiplier is a waste of time. Almost everyone agrees that infrustructural investment is a good idea, especially now, as long as, to paraphrase Cochrane, we don't call it Keynesian stimulus. Well, let's not. :)

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    1. I'd call it Flubber if it would help get the public to realize we need it...

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    2. Flubber? I can see myself campaigning for Flubber, lol.

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    3. Kent Crawford1:50 PM

      Where you miss the boat is two-fold errors. First, Federal responsibility is limited to the inter-state system, the maintenance of which is covered by part of the gasoline taxes we all pay at the pump, or cash register, as it were. Second, what the lefties are talking about is spending Federal dollars on state and local roads and streets, for which the states and localities are already collecting taxes to maintain.

      Why should the Federal government borrow money to pay for repairs we have already paid for? And do we really want the Federal government involved in street repair? Those idiots can't even find the ground with a map and detailed instructions!

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    4. And do we really want the Federal government involved in street repair? Those idiots can't even find the ground with a map and detailed instructions!

      This is faith-based.

      If you assume the conclusion, you're always going to get the conclusion you assumed.

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    5. Nathanael10:27 PM

      Kent, you're also wrong about the gas tax. $40 billion has been taken from the federal General Fund for highways in the last couple of years, because the gas tax wasn't enough to cover the maintenance of the federal highway system.

      (The federal highway system is in fact oversized. Urban expressways have proven to be really horrible for cities, but are very very expensive to maintain -- a few dozen teardowns and we might have a sustainable system.)

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  2. Almost everyone agrees that infrustructural investment is a good idea, especially now.

    They mustn't have CSPAN around your place.

    For values of 'almost everyone' that leave out one of two major political parties, at least if you reject the idea that all the infrastructure repair be done with money collected over time from FICA.

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    1. Last time I checked, Chris Christie (a Republican) was asking for money for infrastructural investment. Peter King of Long Island the same. And not just to rebuild, following Sandy, but to strengthen the infasrtucture to withstand similar phenomena.

      When the majority (in popular vote) party and a significant share of the minority party agree, I call it ALMOST everyone. You can call it whatever you like. Boy, did someone wake up on the wrong side of the bed or what.

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    2. It's not "almost everyone" -- it's "people whose particular ox has been gored this particular time".

      "Almost everyone" would routinely produce parliamentary majorities for necessary infrastructure spending. It hasn't, not yet, not at the federal level.

      Two GOP pols don't make a summer any more than two swallows, and they certainly don't when Rep. King's colleague, the GOP rep from hurricane-prone Biloxi votes 'no'.

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    3. King and Christie represent large numbers of people. Look, you want to take aim at the GOP, be my guest. What I don't understand is why you are doing it by quarreling with me over a choice of words. In the spirit of the post, I meant among people who understand the theoretical debate on the Keynesian multiplier. I doubt that the GOP rep. from Biloxi does. I do think that the majority of voters (who voted for Democrats even though the GOP got the majority of seats in the House thanks to gerrymandering) support it also. Anyway, Happy trolling, Happy New Year, etc.

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    4. Nathanael10:25 PM

      Mr. Machina, we routinely get people voting for parliamentary majorities for necessary infrastructure spending. 51% of voters in the US voted for Democrats in the House of Representatives.

      Unfortunately, we don't have a parliamentary system. We have a dysfunctional mess of a government which is going to collapse if it isn't made more democratic. Gerrymandering, malapportioned Senate, "filibuster" bogusness, Electoral College, first-past-the-post leading via Duverger's Law to a two-party system, etc etc etc.

      If we had the electoral system of Germany, we'd have a better government already. The Green Party representatives would be making sure of it.

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  3. No, it's not Keynesian stimulus. It's repairing the roads because they need repairing. What's so difficult to understand about that?

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    1. BTg problem. Yhey're public roads. If providing them is to be a good, they have to be private roads.

      · Because 'public good' is a logical surd.
      · Because everything that is, is, because it can be bought and sold.
      · Because anything which cannot be bought and sold, is not.
      · Because everything that can be bought and sold, must be bought and sold.

      Ontology recapitulates property.

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    2. Fantastic circular argument!

      "Because everything that is, is, because it can be bought and sold."

      Children, then?

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  4. How does repairing infrastructure benefit the 0.1%?

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    1. ...pointing out that politics trumps economics, and in the USA since Citizens United, politics means the special interest of the existing elite.

      So: what's the case for repairs, again?

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    2. Anonymous3:20 PM

      This is something I have been arguing for years. It is just good policy all the way around. It is needed, it needs to be fixed, it provides great returns, can crowd in private investment rather than crowd out, and we can basically borrow for free right now. What is not to like about this, especially given our economic times?

      Plus, it helps alleviate some of our long term structural unemployment problem regarding middle class jobs.

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    3. Anonymous3:21 PM

      Oops...this was met to be a general reply, not a reply to Greg.

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    4. Nathanael10:22 PM

      Greg, the elite's nannies and butlers and lawn maintenance workers need to be able to get to work.

      Of course the elite does not think about such things as they fly in their private helicopters. But they SHOULD think about such things.

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  5. I agree.

    I will take it a step further and say that the Fed should announce that as part of QE it will commit to buying a large dollar amount of NEW state and local bonds issued to pay for infrastructure repairs and upgrades.

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  6. Yes!! Of course we should ignore the multiplier - it was always mostly nonsense, even Keynes thought that.

    Not sure about the infrastructure spending but, hey, if it stick the multiplier in the box marked "silly ideas" that's fine!

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    1. "Not sure about the infrastructure spending"

      I thought you were in favour of repairing roads?

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  7. Anonymous5:35 PM

    Noah:

    You are right on with this post. Not only do we have the opportunity to get this infracstructure at a low rate compared to typical Fed rates, we can almost certainly pay less in interest than your typicaly municipality.

    In a way, this takes assets off municipalities sheets onto the Federal governments...

    Also, one can wonder how much better society would look if Keynesian economics was applied to infrastructure and schools in the 1930s, across the then developed world, rather than to war machines...

    Frank

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  8. Noah, the $2 trillion estimate comes from the American Society of Civil Engineers. Yes, they are qualified to give such an estimate, but also have a huge financial incentives to provide such a large number. Some skepticism is required here, no? This is why if we do do fiscal policy I prefer the helicopter drop kind, the ones that directly put dollars into household's hands. Would love to see estimates on the size of this type fiscal multiplier. I suspect it would be sizable in a depressed economy.

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    1. Noah, the $2 trillion estimate comes from the American Society of Civil Engineers. Yes, they are qualified to give such an estimate, but also have a huge financial incentives to provide such a large number. Some skepticism is required here, no?

      Fine. I will introduce a "skepticism fudge factor" of 1/4, assuming that the rent-seeking civil engineers asked for 4 times what they really needed. New figure: $550B over 5 years, or $110B per year. Still a LOT more than what we're spending.

      This is why if we do do fiscal policy I prefer the helicopter drop kind, the ones that directly put dollars into household's hands. Would love to see estimates on the size of this type fiscal multiplier. I suspect it would be sizable in a depressed economy.

      Nope, check the Auerbach & Gorodnichenko paper, the multiplier on temporary tax cuts (which is the same as what you're proposing) is a little less than the multiplier on govt. consumption, and less than half of the multiplier on govt. investment.

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    2. Why 1/4 instead of 1/100? My flights from San Diego went very smoothly, the freeway I drove home on was in great shape, my water is good, and I haven't had an electrical outage in years. I don't think it is at all clear that the social return on another dollar of infrastructure investment would be greater than the return of the same investment in private business.

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    3. Great evidence there, Barker...

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    4. Noah, if you mean the below Auerback & Gorodnichenko paper I don't think we can draw strong conclusions about tax shocks from it. It uses a tax receipt (net of transfers) measure from which tax shocks are estimated. The problem is that it hard to disentangle true structural changes in tax revenues vs. business cycle-driven changes. Also, the aggregate tax receipt measure they use ignores the tricky marginal tax rate elaticity questions. The authors admit in the paper these are real problems and chose to focus on the government spending implications of their paper.

      http://emlab.berkeley.edu/~ygorodni/AG_fiscal_multiplier.pdf

      Anyways, I was thinking of a helicopter more along the lines of this: Fed prints money, gives it to the Treasury Department to disburse to households, and allows temporarily higher inflation from the monetary injection. Or in a more vogue example, Treasury uses the platinum coin to hand checks out to taxpayers and Fed does not sterilize it.

      P.S. Contra Auerback and Gorodnichenko, Valerie Ramey in her AEA paper shows the government spending multiplier is not any higher during periods of slack. This along with her survey paper in the JEL speaks to the uncertainty of the true size of the fiscal multiplier.

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    5. I like anecdotal evidence better than a 1/4 fudge factor pulled from the air.

      Look, I appreciate the point you are making, but the ASCE report is not evidence that infrastructure investment is more productive than other investment. (http://www.infrastructurereportcard.org/) Read it and see if you find any acknowledgement of opportunity cost.

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    6. I don't think it is at all clear that the social return on another dollar of infrastructure investment would be greater than the return of the same investment in private business.

      Of course that is not quite the correct comparison. The question is whether the real return is greater than the state's real cost of capital. Right now the real cost of capital is very small.

      If there is existing infrastructure that needs to be repaired if it is to continue in existence then that is a different calculation than the cost of entirely new infrastructure.

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    7. Except that government capital is ultimately taken from the private sector. The cost of government capital is more than the treasury rate, it also includes the cost of distortionary taxation, whether that taxation will occur now or sometime in the future to pay off the debt.

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    8. Beckworth: You have a point, these things are hard to measure. However, you seem to be just ignoring the huge size of the government investment multiplier in the AG paper. Also, I've seen a number of papers that suggest <1 multipliers for transfers.

      Barker:
      Except that government capital is ultimately taken from the private sector.

      That's right, there's a fixed lump of capital in the world. It's like gold. OH WAIT, maybe capital IS gold! Hey, maybe we should all go read Zero Hedge...

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    9. Saying that raising government capital ultimately requires distortionary taxation is not the same as saying that there is a fixed lump of capital in the world. It just means that the social cost of government capital is greater than the rate on Treasury bonds.

      Finding shovel-ready projects that are positive NPV at the true cost of government capital is hard. Finding politically profitable boondoggles that waste a lot of capital is much easier.

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    10. Finding shovel-ready projects that are positive NPV at the true cost of government capital is hard. Finding politically profitable boondoggles that waste a lot of capital is much easier.

      So in practice, politically conservative types wave their hands and say "Oh, we don't need infrastructure spending, it's all a bunch of boondoggles", without any solid evidence to back them up, and meanwhile our infrastructure decays and disintegrates. "Oh, I flew on a plane and it was awesome." Etc.

      Fact is, repairing damaged infrastructure isn't building "bridges to nowhere", because those bridges already go to somewhere. And they got damaged because lots of trucks went over them, meaning they were used for commerce.

      As for the distortions of taxation, well, you need to balance that against the long-term benefits of the public goods - which are partly, but not entirely, included in that short-term multiplier that Auerbach and Gorodnichenko find.

      But hey, if you're really worried about distortionary taxation, just pay for infrastructure spending by cutting down on transfers (e.g. health spending). I'm all for that, so I'll back you up!

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    11. Someone who pulled a 1/4 fudge factor out of the air is saying that others don't have solid evidence?

      No one is arguing that we shouldn't continue to perform basic maintenance on bridges. But it isn't obvious that we need to spend more (or less) than we are already spending. I could be convinced either way by the right data, but your post simply took it for granted that we are way below optimal spending levels.

      Maybe we should privatize some roads and observe levels of maintenance and replacement chosen by the owners. At least we would have a benchmark against which to judge government infrastructure spending.

      Glad we agree that distortions from taxation should be factored in, and that our government transfers too much money.

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    12. Someone who pulled a 1/4 fudge factor out of the air is saying that others don't have solid evidence?

      That was obviously a joke, to humor Beckworth. My real "fudge factor" is 1 - in other words, I take the civil engineers at their word.

      You get that, right?

      But it isn't obvious that we need to spend more (or less) than we are already spending.

      Except that engineers say we need to spend a lot more, and I trust them.

      I could be convinced either way by the right data, but your post simply took it for granted that we are way below optimal spending levels.

      No, it relied upon the testimony of people who actually know about the technical aspects of infrastructure, which I don't, and I'm certain you don't.

      Glad we agree that distortions from taxation should be factored in

      In principle, yes, but in practice, I don't know how big the distortions are. A supposedly steep income tax hike in 1993 did not noticeably decrease economy-wide work effort, nor did its reversal in 2001 noticeably increase economy-wide work effort. Micro studies have found that the Frisch elasticity of labor supply is small. So I'm not hugely worried about tax distortions, except for corporate taxation.

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    13. In other words, you are ignoring Beckworth's point that engineers have an incentive to exaggerate the problem.

      You are a very trusting person. If you trust every professional group about how much should be spent on them, you will blow through many trillions in a hurry.

      You are probably right that the short-run distortions of taxes on wage income are fairly small, but long-run distortions are probably higher, and taxes on investment income are very distortionary. (I guess you should trust me, since I am a professional investor) Your comment about corporate taxes suggests that you agree, but the individual income tax also distorts investment decisions.

      You might not like that it is from AEI, but I thought this was a pretty good piece refuting Diamond and Saez on the costs of taxation: http://www.aei.org/files/2012/11/19/-should-the-top-marginal-income-tax-rate-be-73-percent_085518416524.pdf



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    14. Barker, don't you know I'm a frigging hyper-genius with an I.Q. of 3 million? You should trust me on everything.

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    15. I'm not sure to what extent folks should trust either of you without first looking at the data. There's a lot of historic data that supports the measured benefits of infrastructure repairs stemming from the '82 Surface Transportation and Assistance Act and its impacts. Please see Reagan's speech upon signing the law at: http://somewhatlogically.com/?p=505 (and my pothole picture is vastly superior to the one on this post. Obviously the person in the picture is an out-of-work highway engineer fishing for jobs)

      For a more complete discussion of the Act and its impacts, see http://www.fhwa.dot.gov/highwayhistory/reagan_staa_02.cfm Of particular significance to this debate...(which also raises the question of where depreciation of fixed assets shows up in gov't budgeting and accounting)

      "As President Reagan, Secretary Lewis, and Administrator Barnhart had predicted, the increased revenue for Interstate 4R and bridges had the desired effect. By the mid-1980's, Interstate pavement conditions had begun to show overall improvement (i.e., the pavements that were improved exceeded the aging pavements that deteriorated to poor condition). The improvement was documented in The Status of the Nation's Highways: Conditions and Performance," released on May 29, 1985, the eighth in a series of biennial DOT reports to Congress. The report covered conditions as of FY 1983. In an accompanying news release, Barnhart said:

      One of the major findings of this report is that the steady decline in pavement quality which had characterized previous status reports has been halted. While it is still too early to see significant changes in highway conditions on a broad national scale, data received from state highway agencies indicate that during 1983 pavement improvements on major highways—including the Interstate system—were sufficient to bring us into at least a neutral position with regard to pavement deterioration.

      According to the DOT's Sixth Annual Report to Congress on the Nation's 574,045 bridges on public roads, released May 22, 1985, at least 10,605 structurally deficient bridges (defined as no longer able to accommodate the vehicle weights for which they were originally designed) had been improved and were no longer structurally deficient. In a news release issued May 22, Secretary Dole said, "These bridges, which heretofore had been either closed or restricted to handling only light-weight traffic, can now accommodate the heavier vehicle loads commonly in use on the nation's highways today."



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    16. Barker has never had a power outage? He obviously does not live in Long Island, New Jersey, or parts of Pennsylvania!

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    17. If an engineer looked at my house, I'm guessing that she would find $50-100K in "deficient infrastructure." The garage roof could use work, there are cracks in the driveway, etc.

      Does that mean I should immediately fix all of these things? No, because it won't kill me to let them go another year, and I can earn a better return by investing the money in my business.

      There is an optimal level of decay in infrastructure, and that means that it is best that some things are not shiny and new.

      Doctors want 100% cure rates, and engineers want 0% failure rates, but economists (and markets) have to tell them that there are diminishing marginal returns to investment and opportunity costs, so it is best to settle for less. If the power never goes out, we have probably spent too much on infrastructure.

      Some infrastructure investments are positive NPV. Some have positive externalities which should be taken into consideration. Some are financed with taxation, so we should take account of the distortionary effects of that. The calculations are complicated, and the political process makes it even harder to sort out which projects make sense.

      I am not against infrastructure, but I am against the idea that we should buy whatever engineers can think of because it is bound to be worthwhile.

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    18. But for government, public goods is its business...

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    19. I mean, assume you had a business, and that at some point your business needed to refurbish its machine tools, which were depreciating steadily. Suddenly, your cost of capital went through the floor. You'd go on a refurbishment binge, right?

      Or of course if you had some sort of growth opportunity out there that was even more appealing than a refurbishment binge, you'd do that instead. But in the case of government investment, that's analogous to spending on different kinds of public goods, like new infrastructure or research.

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    20. Now, in the above example, if you have too much capital and no other growth opportunities, and your cost of capital went way down, you'd still let some of your machines decay.

      For this to be the situation of our current government, you'd have to claim that we actually have too much infrastructure as it is, and we need to let some of it decay away.

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    21. Anonymous6:35 PM

      "witness Japan's wasteful public works"

      What made Japan investments' wasteful and why would ours be different?

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    22. Actually, transfers and borrowing is its main business - 51.2% of expenditures are transfer payments and interest. But more seriously, government isn't really in business at all - it is supposed to maximize the welfare of its citizens. If they can better use the money, government should let them keep it.

      I completely agree that if the cost of capital declines, I would be more likely to go on a refurbishment binge. The cost of government borrowing has gone down, so all else equal, more government projects are positive NPV than before. And all else isn't equal if there is anything to Keynesian economics.

      My impression, however, (admittedly lacking hard supporting evidence) is that we have a lot of excessive infrastructure. Small town airports are often palaces, Amtrak loses money, traffic counts on lots of freeway is low, etc. Burying power lines might be a great idea, but the money will probably go to another runway in Kalamazoo instead.

      I don't dispute that in principle infrastructure investment can make sense. But I suspect that if we did careful cost-benefit analysis we would spend less than the engineers want, and we might let some stuff decay.

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    23. Optimum level of decay? David, maybe you should think of things more as Noah suggests. Note that he is talking about infrastructure repair, not new expenditures, essentially catching up on deferred maintenance. Any engineer will tell you that the longer you defer maintenance, a favorite gov't budget trick, the more repairs will cost you, until it becomes cheaper to tear something down, scrap it and build anew or abandon it completely.

      The ultimate deferred maintenance program in roads is to wait until they break down completely, and then revert them to gravel roads. Here's a good article from the University of Minnesota. ://www.mnltap.umn.edu/publications/exchange/2012/spring/lowvolume.html
      Reverting to gravel roads might save a few bucks short term, but one has to factor in the economics of the loss of capacity and the eventual higher maintenance costs. One of the big problems is that gov'ts don't seem to have reliable means to account for the added capital expenditures that will eventually be required from deferred maintenance.

      You might want to look at the cost of the optimum level of maintenance on your roof to insure the longest economic life, and not wait until it leaks and the framing rots and the sheetrock falls off the ceiling. That's the correct level of infrastructure investment for your private benefit. Useable roads are a public benefit, which should be maintained to maximize the welfare of the citizens

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    24. Right, but it isn't optimal to refurbish every day, is it? It also isn't optimal to wait 30 years, but exactly when is the right time? It isn't obvious! Engineers and road contractors will say it is soon, but careful analysis will often suggest waiting longer.

      I own a lot of buildings, and this kind of thing comes up all the time. No leaks, no rot, but getting there. Should we wait another year or not? You can waste a lot of money doing things too soon, and also by waiting too long.

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    25. Right, but it isn't optimal to refurbish every day, is it?

      Of course not, that doesn't fit the analogy at all.

      It also isn't optimal to wait 30 years, but exactly when is the right time?

      Do you see how with these two sentences, you've conflated an issue of timing (second sentence) with an issue of frequency (first sentence)?

      Should we wait another year or not? You can waste a lot of money doing things too soon, and also by waiting too long.

      Of course. But if you tell me that your cost of capital doesn't figure into your decision when to refurbish, I'm going to look at you funny.

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    26. But I said that the cost of capital matters (two posts up) - and that the government's cost of capital has declined, so more projects are now positive NPV than were before the decline. I agree about that.

      No, both sentences are talking about frequency. Should maintenance/replacement be every day or every 30 years? OK, maybe I should have been clearer when I said "right time" but I think you understand.

      Of course, there are at least three parts to infrastructure spending: brand new projects, like the Big Dig in Boston, replacement of existing infrastructure, and regular maintenance. My point applies to all three. It is easy to be impatient and want new stuff right away, replacement sooner rather than later, and more crews doing maintenance more frequently.

      There are costs to all of this, optimal wait times for new projects, and optimal frequencies for replacement/maintenance. Optimal schedules depend on the cost of capital, and capital is cheaper than it used to be, so we should do more, but probably not nearly as much as the engineers want us to do. And if we were doing too much already, then a drop in the cost of capital doesn't necessarily even mean we should do more than before.

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    27. And also, since marginal tax rates have gone up a little, the costs of distortion from taxation have gone up, offsetting the lower cost of borrowing. The change in interest rates over the past few years might outweigh the change in tax rates, but it would be an interesting calculation - the 10 year Treasury rate is down 22% from 1/1/09, but the capital gains tax rate just went up by 33%.

      I realize that this is a clumsy way to look at it, but it isn't so obvious which effect is greater.

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    28. Why the distrust of supposedly scheming engineers? Hire them to do the right job such as come up with a preventive maintenance program/replacement cost schedule. (lots of data on highways, aircraft, trucks etc. usually based on utilization) In his field, any competent engineer can calculate to a useful degree of precision the optimum cost and level of ongoing maintenance such as for a roadway, building or other piece of equipment to reach its maximum economic life. The cost of capital for replacement of an item has a huge impact on the decision as to when to replace it or invest more to extend its working life. Especially true when technological obsolescence also drives the decision. When capital is cheap, upgrade.

      To reinforce Noah's point, I would further note that in calculating and optimizing economic life it is combination of maintenance costs plus capital costs for replacement. You could probably get some real bargains on your building maintenance right now, plus get superior, longer lived roofs for your buildings, but if you wait and defer maintenance it will cost more if interest rates rise and require more work and expense Hiring a good engineer for the analysis can help you maximize the long term value, unless his brother is a roofing salesman.

      Delete
    29. So I guess it really does come down to how much we trust the engineers. Maybe we're above or near to the optimal infrastructure point, and the engineers are just suggesting unnecessary repairs, intentionally or unintentionally.

      But in addition to the testimony of the engineers, we have the evidence of declining U.S. infrastructure spending over time. At some point, we'd expect it to hit or oscillate around some kind of steady state.

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    30. No oscillations or steady state road quality...given declining expenditures over time, you just hit the point where the bridge collapses (or has to be closed) and the road becomes impassable. (See Univ. Minnesota link in my earlier response)

      Delete
    31. In fairness, based on current figures, if you drastically reduce the amount of miles of road to the point that you have sufficient funds to maintain and eventually replace them, you might hit a steady state. But then again, this approach might reduce transportation efficiency to the point that it impacts economic efficiency and thus tax revenues....

      Delete
    32. David, if it is timing we are talking about then greater infrustrucural investment need not result in higher taxes. We can spend today more and make it up by not having to spend in the future. You are also ignoring the productivity impact of such investment. If GDP rises (e.g. because employees are not stuck for hours in traffic and can instead spend more hours working or are more productive during those hours) you can cover the investment by an increase in the tax base rather than in tax rates.

      Delete
    33. CA - Right, it is a complicated calculation. Infrastructure costs a lot (usually more than original estimates), has positive but uncertain benefits, is ultimately financed by taxes, which have high and uncertain costs, and is temporarily financed with debt, the costs of which depend on interest rates. Lots of interest groups benefit or are hurt by each aspect of this calculation.

      It isn't obvious whether we are spending too much or too little, and given the incentives interested parties have to distort the facts, we might never know.

      What is the correct policy? I would say caution. Don't go on massive spending binges, but don't make massive cuts either. Privatize whenever possible in order to obtain market signals about optimal investment and pricing.

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    34. I would say it's clear that the current state of our economy indicates that a massive spending binge is in order.

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    35. Forgive me for introducing some real numbers from an actual case into the debate. The 2007 Minneapolis I-35W bridge collapse was a tragedy, killing 13 people and injuring 145. Originally built in 67, the 4 lane bridge had a 50 year life span based on a loading of 66,000 vehicles per day. It only lasted 40, and the shoulders had been eliminated, adding two lanes to permit 141,000 vehicles per day use.

      NTSB said that added weight and use contributed to the collapse. Design inadequacies in the original bridge were also a factor. (maybe bad engineering, but perhaps upgrading on the cheap.) Read the NTSB report before blaming them) In 1990, the federal government gave the I-35W bridge a rating of "structurally deficient," citing significant corrosion in its bearings. Subsequent inspections noted cracking and fatigue problems. Approximately 75,000 other U.S. bridges had this classification in 2007. Gov Tim Pawlenty said the bridge was scheduled to be replaced in 2020.

      Costs: $400,00 per day to highway users from time/fuel costs with detours, $60 million to the State's economic output. http://www.dot.state.mn.us/i35wbridge/rebuild/municipal-consent/economic-impact.pdf Stores and malls served by the bridge lost up to 40% of sales.

      The replacement bridge cost $235 million and federal disaster relief another $5 million, and other disaster related expenses.

      If you want a good place to start Noah's spending binge, NTSB identified 700 major bridges with similar design and structural life issues.

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    36. Nathanael10:20 PM

      There probably are too many road lanes -- if you look at the urbanist and planning blogs, they complain about dangerous and unnecessary STROADS.

      But there definitely aren't enough railroad tracks. And there definitely aren't enough sidewalks. And there definitely isn't enough public transportation. And there definitely isn't enough money going into maintaining ordinary city streets -- or railroads of any sort.

      Perhaps we have too much heavy-infrastructure sewage system material -- but only because we don't have enough "green/blue" infrastructure, wetlands and swales and so forth.

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  9. Noah, may I suggest picking up EK Hunt's History of Economic Thought.

    The point you're making here is pretty spot on to what Keynes (the man himself) was saying in the General Theory. Now clearly it's not the point that Hicks made with the IS-LM. But Keynes actually thought that infrastructure investment was the best form of stimulus for pretty much all the reasons you're suggesting here. Public infrastructure not only provides short term jobs but it helps to boost long term profitability of the economy.

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    1. I am trying to expand the Richard Kahn article in Wikipedia from the pathetically small stub that it currently is. Richard Kahn, as you and Noah no doubt know better than I, is credited with the multiplier idea. I mention this only to emphasize the fact that I happen to be uncommonly aware (for me) of Keynes and the multiplier, General Theory etc. at the moment.

      BB, you ARE correct. Keynes endorsed infrastructure investment! Noah is correct, in a netted out sort of way too.

      P.S. All the infrastructure nay-sayer's need to read a few decades of infrastructure assessments for most municipalities and counties in the U.S.A. They could say that it is all lies, by those evil rent-seeking government employees and structural engineers. I have only one response to that: How many civil engineers are among the 1% or more relevant, 0.01% or so? Not many, I don't think. They haven't exactly been living off the fat of the land, nor are they known for such, historically. I would be inclined to trust them.

      P.P.S. Y'all (not you, BB, I'm referring to the others) should stop harranging Noah for his ad hoc 25% "multiplier" that he applied to that infrastructure improvement estimate. That was very accommodating of him, yet subsequent comments failed to appreciate the concession, and argued whether 25% were an appropriate value! I don't know how Noah has the patience to deal with such insouciance.

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  10. I though you were going to say IMF mea culpa were "stupidities". No jokes here: that's what the Spanish right wing think tank says http://www.dpeon.com/english/69-austerity-defeated.html
    Don't expect Europe will change its austerity suicidal policies... they just love it!!

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  11. In Eggertsson and Krugman (2010) in addition to the paradox of thrift, there are the supply-side paradoxes of toil and flexibility. In practice the EU Austerity has proven that increasing AS conventionally in depression is actually contractionary. In the short run, of course. And seriously, wouldn't it take some time for that the 2 trillion to work, excluding the 'Keynesian' multiplier?

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    1. I'm not disagreeing with your proposal, but I don't think a plan that will somehow increase AS significantly at a very low cost will pull us out of a depression; there is still the output (AD) gap to fill; in fact the gap will get bigger and there are still balance-sheet and debt issues.

      BTW, a plan using a balanced budget multiplier and investment and is big enough may work. But probably in Europe or Japan for institutional exogenous reasons (*Repub*cough*licans*cough*).

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    2. Dimitar, some of the theoretical findings of the ZLB are sensitive to how these models are solved. For example, the paradox of toil disappears when these models are not solved in log-linearized form.

      http://www.frbatlanta.org/documents/pubs/wp/wp1205a.pdf

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  12. Noah, very good post. This is a much more straightforward case to argue before the electorate (Barker isn't the audience here, he will never be convinced, not if a decaying bridge falls on his head.)

    Additional points:

    1) Not only is capital cheap, labor is available.

    2 & 3 & 4) Some of the calculable costs of deficient infrastructure include the slowing of trains over poorly maintained roadbed, diverting trucks away from load-limited bridge spans, delaying barges and diverting ships because channels and harbors need dredging. All these waste fuel. Fixing them is green! and makes us less energy-dependent! and reduces CO2 emission! Win-win-win!

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  13. Anonymous7:53 AM

    Thanks for bringing Baxter and King into the discussion. Excellent post.

    There are more arguments that can and should be brought to bear on the infrastructure investment issue. I think Samwick's idea of an infrastructure bank is worth pursuit. There are a multitude of good reasons to invest now that should be used to overwhelm opposition (which argues technicalities) without good clear reasoning other than a desire to limit the amount of public capital, goods and services.

    As Baxter and King note:
    "An unexpected permanent increase in the flow of public investment introduces three forces which operate on the economy along its transition to the new steady state. First, there is a permanent increase in governmental absorption of resources, as with the basic government purchase studied above. Second, as the stock of public capital accumulates over time, it directly yields an increased flow of output. Third, the marginal product schedules for private labor and capital shift over time as a result of the rising stock of public capital, stimulating alterations in labor and private capital.

    ...The gap between the two economies rapidly widens as the circle economy transits to a new steady state with higher private investment, consumption, and labor input, while the triangle economy moves to the original steady state with unchanged private investment, consumption, and labor input."

    The paper is important because it links infrastructure spending to labor policy and altering the structure of an economy. Anyone who has been to Haiti (or any other "developing" country) knows that much private initiative is made more difficult (if not impossible) by lack of public capital. In our present state, resources (especially labor) are underutilized and expected to be underutilized for a long time. This is a drag on growth and output. Investments in public capital allow labor to be used fully and productively.

    -jonny bakho

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    1. Jonny, your example of Haiti suffers from being a better illustration of the other sides point of view. There has been substantial "public investment" in Haiti since the earthquake due to charity and assistance from outside but little "public capital" created because of the corruption of the system. Albeit an extreme example, this is exactly what worries your intellectual opponents. If $2 trillion of effective public capital is needed, most of them read that as $4 trillion of public investment (re Cochrane). Advocates really have to get practical about how it can be administered in an effective way.

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    2. Anonymous10:18 PM

      From what base? Haiti has historically suffered from underinvestment. In the 1803, the revolt destroyed much of the production property. That was followed by years of embargo (couldn't allow the revolt to spread). One historical reason for lack of investment is corruption. Recent investment doesn't even replace the housing stock and infrastructure lost in the quake. The gap in public capital stock is far larger than the meagre aid for rebuilding. No one is calling $100 Billion for Sandy "Investment". It is mostly replacement, insurance to fix damages.

      The US has its own share of corruption with no-bid contracts and bridges to nowhere. Claiming that government is always ineffective and then proving it to your base by no-bid contracts and payouts to political donors is not good capital investment. Powerful wealthy elites can corrupt government and prevent infrastructure investment.

      -jonny bakho

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  14. Anonymous8:01 AM

    David Beckworth misses an important point with his "helicopter drop".

    Public investment in public infrastructure can be directed to maximize use of domestic labor and improve public capital which improves our future domestic economy.

    Transfer payments to supplement wages are important in the absence of full employment or living wage laws and there is a place for helicopter drops. However, as a longer term labor policy, public capital investment will win over helicopter drops.

    -jonny bakho

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  15. I agree that the infrastructure in California is, on a relative basis, in pretty good shape. I visited recently, and found the freeways to be in good repair. Not quite so much for streets in urban neighborhoods.

    However, in much of the rest of the country, infrastructure is in terrible, terrible shape. Witness the widespread, long lasting, power outages after storms in the Northeast. These were very much due to lack of tree-trimming, and to failure to run power lines underground. Yes, yes, I know that the the power companies are private -- but they operate under rules established by governments.

    When our children were small, we used to play a game when returning home to Michigan from a vacation. A few miles before the state border, we would tell our kids to close their eyes and try and guess when we crossed the border. They got it right within a few yards every time. The condition of Michigan roads is atrocious.

    Ditto with bridges, with sewers (Grand Rapids, MI still dumps millions of gallons of sewage into the river after a hard rain), with water pipelines and gas pipelines. Another tunnel under the Hudson river would have HUGE economic benefits, but NJ doesn't think it can afford to fund one.

    I don't have a clue what the total infrastructure gap adds up to, but it is clear that it is extremely high.

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  16. Anonymous9:10 AM

    The rich have their own infrastructure. The rich own the republicans in congress and the senate. The rich do not care if the middle class and poor have decent roads, schools, bridges, airports, utilities, water and sanitation. Why would any rational person expect republicans in congress and the senate to go against their masters?

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  17. Anonymous9:43 AM

    The case for repairing infrastructure we already have is so tight, since most of it is being utilized or hyper-utilized, thus its state of dis-repair.

    That 2 trillion estimate does not even factor in the possibilities of creating new infrastructure-high speed rail in the NE, congestion pricing (which could have MASSIVE economic gains), more infrastructure for walkable urbanism, etc...

    Frank

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    1. This is also a good point.

      Delete
  18. Anonymous9:45 AM

    Noah:

    Is that a pic of Ann Arbor, above? I remember some of their crappy streets well...;)

    Frank

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  19. Anonymous9:48 AM

    Finally, somebody explained this in a clear intelligent fashion. Note that Cochrane is constantly doing the opposite of Krugman: namely, poo-pooing government spending and making it look like the case for it is built only on Keynesian effects, which he denies ( even if he has that disclaimer about doing it if it's a good idea )

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  20. Ken Schulz' first nicks my point, though I was going to enhance it: not only is capital cheap, not only is labour available, but it is also likely to be cheaper than in boom times. (Same probably goes for materials and the like.) Construction labour and related trades are underemployed, and unless you're going to soak up the whole lot (unlikely), you should have the advantage of a bit of a supplier bidding war to keep the costs low.

    So while I personally have never believed in a fiscal multiplier (at least, not in the sense that government spending gets one and no other sort does), I've also never understood why we shouldn't have a counter-cyclical fiscal policy for reasons of government economy. In fact, sound government would have a wodge of well-planned projects on the back burner, waiting to be given the go-ahead when the economy starts to look wobbly.

    And then we get the infrastructure we need at prices we can afford. What's not to like?

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  21. This is why, for example, Nick Rowe's endless OLG burden-of-debt-on-future-generations discussion makes me crazy.

    "Yeah, if the projects are worthwhile, especially given current low rates, we should be doing them. In spades. And if growth>interest, it's also not an issue. But let's put those aside. Let me digress into endless speculation about a quite-possibly tiny and uncertain effect at some distant possible point in the future."

    This quite effectively distracts from the prosperity creation that is lying on the ground before us, ready to be picked up, and gives aid and comfort to those whose only real goal is to maintain the wealth of wealth incumbents. (A myopic and ultimately even self-destructive goal and approach [read: irrational].)

    That may not be the (conscious) intention of those who field such arguments, but it is certainly the effect.

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  22. I agree your thesis here, and that arguments about the multiplier, theoretical or real, are not very useful because no one can predict that future a few years out -- its like predicting the price of gold, oil or the NASDAQ.

    But living in the NoVA DC suburbs, I have recently seen this in action with the contruction of the new Metro line to the airport, which is not yet completed. It has already spurred much private investment and certainly improved local property values.

    I suppose the real $64K (or M or B) question is which projects are worthy and which are not. I agree that there will be waste somewhere, but that does not imply waste everywhere. It should not take a genius, though, to spot areas that are congested, growing or otherwise in need of repair. But rather than using public dollars to attempt to jump-start the most hopelessly depressed areas (ala the Murtha Airport in Johnstown, PA), I would start in places like North Dakota where the economy is already cranking up and are likely to need the most improvements the quickest, along with the obvious NJ/NY reconstruction from Sandy. If public money made some effect to follow private economic activity, you'd probably see larger multipliers in fact, along with appropriate human migration to where the jobs are.

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  23. I agree with the basic argument, and dismiss those who regard all public spending as wasteful with contempt, but the point I always make to the Keynesians is, at what point do you say that the debt is too much? This is what Krugman etc get wrong - wilfully, I suspect - the real purpose of austerity is not economic recovery, but simply to get control of growing debt. If infrastructure spending has a high return, lets raise tax, especially taxes that drag the least on economic activity, like land tax or inheritance tax, to pay for it.

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    1. Well, if infrastructure is worth doing, the additional debt to pay for it shouldn't be a problem. A corporation that takes on debt in order to expand into lucrative, worthwhile projects is making the right economic decision, and government in this regard is no different.

      That said, I think we need to shift spending away from transfers (health care) into infrastructure, research, and other public goods.

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    2. No, because of risk. There is a risk that the infrastructure returns might not turn out as expected, and if you have not matched the duration of the debt closely to the returns, there is rollover risk. As a result, there comes a point when the hurdle to expanding the state balance sheet becomes prohibitively high. Reinhart and Rogoff suggested debt to GDP of about 90%, but there well be alternative ideas. The key point though, is that there has to be some limit, and it is unwise not to consider this.

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    3. Krugman does not get it willfully wrong. He realizes that austerity measurements during these times can be self-defeating. He also realizes that the unemployment problem takes priority to our debt problem.

      The best way to tackle our debt is for a strong, robust recovery since most of debt is cyclical, not structural.
      http://www.bloomberg.com/news/2012-12-26/the-deficit-not-as-bad-as-they-want-you-to-think.html

      During these times, fiscal consolidation is actually increasing debt-to-GDP ratios in Europe, besides Ireland. Talk about self-defeating.
      http://www.economicshelp.org/blog/5268/economics/is-austerity-self-defeating/

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    4. No, Krugman would never say that austerity is self-defeating, because his models show that it is not. Even Greece has successfully managed to reduce its budget deficit. Hard going, yes; self-defeating, no.

      And while we are at it, allow me to have a dig at the silly argument that austerity lowers economic output, feeding back to the deficit etc. So the world is non-linear and feedback loops exist; deal with it! And it seems to me that the effect of austerity on economic activity does not have to be that depressing anyway - as I say above, tax something that drags less on real activity, like wealth.

      The fundamental problem here is that the spoilt old industrial world lacks the guts to meet the challenge that they are facing from a changing world. I can afford to pay, say, 10% more tax as long as it takes to get out this mess; I'll pay if everyone else can afford to pay does too.

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    5. Obviously, you don't read Krugman and have your preconceived notions.

      Austerity measurements are not always bad. They can be good at times, but it depends on the context of the situation. Austerity measurements right now are not good. The evidence is abundant, so I am not sure why this is even debatable at the moment.

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    6. I do read Krugman, carefully. That's how I know that his own models show that austerity works. He likes to play that down of course.

      Of course, austerity is horrible, but what Krugman fails to show is that borrowing to avoid austerity does not simply postpone the horribleness, and perhaps even make it worse.

      I suspect the truth is that many like Krugman quietly don't care if the debt ends up being reduced by inflation.

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    7. I am highly skeptical of your claim that Krugman's own models show that austerity works during times like these. Plus, you say austerity works, then in your next line of thought, you claim that it is horrible.

      The best way to tackle our debt is for a strong and robust recovery. This will increase inflationary pressures, but this is besides the point. A strong economy has higher tax receipts and less need to spend. As long as GDP grows faster than debt, then debt is really not a problem.

      You make another mistake by putting a future speculative problem before an actual real problem. If we continue on our current trajectory, debt will be a problem, but it is best solved by growth. This is completely speculative since the future is uncertain. For example, the Bush tax cuts were enacted because Greenspan and Republicans thought we would pay off our debt and have too much idle money sitting in the public sector. What did the future bring?

      Plus, you completely ignore the present problem which is real. We have an unemployment problem and a weak economy in which millions are unnecessarily suffering.

      Why place a future speculative problem before a current actual problem?

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    8. Austerity during recessions is a bad idea regardless of whether you are Keynesian or not. If public services (schooling, law enforcement, etc.) are worth providing in the long run you do not want to cut them down simply because your tax revenue went down. You borrow the difference during the recession and pay it off during the boom. It is called smoothing, and private households do it also.

      Greece is a different story. They had a debt problem even prior to the recession. Instead of dealing with it during the "good" times, when it would have been relatively less painful, they ended up having to do it in the midst of a global recession. This is the problem.

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    9. @IHO eg here: http://krugman.blogs.nytimes.com/2012/04/24/austerity-and-growth-again-wonkish/ "one euro of austerity yields only about 0.4 euros of reduced deficit"

      As I say, I do not deny the suffering, but want it addressed by real, structural measures like tax shifting, not by giving up trying to reduce the debt.

      @CA, when is the boom coming (and note IHO's remark about what happened to the surplus during the last boom - politicians will never tackle debt until they have no choice)?

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    10. Rebel, do you really want me to forecast when the boom will come? Or are you implying that this is a permanent slump? Recessions are followed by periods of expansion, this is one of the stylized facts of business cycles.

      Laying off teachers and firefighters because of a shortfall in taxes and hiring them back when finances improve is just not good policy! This has nothing to do with Keynesian multipliers. The surplus during the last boom went to tax cuts, two wars, and paying for Medicare. Are you really saying that we should cut essential public services to pay for these policies because restoring tax rates, reducing our military engagements, and fixing Medicare are not politically feasible? If you wouldn't do that during goods times, it makes no sense to do it now.

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    11. @RE I didn't open up the link since NYTimes only allows 10 visits per month and I am not a subscriber. Therefore, I have no idea what point you are trying to make. Perhaps you want to expand on your expressions....

      I want structural change also, such as fixing our exorbitantly high medical costs, the erosion of the middle class, the increased job polarization, our shortsighted trade agreements, and the divergence between compensation and productivity.

      Plus, most of our debt is cyclical, not structural. While I am all for structural solutions, they should not be used to address our cyclical problems.

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    12. @CA While I agree with you on your first point, you can blame the Austerians for slashing public employment and not properly investing into America right now.

      Spending on goods and services is down and public employment has shed hundreds of thousands of jobs. Most states have balance budget laws. Therefore, without aid of the federal government, they had to lay off public employees since tax revenues dried up due to an economic crisis outside of their control. While tax revenues dried up largely due to the shadow banking industry crashing the global economy (According to Austerians, the shadow banking was supposed to regulate itself since markets are efficient), they lost their jobs while Wall St. made out like a bandit while borrowing billions below market interest rates.

      As for Europe, the evidence is in. Austerity measurements are not helping. In fact, it is prolonging recovery and even making the debt less manageable to handle due to anemic growth.

      While Greece had some serious structural problems before with their debt, it wasn't totally unmanageable, but the Euro and the financial crisis made it all more great.

      Plus, your argument is completely bogus. America had a debt problem before the crisis, and a good chunk of it was structurally driven by the Bush tax cuts and our warmongering.

      Does that mean we should fire teachers and not invest into infrastructure? What a silly argument.

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    13. @CA / IHO

      First, I should say that I am British, so my points are general rather than referring to the USA in particular.

      I am afraid that I do expect that this will be a very long-lived slump. Partly because it is a post-financial crisis slump, and I think that there are bad assets left that are deterring new "investment" in the widest sense of that word, as in Japan. And partly because I think that the financial boom and bust overlays a deep competitiveness problem versus the rest of the world. I would be wary of making policy on the assumption that a strong recovery is just a matter of time.

      "Does that mean we should fire teachers and not invest into infrastructure?" No, you are not reading what I am writing; I am saying that TAXATION SHOULD BE RAISED to allow increased investment without cutting vital current expenditure. You might be confused because my views are unusual - they might be described as hard money socialism. I believe in honest redistribution (ie not stealth redistibution by inflation, which tends to hit relatively poor savers) to mitigate present suffering, and structural change to restore growth.

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    14. @RE OK, we largely agree, though timing the tax hikes so as ot to hurt the recovery is important!

      @IHO I am not sure what is my bogus and/or silly argument is. First of all, the U.S. certainly did not have a debt problem before the crisis. Its debt to GDP ratio was relatively modest, given also its ability to print its own currency. This is very different from Greece. Second, a country that has a debt problem needs to address it. But I never said that they should do so by laying off teachers or not investing in infrastructure. This is also not what Greece has done, largely because some of its infrastructiral investment is funded by the E.U . But eventually they have to cut from somewhere, and find ways to raise revenue. This is indisputable!

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    15. @CA Your argument is bogus since you argue for more austerity measurements for Greece for their structural deficits while completely ignoring the fact that the US also had structural deficit problems before the crisis due to the Bush tax and our warmongering.

      However, due to the shadow banking crashing the global economy, deficits increased as tax receipts dried up.

      You claim that people need to suck it up and pay off their debt.

      I don't care if Greece has to cut spending on some programs. I was never against cutting spending on some places. However, I am against austerity hawks who claim that we have a deficit problem over an unemployment problem.

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  24. i agree with the assessment that infrastructure needs improvement and I can cite some examples (like investing in putting power and other lines underground, and better plumbing in cities), but I think that's where the agreement ends.

    If you look at the 10 most congested cities, its not clear to me that more roads (or even better rail or subway systems) are the answer. Some combination of better technology (so people can work and take classes from home) and self-driving smart cars would relieve a lot of congestion. I understand why MD-DC-VA-DE-NJ-PA-NY might want to band together and built better east coast rail in the DC-NYC corridor, but i am not clear why Minnesotans or Texans should let their federal tax dollars go there since they don't benefit. Same with a CA high-speed rail. Occasionally I wait in long lines at airports, but that is not due to insufficient spending - its due to homeland security that insists on body scanning me, and because the FTC and FAA allow these little local monopolies (i mean hubs) and there is sometimes little local competition.

    Overall the Am Soc of Civil Engineers is lobbying group who purpose is to ensure plentiful jobs for its members. So I put as much stock in their analysis as I did in the Nation Association of Realtors 2005 housing bubble denial. Both the NAR and the ASCE are cheerleaders for their respective industries. We need to apply some skepticism to the alarmist positions put out by the ASCE, because their goal is to make *any amount of spending* on infrastructure seem like not enough.

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    1. You don't have to believe the ASCE, but to dismiss their data without specifying where and by how much it is wrong is simply an ad hominem argument that lends nothing to arriving at real understanding. One can compare the ASCE recommendations with that of the DOT/FTA reports, Status of the Nations Highways, Bridges and Transit: Conditions and Performance. http://www.fta.dot.gov/about/about_FTA_5208.html Much of the data in these reports comes from physical evaluation of specific bridges and highways. Generally it follows reasonably closely the ASCE position.

      But of course, much of the work was done by engineers, albeit working for State and Federal agencies, but we know what liars engineers are, and they cheat by using actual data.

      And airline hubs are a creation of the airlines...for their benefit. Remember that when Reagan fired all the controllers, they were forced to reduce flights to be able to manage the runway real estate with limited approach control personnel. Runway capacity is the real restriction on air traffic. The system runs so close to capacity, that severe weather anywhere in the national system causes cascading delays, especially in the North East. See the Atlantic article, "Slam and Jam" by famed journalist (and pilot) William Langeweische, http://www.theatlantic.com/magazine/archive/1997/10/slam-and-jam/305134/ (Quiz: When was the last new runway system build for a major metropolitan area, and how much did deregulation increase the number of take-offs and landings?)

      Uninformed arguments can't lead to workable solutions.

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  25. Anonymous12:05 PM

    Aren't you really talking about marginal utility here?

    And I also think that multipliers are relevant to this, because it makes the difference of whether those infrastructure investments should be payed for by cutting other government expenses or by debt.

    I agree with your basic point, but I think it needs some qualification. I am not convinced though that talking about the multipliers inhibits this discussion, as you say, and I don't think you really make a good case about that. Especially in the current environment with Fix The Debt and Repubs and all. IMHO the point about talking about multipliers is not about promoting government investments, but more about allowing more government debt, countering the austerity folks.

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    1. @Anonymous: "I am not convinced though that talking about the multipliers inhibits this discussion"

      Disagree. I think it distracts policy makers from large and really quite obviously positive first-order effects with much hand-waving, smoke, and mirrors about probably much smaller and certainly much less certain second- and third-order effects.

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  26. Plumbing plays very important role in healthy home. Once the foundation built, a plumber runs all the water supply lines to the home where sinks, bathtubs, showers and other fixtures will be installed.Plumbing services are very necessary to keep your home safe and healthy.

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    Replies
    1. Ha! We have a spammer qua Chauncy Gardener invoking the hydraulic metaphor!

      Delete
  27. Hi, I thought of taking a different approach. In the UK we have had Keynesians, Friedmanites and all sorts running the economy since the Second World War. So I asked the question "does public spending increase the private sector part of GDP?". Does it actually work? What I found surprised me. Increasing public sector spending seems to be bad whenever it exceeds private sector growth. Take a look at the graphs in the following link:

    http://pol-check.blogspot.co.uk/2013/01/can-increased-public-spending-end.html

    Any comments?

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  28. Nathanael10:15 PM

    The thing which I immediately notice in this post is the photo.

    Look at the high quality and standard of that *brick* road.

    Why did we pour oil-based asphalt over it again? Seems like removing the asphalt would be an improvement at this point.

    There seems to have been a bias towards *non-durable* infrastructure choices in recent years. What's up with that? Can we stop it?

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