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Tuesday, December 10, 2013

Fighting Deficient Aggregate Demand with Infrastructure Spending

Brad DeLong is "Pleased to See Martin Feldstein Wisely Calling for Large, Immediate Fiscal Stimulus to Boost Employment!":

I Am Pleased to See Martin Feldstein Wisely Calling for Large, Immediate Fiscal Stimulus to Boost Employment!, by Brad DeLong: But the rest of his column leaves me puzzled…
Martin Feldstein calls for the U.S. to fight deficient aggregate demand by spending an extra trillion dollars on infrastructure over the next five years–and then to keep that program from worsening the government debt-to-GDP ratio by also enacting tax increases and spending cuts that would bring the debt down to its baseline level between, say, years five and fifteen, by, say, 2028.
With idle labor and slack capacity at their current levels, the best bet is that such a program would boost total real GDP by at least $2 trillion over the next five years–and actually raise the government’s debt five years hence by at most $333 billion because of the federal, state, and local taxes that would be paid on the added income from higher real GDP.
But there is no need to also find the political will to reach agreement on longer-run tax increases and spending cuts in order to keep this program from worsening the long-run debt outlook..., an extra trillion dollars of infrastructure will boost U.S. national income in the long run by at least $40 billion a year–and the U.S. government will then collect $13.3 billion a year in extra taxes because of higher levels of income.
Thus Feldstein’s short-run program alone, without the hard-to-pass long-run component, would free up more than $7.8 billion a year of debt-amortization capacity: it would all by itself improve the long-run fiscal picture.
So why the focus on the need for a hard-to-pass long-run deal, and the unnecessary claim that it must be coupled to the short-run before what makes sense makes sense? It remains a mystery to me…
Also a mystery to me: just what is it that makes quantitative easing so risky? Keeping the U.S. economy in a situation of slack aggregate demand–yes, that is risky. But how is the Fed’s buying government bonds and holding them to maturity–even a lot of such bonds–risky? What is the risk? What might happen that would be bad, and couldn’t be neutralized? ...

He also points to Krugman's comments: My Favorite Martian.

    Posted by on Tuesday, December 10, 2013 at 09:14 AM in Economics, Fiscal Policy | Permalink  Comments (89)

          


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