Saturday, July 05, 2014

Paul Krugman explains how public disinvestment in infrastructure, in addition to being stupid in itself, also helps undermine US economic recovery from the Great Recession

(Total public spending on construction, adjusted for the price level [GDP deflator] and population growth; 2007IV=100:)

As I've mentioned in the past, I often find myself facing a dilemma when I read Paul Krugman's New York Times columns. With remarkable consistency, they almost always provide clear, cogent, insightful, and illuminating analyses of important issues. So I'm often tempted to quote from or reproduce them, or at least cite them and link to them. But precisely because they're so consistently good, I worry that if I start doing that for some of them, why not do it for all of them?

But every once in a while I feel I should overcome that hesitation. Tuesday's column by Krugman (see below) provides one good occasion for that.

First, some background. One of the reasons that recovery from the economic crash of 2008 in the US has been so slow and unsatisfactory is that it has been politically impossible to pursue the kinds of policies that would help improved matters. Ever since the Great Depression of the 1930s, it has been clear—except to economic illiterates and people with a quasi-theological commitment to pre-Keynesian economic dogmas—that in almost all cases the right response to a major economic downturn should include counter-cyclical fiscal policy. That means, among other things, that while the economy is still recovering from a serious recession the government should be running a deficit (unless there are some very special constraining circumstances) to boost overall demand and help stimulate the economy.

It may seem common-sensical to say that in hard times, when families have to "tighten their belts," governments should also tighten their belts and cut back on spending. In fact, a depression or recession is a good time to increase public spending (except, again, in some rare and special circumstances). Cutting public spending and government deficits during such periods—a package of policies now often referred to as "austerity"—has contractionary effects on the economy. "Austerity" policies make a bad situation even worse or, best, undermine economic recovery (as the experiences of Britain and a number of other European countries since 2008  have once again demonstrated).

In 2009, fortunately, it was possible to pass the so-called economic stimulus (the American Recovery and Reinvestment Act) here in the US, despite almost monolithic Republican opposition. The 2009 stimulus was probably too small (as a number of economists warned at the time), and it could have been better designed in various ways. But it did help to pull the economy out of free fall and almost certainly prevented the Great Recession from going over the edge into another Great Depression. Since then, however, especially if one takes into account state and local governments as well as the federal government, the US has been pursuing contractionary fiscal policies to a degree unprecedented since World War II—with predictably unfortunate results.

This has been perverse as well as harmful. There is certainly no lack of obvious candidates for useful spending on public investment. All over the country, for example, we have aging, outdated, or even crumbling infrastructure that needs to be repaired, updated, or otherwise improved. There are also a lot of unemployed construction workers and under-utilized construction firms, along with plenty of other under-utilized capacity in the economy . And this is a moment when the US government can borrow money at absurdly low interest rates. If that money were invested in repairing and modernizing the country's infrastructure, it would help reduce unemployment and stimulate the economy in the short run, and would also yield important long-term benefits. (If the idea of using borrowed money for this purpose sounds alarming, it's worth bearing in mind that business firms routinely borrow money to make long-term investments. Sometimes they do it wisely and sometimes they do it unwisely, but anyone who argued that they should never do it would be considered bonkers.)

Even if the government didn't use borrowed money for this purpose, but found ways to pay for it that didn't increase the short-term deficit, this would still be a very wise public investment with short-term benefits as a bonus. (Even some Republicans claim to agree with this, though not ones currently in Congress.). In fact, it seems crazy not to not to seize this opportunity.

Instead, as the graph above illustrates, overall public spending on construction in the US has been dropping sharply since 2009 (when the effects of the federal "stimulus," which had temporarily counteracted the effects of sharp cutbacks in state government budgets, began to peter out). More generally, rather than increasing public investment in infrastructure, on balance we have been engaged in a process of public disinvestment in infrastructure at every level of government.  As Krugman correctly points out:
In policy terms, this represents an almost surreally awful wrong turn; we’ve managed to weaken the economy in the short run even as we undermine its prospects for the long run. Well played!  And it's about to get worse.  [....]
Why on earth would we be doing something so obviously unwise, harmful, and perversely self-defeating. The short answer, which actually captures a lot of the explanation, is that the Republicans are the problem. A more complete answer would take longer to spell out. As a start, read Krugman's very useful and informative account of this folly. Unfortunately, this is just one example of some larger pathologies in current US politics.
We can’t simply write a check to the highway fund, we’re told, because that would increase the deficit. And deficits are evil, at least when there’s a Democrat in the White House, even if the government can borrow at incredibly low interest rates. And we can’t raise gas taxes because that would be a tax increase, and tax increases are even more evil than deficits. So our roads must be allowed to fall into disrepair.

If this sounds crazy, that’s because it is.  [....]  [E]veryone from progressive think tanks to the United States Chamber of Commerce thinks we need good roads. Yet the combination of anti-tax ideology and deficit hysteria (itself mostly whipped up in an attempt to bully President Obama into spending cuts) means that we’re letting our highways, and our future, erode away.
—Jeff Weintraub

========================================
New York Times
July 3, 2014
Build We Won’t
By Paul Krugman

You often find people talking about our economic difficulties as if they were complicated and mysterious, with no obvious solution. As the economist Dean Baker recently pointed out, nothing could be further from the truth. The basic story of what went wrong is, in fact, almost absurdly simple: We had an immense housing bubble, and, when the bubble burst, it left a huge hole in spending. Everything else is footnotes.

And the appropriate policy response was simple, too: Fill that hole in demand. In particular, the aftermath of the bursting bubble was (and still is) a very good time to invest in infrastructure. In prosperous times, public spending on roads, bridges and so on competes with the private sector for resources. Since 2008, however, our economy has been awash in unemployed workers (especially construction workers) and capital with no place to go (which is why government borrowing costs are at historic lows). Putting those idle resources to work building useful stuff should have been a no-brainer.

But what actually happened was exactly the opposite: an unprecedented plunge in infrastructure spending. Adjusted for inflation and population growth, public expenditures on construction have fallen more than 20 percent since early 2008. In policy terms, this represents an almost surreally awful wrong turn; we’ve managed to weaken the economy in the short run even as we undermine its prospects for the long run. Well played!

And it’s about to get even worse. The federal highway trust fund, which pays for a large part of American road construction and maintenance, is almost exhausted. Unless Congress agrees to top up the fund somehow, road work all across the country will have to be scaled back just a few weeks from now. If this were to happen, it would quickly cost us hundreds of thousands of jobs, which might derail the employment recovery that finally seems to be gaining steam. And it would also reduce long-run economic potential.

How did things go so wrong? As with so many of our problems, the answer is the combined effect of rigid ideology and scorched-earth political tactics. The highway fund crisis is just one example of a much broader problem.

So, about the highway fund: Road spending is traditionally paid for via dedicated taxes on fuel. . The federal trust fund, in particular, gets its money from the federal gasoline tax. In recent years, however, revenue from the gas tax has consistently fallen short of needs. That’s mainly because the tax rate, at 18.4 cents per gallon, hasn’t changed since 1993, even as the overall level of prices has risen more than 60 percent.

It’s hard to think of any good reason why taxes on gasoline should be so low, and it’s easy to think of reasons, ranging from climate concerns to reducing dependence on the Middle East, why gas should cost more. So there’s a very strong case for raising the gas tax, even aside from the need to pay for road work. But even if we aren’t ready to do that right now — if, say, we want to avoid raising taxes until the economy is stronger — we don’t have to stop building and repairing roads. Congress can and has topped up the highway trust fund from general revenue. In fact, it has thrown $54 billion into the hat since since 2008. Why not do it again?

But no. We can’t simply write a check to the highway fund, we’re told, because that would increase the deficit. And deficits are evil, at least when there’s a Democrat in the White House, even if the government can borrow at incredibly low interest rates. And we can’t raise gas taxes because that would be a tax increase, and tax increases are even more evil than deficits. So our roads must be allowed to fall into disrepair.

If this sounds crazy, that’s because it is. But similar logic lies behind the overall plunge in public investment. Most such investment is carried out by state and local governments, which generally must run balanced budgets and saw revenue decline after the housing bust. But the federal government could have supported public investment through deficit-financed grants, and states themselves could have raised more revenue (which some but not all did). The collapse of public investment was, therefore, a political choice.

What’s useful about the looming highway crisis is that it illustrates just how self-destructive that political choice has become. It’s one thing to block green investment, or high-speed rail, or even school construction. I’m for such things, but many on the right aren’t. But everyone from progressive think tanks to the United States Chamber of Commerce thinks we need good roads. Yet the combination of anti-tax ideology and deficit hysteria (itself mostly whipped up in an attempt to bully President Obama into spending cuts) means that we’re letting our highways, and our future, erode away.

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