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Saturday, February 27, 2016

'The Cases for Public Investment'

This sounds familiar:

The Cases for Public Investment, by Paul Krugman: One of the annoying aspects of the Sanders/Friedman flap was the assumption of many Sanders supporters that anyone who doesn’t accept extravagant economic projections is against a big program of public investment. Actually, it was destructive as well as annoying; aside from being an insult to progressive economists who believe in infrastructure but also believe in arithmetic, it created at least the possibility that other people would take the crash-and-burn of a particular piece of analysis as evidence that the whole case for spending more is wrong.
So let’s talk about the cases for a lot more public investment right now. Yes, cases, plural. There are at least three reasons to conclude that we should be spending much more than we are.
The first case is simply that America has an obvious infrastructure deficit, and that it has never been cheaper to address that deficit. ...
The second case is a bit, but only a bit, harder: we are still in or near a liquidity trap, a situation in which cutting interest rates as far as possible isn’t enough to restore full employment. ...
You might ask, but are we still in that condition, given that the Fed has started to raise rates? Well, it shouldn’t have — it shouldn’t be raising rates until it sees the whites of inflation’s eyes. And it would take only a modest shock to push us well into negative-natural-rate territory again. Put it this way: the asymmetric-risks story many of us have been using to argue against rate hikes is also a reason to consider increased public investment a valuable insurance policy, giving the economy headroom that might turn out to be crucial if anything goes wrong. ...
Finally, there’s hysteresis: the proposition that demand-side weakness now breeds supply-side weakness later, so that there are big payoffs to boosting the economy through public spending. There’s now a lot of evidence for that proposition, with my only worry being that potential output isn’t an actual number, just an estimate that may tell us more about the dreary minds of international agencies than about real supply-side effects. More on that soon too. But it’s a further reason to spend more now, and to worry even less about any debt that we run up at today’s low, low rates.
The point is that perfectly standard, mainstream economics makes a powerful case for (much) more infrastructure spending. And this needs to be said often.

    Posted by on Saturday, February 27, 2016 at 10:46 AM in Economics | Permalink  Comments (206)


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