Saturday, January 10, 2009

There's no excuse for underspending on great high NPV investments

University of Wisconsin Economist Menzie Chinn has an excellent post, "Is the Implementation Lag for Infrastructure Investment a Problem?" He writes:
There's been a lot of discussion about how the lack of "shovel-ready" infrastructure projects puts a constraint on government investment spending as a mode for delivering stimulus, since most infrastructure projects take a long time to plan and build. But what if the negative output gap is going to be deep and long-lived? Is this concern so pertinent? I don't think so...
GDP and CBO's Estimate of Potential GDP, 2000 to 2019. Source: CBO.

Output does not revert to potential until 2014! This suggests to me that concerns about the time lags involved with investment projects are perhaps not as relevant as in the usual business cycle downturn.
Even Martin Feldstein said the shortage of "shovel ready" projects should not be a deterrent in a recession that is likely to last long enough to plan and execute new projects.

So let's stimulate the economy with things that will make us far wealthier over the long run like investment in infrastructure, alternative energy, education, advanced broadband, and basic scientific and medical research, rather than doing it the Republican way of tax cuts predominantly for the wealthy, and then encouraging people to spend frivolously on short term consumption of little or no lasting investment value.

It's far better to stimulate the economy by spending on infrastructure, alternative energy, and education than on new fashions, yachts, and vacations. Spending on those things make us far poorer over the long run than spending on high-return investments of the kind the pure free market will grossly underprovide due to well established in economics pure free market problems like externalities, inability to patent, asymmetric information, free rider problems, etc., etc.

The Republicans talk about not wanting the government spending to be wasteful, but it's hard to find any spending on infrastructure, alternative energy, education, and basic scientific and medical research that's more wasteful than giving tax cuts to be spent on yachts, mansions, $5,000 suits, or other frivolous consumption with little or no investment or lasting value. For more on this see here.

Let's hope Barack Obama cares more about doing great good than looking like Mr. New Age, post-partisan, compromiser. And he should not be too concerned with the political cost of going against this New Age persona he cultivated. Come next election, with how serious things are, people will care far more about how much great good he ended up doing than whether he stubbornly stuck with the la la New Age persona of his campaign. He has the political capital and the majorities in congress to do great good like FDR, who fought rather than excessively compromised with extremist Republicans. Let's hope he uses it.


Maineiac said...

Thanks for the post, it is clear and it seems non-misleading.

With regards to Obama's "la la New Age persona" I think he was trying to communicate his philosophy of governing and his core principles. The test will be how his policy-results-policy loop works. A key indicator, I believe, is his willingness to accept responsibility when things do not go right.
A key element is the number of people such as myself being able to understand the policy debate and the result. I think blogs such as yours are invaluable in this regard. Thanks

donna said...

Scary how much that graph looks like this one: