Arguments Against Infrastructure Stimulus – Political
I’ve been struggling for some time to understand the resistance of some politicians and economists to massively increasing infrastructure spending, which seems to me (and many others) to be an obvious policy path. It’s summed up by Jay Ackroyd: “This isn’t hard. Hire people to build things using the free money the world is offering us.”
But it’s even better than that. While real yields – the nominal interest rate less expected inflation – on 10-year Treasuries are currently less than 0.2% per year, the real yield on 7-year Treasuries is negative!
I’ve been through the scenario of how this sets up a win-win-win-win-win before. It’s also a no-brainer; we borrow money for seven years at a rate that’s less than the expected inflation rate, meaning lenders will to pay the U.S. government to keep their cash safe for SEVEN YEARS. It’s not just a no-brainer, as Brad DeLong wrote in one of the funniest lines I’ve seen from an economist: “[S]ince expansionary fiscal policy does have [positive capacity utilization and employment effects], it is something that you should advocate even if you have less than no brain at all–even if you have a negative brain.”
If DeLong’s right, that this is a negative-brainer, how can anybody possibly argue against it? I recall two arguments against, which I’m going to call the “stupid political argument” and the “reflexive neo-classical Austrian argument.” The former is simplistic and ignorant, and appears to be motivated purely to score political points, and the latter fails to sufficiently extend the theory of some long-dead economist.
In this post I’ll touch on the stupid political argument, and leave the more interesting economics argument for the next.
The stupid political argument is simple: we can’t afford the additional debt. It’s an easy argument to make, because the scary images are easy to conger – the debt’s higher than ever, it’s on an ever-increasing path, we’re going to become Greece, blah blah blah. The pertinent points here: the debt and deficits we have are (1) far from unmanageable and (2) wholly unrelated to the investment in infrastructure that so many economists now advocate.
First, we can “afford” more debt. Today’s low interest rates means that even with much higher debt, our interest payments as a percentage of GDP are lower than they’ve been at any time since the early 1970s. In 2010, public debt/GDP was 62.2%, (expected to rise to about 70% this year), and debt service amounted to less than 1.3% of GDP. Compare this to 1983, when debt/GDP was 33%, and debt service was more than 2.5% of GDP. What happens if real interest rates rise? First off, the Fed has made clear this won’t happen in the near term. Secondly, once we borrow the money, rising interest rates make no difference until and unless the debt has to be rolled over into new bonds with higher interest rates. Since I’m talking about paying off this debt primarily with state and local tax revenue over the next decade, rising interest rates wouldn’t matter.
Secondly, the debt as it exists today is primarily a function of four variables: tax revenue, health care costs, defense spending, and entitlement spending for old folks. Taming the budget means addressing all of these. It does not mean “we can’t afford to fix our collapsing infrastructure.” I’m talking about spending $250 billion per year for three years on infrastructure – this is less than 15% of the projected costs of defense, Medicare, Medicaid, and Social Security. Want to pay for it with budget cuts? Fine – you know where to look.
But if we cut these programs by $750 billion for three years, we’ve done nothing to address the long-term fiscal problems of the country; health care costs are still rising, people are still getting old, Social Security will still be increasing too fast and being paid to people who don’t need it, and we might still be collecting far too little revenue to support the government the people appear to want.
Buy the infrastructure now with impossibly cheap money using workers who aren’t doing anything else. Read on for the fun economics argument.