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Investment in infrastructure is a no brainer

NYTimes comic strip that gets economics right, which is more than you can say about most pundits and a good chunk of the profession.

Comments

  1. Infrastructure investment as a way out of recessions are a bad idea. First, many such projects take years to plan and get started, by which time the recession may be over. Second, interest rates are low at least to some extent for an artificial reason: central banks have cut those rates.

    For an optimum allocation of resources, prices (including the price of borrowed money) should be at free market rates.

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    1. Hi Ralph, thanks for the comment. First, I'm very skeptical of the argument that there are no ready made projects. Look at the experience of the WPA in the 1930s. And the engineers have had a report on all the upgrades needed for infrastructure for years (US gets a D grade).

      On the interest rate, there is nothing artificial about central banks keeping them low. That's what happens in a world where a natural rate of interest does not exist. Note that your comment is about what interest rates "should be" in a free market, but alas that's not what they are.

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    2. I didn’t actually say there were “no ready made projects”. I said “many such projects take years to plan and get started”. That’s certainly true of the projects that featured in your cartoon: bridges, sewage systems, transit systems, and school buildings.

      Next , 90% of the unemployed do not have skills relevant to the latter projects. And just in case anyone wants to claim there are loads of construction workers unemployed as a result of the downturn on house construction caused by the crunch, that is not true: the evidence is that former construction workers have found no more difficulty getting alternative work than those losing jobs in other sectors.

      Next, why skew the economy towards infrastructure projects in a recession? I.e. why not boost ALL TYPES of economic activity? That way, far better use will be made of the variety of skills amongst the unemployed. One might as well skew the economy towards farming, car production, restaurants, you name it.

      Re interest rates, the RELEVANT rate is the rate that will apply over the lifetime of the capital investment: 20 – 50 years? And the crunch has had no discernible effect on the 30 year rate. The only major change in that rate since WWII was the big spike during the 1970-80 inflationary episode. But that was not so much a rise in the REAL or inflation adjusted rate: it was a rise in the nominal rate to take account of expected inflation.

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    3. There is one simple reason, it is needed, and it's good for growth. The notion that skills are not available is not credible. There are lots of simple jobs that require little skills, and for those that do need, you can always get immigrants. And yes this has multiplier effects, so overall is good.

      And on the interest rate the long run interest (which is not 50 years, longest bonds are 30, and nobody thinks that bonds of 10 years are not relevant for investment) are influenced indirectly with the base rate and directly (QE is basically that) by the Fed. THat's why they are low.

      During the Depression Eccles guaranteed that long term interest on government bonds should not be above 2.5%. I would rather do what Jamie Galbraith suggests and get an Infrastructure bank with public money, but that's not essential.

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