Scott Sumner  

Infrastructure is not fiscal policy

PRINT
Bugs... The Case for Allowing Cash...

A recent comment started off as follows:


Suppose someone had a fetish for fiscal policy and infrastructure

Using the construction of infrastructure for fiscal policy purpose does NOT get you any more infrastructure than not using it for fiscal policy purposes. It gets you a more countercyclical timing of infrastructure spending. Thus you do more infrastructure spending than usual when unemployment is 10%, and less infrastructure spending than usual when unemployment is 4.9%. The average level of spending is unaffected. At least that's the standard Keynesian model. If you do more infrastructure spending at all points in time then that's no longer fiscal policy, as the term is normally defined. It's no longer countercyclical.

I do recognize that many Keynesians no longer look at things this way---that ad hoc models have been created to justify a preference for more infrastructure. But I think we need to be very careful here.

Economics will never be taken seriously if it becomes a set of "now more than evers", that is, if we ex post adjust our models as needed to justify our current policy preferences.

Economics as a field needs to have well established models that can be taken off the shelf during a recession, and used in the fashion envisioned by the model builders. Thus over the two decades prior to 2007, I wrote papers on the following:

1. Target NGDP.

2. Target the forecast, preferably using market forecasts.

3. Japan's liquidity trap was actually an excessively tight money policy.

4. Central banks never run out of ammunition.

5. Monetary policy is preferable to fiscal policy at the zero bound.

6. The current setting of monetary policy matters much less than changes in the expected future path of policy.

7. Temporary currency injections will have little or no impact on the price level.

When the Great Recession hit, I was able to take these models off the shelf, and use them in my blog.

In contrast, prior to 2007, no one (AFAIK) was suggesting that infrastructure spending is a sensible countercyclical tool when unemployment is 4.9%. And if someone did recommend it, they almost certainly recommended LOWER than usual spending at 4.9% unemployment.

None of this means the current proponents of infrastructure spending are necessarily wrong. Just that (unlike market monetarists) they cannot point to a pre-existing set of published papers that justify their views. Their recommendations are ad hoc, in the worst sense of the term.

For example, one recent justification for more infrastructure spending at 4.9% unemployment is to raise the Wicksellian equilibrium nominal interest rate. If you had polled 100 elite economists back in 2007, and asked them "what is the best way to raise the Wicksellian equilibrium nominal interest rate", I'd guess roughly 100 would have suggested a higher inflation target, and roughly zero would have recommended more infrastructure spending at 4.9% unemployment. Today there would be many economists on each side.

I have more confidence in their 2007 views---and mine.


Comments and Sharing






COMMENTS (6 to date)
Anonymous writes:

Economics will never be taken seriously...--Scott Sumer.

Actually, I agree with this excellent post.

But do economists suffer from Brian Caplan's description of innumeracy?

The amount of infrastructure spending proposed by either Clinton or Trump easily by annual $1 trillion outlays for "national security."

BTW why not beautiful hanging gardens lining freeways? With statues and splendid bas reliefs. Is there a reason everything has to be ugly?

Rajat writes:

You think things are strange in the US - people are saying the same things in Australia about the need for more infrastructure to stimulate the economy despite UnN being only a little higher, but the RBA's target interest rate still at 1.5% and the wrapper not yet taken off QE-type actions.

AntiSchiff writes:

Dr. Sumner,

I think two of the reasons some are calling for more infrastructure are,

1. Many think the US needs it anyway. Put Larry Summers is an example.

2. Some liberals erroneously believe fiscal stimulus is necessary to maintain growth even on a secular basis. Examples are Robert Reich, Bernie Sanders, and apparently, Hillary Clinton. It also includes the MMT sorts.

This latter myth is one Krugman has taken on in a blog post or two over the years, but a lot more debunking of this myth is needed.

AntiSchiff writes:

I guess I should also point out that Summers is also is guilty of reasoning from a price change when he argues that ultra-low interest rates reduce the costs of fiscal stimulus, further justifying such spending. Such logic is the sort that would bring the US ever closer to Japanification.

foosion writes:

Now more than ever-ism? How about:

Times are bad, we must cut federal income tax rates (to stimulate) and we must cut government spending (we can't afford it).

Times are good, we must cut federal income tax rates (return money to the people) and we must cut government spending (not needed).

BTW, is there any good argument that we don't need functioning roads, bridges, street lights and other infrastructure or that the market would produce enough of it without government?

Scott Sumner writes:

Lots of good comments, don't have much to add.

Foosion, Agree with your first point about taxes. On the infrastructure, there certainly is a good argument that the government should not spend more on infrastructure right now. And that's an overwhelmingly strong argument that the government should not spend more on infrastructure right now FOR THE PURPOSE OF BOOSTING AD.

I'd like to see us privatize as much infrastructure as possible.

Comments for this entry have been closed
Return to top