Sunday, July 06, 2014

Can infrastructure "stimulus" unite Krugman and Cochrane?

(Over at Bloomberg View, I took a different approach to John Cochrane's WSJ piece. Here's what I wrote. In related news, I recently found out I'm allowed to repost the entirety of my BV posts 48 hours after they are published...)
John Cochrane, the University of Chicago Booth Business School finance professor and blogger, has an op-ed in the Wall Street Journalabout fiscal stimulus. Cochrane thinks stimulus isn't the answer, and cites his own research to show that the economic models used to justify stimulus spending are on shaky ground. Instead, he thinks that erratic government policy, taxes, regulation, and ham-handed attempts at redistribution are to blame.
I’m sure a lot of bloggers will jump in to counter Cochrane’s points -- David Glasner, for example, has a rebuttal already. I could write an article about how I agree with some of his points (I like his paper on New Keynesian models) and disagree with others (the alternative explanations he suggests have trouble explaining the Great Recession itself).
But I’m not going to write that article, because, frankly, this debate is kind of over.
There’s very little use in arguing about Keynesian stimulus spending, because no new Keynesian stimulus is on the table. In fact, there hasn't been serious consideration of a major new stimulus for years now.
What’s more, I think we’re starting to understand the political economy of stimulus itself -- when it is and isn’t feasible. Basically, when output is collapsing -- in the first few scary days of a recession -- we always do some kind of stimulus. Bush did it, Obama did it. As legendary macroeconomist Robert Lucas put it: “I guess everyone’s a Keynesian in the foxhole.” But once the economy is out of the foxhole, support for Keynesian spending dries up -- witness thefailure of Clinton’s attempt at stimulus in 1993 (two years after the end of the 1991 recession). Also, observe that despite repeated calls for new stimulus by Paul Krugman and Larry Summers -- almost certainly the world’s two most famous academic economists -- the Obama administration has given no sign of listening. Even back in the 1970s, when Keynesian economics reigned supreme, the idea that Congress could stabilize the economy had mostly been set aside in favor of the notion that this was the Federal Reserve ’s job.
So whether Cochrane or Krugman is right, stimulus of the pure Keynesian kind just ain’t happenin’. We need to think about what can be done to pull the economy out of its slump. Cochrane and his fellow-travelers propose a sweeping program of deregulation and dismantling of the welfare state, but that is also politically unlikely. One measure they endorse -- the ending of extended unemployment benefits -- has already been done, but so far doesn't seem to have forced many people back to work.
So what to do? Well, there is one idea that has the potential to appeal to both Keynesians and structuralists: repair our infrastructure. This is what Larry Summers is pushing for right now:
Who here is proud of Kennedy Airport?” Summers asked the audience. Not a hand went up...Summers seemed almost incredulous that the nation isn’t taking a golden opportunity to fix its crumbling infrastructure: “At a time when we can borrow for way below three percent and construction unemployment is high, why aren’t we building?
Let's be clear what the "fiscal stimulus" argument is and is not about...[it is not] about debt financing of "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.
If infrastructure spending happens, people will undoubtedly label it “stimulus,” but the truth is that it’s something else entirely -- you don’t need a Keynesian multiplier to make it work. Let me quoteCochrane himself, from 2012:
So there are at least two big non-Keynesian reasons to unleash a wave of infrastructure spending right now. The first is that interest rates are low. Interest rates represent the government’s cost of capital, and as every MBA knows, you invest when the cost of capital is low. Second, America has an infrastructure deficit, as this McKinsey report makes clear. Some countries, such as Japan, spend too much on infrastructure, but we spend too little, and our roads, bridges and airports are in disrepair.
Now, conservatives and structuralists will naturally worry that infrastructure spending will be distributed inefficiently, going to wasteful pork instead of productive uses. That’s a valid worry, and it’s a reason why we should also try to encourage private investment in infrastructure, as Summers suggests. It’s also a reason to have organizations such as the American Society of Civil Engineers help oversee infrastructure-spending decisions. Another worry is the high cost of infrastructure in the U.S.; bringing costs down will actually involve making a lot of reforms that conservative structuralists like Cochrane probably would like, such as shortening environmental reviews and administrative costs, and allowing infrastructure contractors to pay lower wages.
So there is the chance here for a bipartisan deal on a policy to help boost our economy out of its continuing doldrums. Infrastructure spending can appeal to both Keynesians and anti-Keynesians. Let’s do it!


  1. I don't know about you, but nothing says "freedom" to me like a broken truck axle, or a derailment, or a mandatory water-boiling order.

  2. You've put your finger on the reason we don't have infrastructure spending: it makes too much sense; it might be good for the country; it might be good for employment. We aren't doing it because the Republicans don't want to do anything good that Obama might get credit for.

    1. It makes me depressed to say I have to agree with that.

  3. Part of the issue is that infrastructure costs a ton to build in the US due to all the noses in the trough. This kills your ROEs.

    Here in Australia we have a lot of shiny new infrastructure, but a lot of tollroads have failed financially because the traffic projections weren't borne out. However, in many cases the equity investors were foreign pension funds or billionaires so no-one really cared.

  4. I'll support that, and I'm a supply sider and critic of simplistc varieties of Keynesian theory (I like Minsky though, and would never dismiss the power of public credit).

    But you need to deflate your expectatios. Politically, Ds have taken the polarization bait, and now it seems to me too late to get out of that trap without a defeat. Which I don't see happening - Ds will keep winning the presidency, Rs the House. Ds had a great opportunity to seize the center and dominate over the Rs who are moving further and further to the radical extreme. But Obama blew it and I don't see Hillary doing much better.

    Economically, you are kidding yourself with all the Krugmanish "pull out of this slump" talk. We are mid cycle here, it won't get much better than now. There's still enogh slack in construction labor that a moderate public works stimulus would boost output without much affect on inflation. But that's a one off, and comes right back off when the stimulus ends. It would not raise the long term growth trend. It's worth doing because there is indeed a lot of infrastructure work that needs to be done.

    I'd add though that I'd also support a reordering of existing spending towards infrastructure.

    As an analyst of EMs I'm not so fond of using public debt monetization to lower rates and then arguing that lower rates call for higher public borrowig and spending. I know we're a long, long way from Venezuela but that is in fact exactly how you get there.

    1. MaxUtility9:37 AM

      Part of the point of focusing on "infrastructure" for stimulus is the understanding that improved infrastructure improves your long term growth prospects. So the construction jobs may not be permanent, but the long term economic benefits of quality/functional infrastructure do tend to pay off in the long run making these projects net positives and not just "make work".

      The flip side also is that it is a lot cheaper to fix something before it becomes critically degraded or has failed completely. Even if fixing one particular bridge doesn't boost the economy long term, it's still a lot better for everyone to fix it now than to wait till it collapses and deal with the much larger costs and disruptions.

    2. Sure, that's why I said I supported the idea. If it were politically possible I'd be talking more about the details. One thing to keep in mind is there is bound to be a conflict between long-term productivity value and short-term stimulus/employment value, as the most prospective places for productive infrastructure will be different from where the unemployment is concentrated.

  5. Anonymous2:48 AM

    As a UK citizen I can only stare in wonder at how far to the right both politics and economics has gone. The Tea party, already to the right of Genghis Khan, wonder why everyone thinks they're mad and somehow conclude that moving even further to the right is the answer. This noise now prevents the progressives suggesting anything to do with state spending even when the case is overwhelming to do so. Grow a pair for goodness sake.
    As to those fighting an inflation that simply isn't happening and isn't going to happen give it up will you? The inflation figures for the last 60+ years are on my twitter feed at hat tip to Scott Fullwiler. Until this obsession with inflation is lost the economy will never reach full potential.
    Yes let's all hold hands and sing hallelujah but there's only so far you can go in debating with the irrational/. bill40

  6. Anonymous4:25 AM

    Why the hell do we need "fiscal stimulus" in this economy? Man, Noah, you need to catch up. You been gone 2 years? My guess even by the end of the year the most ardent econ-bear will have gone back into hibernation.

    Infrastructure is mostly state done. They have the money, don't let anybody fool you. Put in the right people, thus infrastructure spending.

    1. That is incorrect.

      States MANAGE infrastructure spending, but federal funding is the main source of capital, followed by State debt, but most states have debt caps, unlike the feds. And most states have much weaker individual tax bases than the feds, particularly because it is easier to avoid paying taxes to individual states than it is the IRS.

  7. James G6:06 AM

    Not really sure why we should expect the American Society of Civil Engineers to make objectively benevolent (from a welfare perspective) decisions about what projects to fund.

    1. MaxUtility9:30 AM

      I vaguely get the idea that the ASCE is going to tend to argue that everything's falling apart and needs to be rebuilt. But once you say, "OK, here's $10 billion to fix bridges, which ones should we fix", I think that would be a pretty obvious group to ask for direction. Of course, any pot of money like that will get split up more by political considerations that technical ones, but hopefully you get a few engineers to weigh in on what needs fixing first.

  8. Anonymous8:42 AM

    The politics are bait and switch. Wealthy special interests don't want increased spending on infrastructure, they want their taxes lowered and less money spent on everything (except their pet projects). These interests fill the campaign coffers so they get their way.

    The political argument is not whether infrastructure spending is a good idea or can be done well, the political argument is less spending- lower taxes. In the recession, families have done belt tightening and they believe government should do the same. Government belt tightening has been promoted by all sides including Obama. Obama is moving to support some infrastructure spending but the damage is already done. The belief in belt tightening is hardened in cement. The sides are emotionally tied to their beliefs and rational economic arguments such as the ones you make will bounce off.

    There probably is a majority in the House that would personally favor more infrastructure spending, but are GOP are blocked by special interest money and electoral suicide from working with Dems.

    Politics have mired us in slow growth. Unless their is a substantial flip in strongly held beliefs, even infrastructure is going nowhere fast.

    -jonny bakho

  9. But the Bush bank bailout, which is rooted in supply side economics, was a much more effective 'stimulus' than what Obama did.

    1. Anonymous3:19 AM

      Speaking of rooted...

  10. Anonymous10:54 AM

    I see you think you can escape unscathed from calling others vile insulting names, in the name of the garbage you call "economic theory", which I would call what they are: brain damaged delusions.

    You and your crew of sycophantic morons here, all so ready to nod agreement with whatever bullshit you write, are pathetic scum. Maybe God might forgive you for being such an asshole, but I sure never will. I spit upon you and the vermin who agree with you. Go fuck yourself.

    Save the economy, kill economists on sight.

    1. Bill Ellis2:19 PM

      So brave of you to undertake the scathing of Noah. I mean if you don't do it who will ? I am sure the whole right wing blogosphere is grateful.

      I am sure your devastatingly brilliant and courageous attacks on Noah, the left wing's media Godzilla with rabies, have placed the name ---Anonymous!--- sweetly on the lips of every conservative.

      God bless you, brave and noble Anonymous, god bless you !

  11. Bill Ellis1:46 PM

    Noah, You allude to conservative complaints about why our infrastructure costs are so much higher than the rest of the developed world---too much environmental review and high wages for workers--- and seem to accept their validity.

    But are these the real problems ? Are these the big reasons our costs are so out of line ? The Germans have tougher environmental regs and good wages provided by strong Unions, yet they get better quality at less cost than we do. It would seem the the problem lies elsewhere. But where ?

    Matt Yglesias writes about this and he does not seem to know where the problem is either. The Folks over a CityLab don't seem to have a handle on it either.

    Is it possible our system of infrastructure funding is just way more corrupt than the rest of the developed world ? If I saw these kinds of out of line costs in a "third world" nation my mind would jump to corruption as the cause. The longer the issue of our costs remains opac , the more my suspicious mind entertains the corruption/game rigging/rents story as the cause. But I know I don't really have a clue.

    We know Russia is a kleptocracy. I wonder how costs compare between us and them.


    "A planned 415-mile highway linking Moscow and St Petersburg will be expensive. Stage one, or 27 miles of the roadway, is projected to cost $1.2bn, and that is likely to rise. "

    "...Indiana and Kentucky are spending $2.6 billion to make a bridge wider, there's a $1.7 billion highway interchange in Wisconsin, "

    Matt sums up my frustration....

    " Identifying the causes of this cost crisis and feasible ways of addressing it ought to be a top priority for mass transit advocates. Yet the American Public Transit Association appears to have zero publicly available research on the matter — they prefer a posture of boosterism that emphasizes the benefits of transit spending and the case for doing more.

    The case for doing more is in fact strong. But it would be much stronger if the United States knew how to undertake cost-effective projects."

    1. I should have also said that they will do it at half-price or less what it costs the US to do the job for.

  12. Anonymous2:05 PM

    Stimulus should not be used to stimulate the economy because economic growth benefits conservatives and white people. Rather, stimulus needs to be carefully crafted to benefit cronies, unions and political allies, yet is must also punish adversaries. How to do this? This is why Obama struggles with the issue.

  13. There are political obstacles to infrastructure. Canada wants to spend Canadian money in Detroit, at Canadian risk, to build a new bridge and various American political interests have been doing their best to block the project for ten years. A project that should have been a no brainer for a City in financial collapse has been mired in American politics.

    1. Bill Ellis7:47 PM

      That sounds like a battle of rent seekers.

  14. Bill Ellis10:29 PM

    Could the reason our Infrastructure cost be so out of line with the rest of the developed would be because we try to IMPOSE market elements into the process--- setting up protracted battles between rentseekers ?

    Does most of the rest of the developed world have more of a command economy approach to infrastructure ? I believe so. Germany certainly does.

  15. Our roads and bridges are in generally poor shape, compared to systems in comparably rich nations.Our national water infrastructure is arguably in an even worse shape. Our electric grid is antiquated and running out of capacity. We have seriously under-invested in high speed internet cables even in our most densely populated cities.

    The only arguments against massive investment in all aspects of our nation's infrastructure boil down essentially to personal greed - trying to put lipstick on those pigs by arguing about "inefficiency" is sad. I would argue that "inefficiency" is one of those concepts that economists as a whole abuse the most. Efficiency is something that needs to be measured, for any claims about it to be made, but metrics about most economic projects are problematic at best, because most of the time you have to impose significant value judgments, judgments based on personal opinions about what is desirable. Under such conditions, any statement about "efficiency" are inseparable from the political values of the person making them. So if people want to argue against massive infrastructure spending, they need to be making political economic arguments against it, not trying to hide behind a false claim of inefficiency.

    1. On the contrary, it is the failure to invest in infrastructure during recessions is inefficient

    2. Bill Ellis9:21 PM

      I agree that our high costs should not stop us from spending on infrastructure.
      In fact I believe doing so would help focus attention on our out of line us a chance to address them.

      Our costs are a big problem. They need to be dealt with.

      We don't have to sweep it under the rug to advocate for infrastructure spending. If liberals don't address it, conservatives surely will...and the more we spend the more they will.
      If only conservatives are addressing it they will get to diagnose the problem. And of course they will say the problem is caused by not punishing the the poor enough, and not rewarding the rich they do every problem.

      With no counter narrative provided by the left, the right wins the media debate by default.

  16. We would get a lot of counter-cyclical stimulus if we applied cost benefit analysis to government capital projects. In a recession, the opportunity cost of many of the inputs into infrastructure projects falls -- capital, project management expertise, labor, construction materials. Even the market prices of many of them fall. Many projects that do not pass cost benefit tests when resources are fully employed would do so in recession. Unfortunately, states and local governments do not have the borrowing capacity to act on the changes in opportunity costs and the Federal Government is paralyzed by fear of "deficits."

  17. I want to add one more comment, more broadly on the subject of "pull(ing) the economy out of its slump”. While you're right that now would still be a good time to build or repair infrastructure, it's important to understand where we're at in the business cycle.

    The "pull us out of this slump" idea reflects two big misunderstandings. One, it assumes that current growth is unusually slow. In fact it’s right about on the four decade trend. Two, it assumes that growth could sustainably accelerate from here if we play our policy cards right. In fact, we're beginning to run out of slack, which means growth from here will get tougher.

    Whyever we didn’t get a rapid rebound after the last recession, we can’t somehow revive that missed opportunity now, five years after the trough. Who knows, maybe a burst of technological progress will materialize and prolong the growth phase. But not likely. Inflation will rise, interest rates will rise, and growth will gradually slow and fall into recession.

    This is not bearishness, this is basic business cycle theory, amply confirmed by a century of empirical data. While it remains academically interesting why we didn’t get the quick rebound (and I’d add, why Europe also didn’t but EMs did), for most of us it’s time to let bygones be bygones, stop belaboring the arguments over why the first half of the cycle didn’t turn out as hoped, and start thinking about how the second half of the cycle will play out.

    The American economy is not in a slump. Labor markets remain softish, but much improved from four years ago. Other than that the economy's doing fairly well, especially relative to other advanced economies. There are always things that could be done that could improve it somewhat. Yes it would be a good time to build or repair a bit more infrastructure, and it's too bad that's politically impossible. But it wouldn't be a growth-trend game changer. Keep perspective.

    1. Anonymous9:25 AM

      Interesting. Can I ask you what effects, if any, has the Lesser Depression / Great Depression had in your welfare/finances so far? Have you, any in your family, or anyone else you know, been directly affected?

      Just curious to know where are you coming from to come up with such strangely academic views...

  18. I would argue bubble-deniers are worse than holocaust deniers