the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.
Pointer from Mark Thoma.
If we assume that government invests perfectly rationally and efficiently, then I think we have to agree that infrastructure spending is likely to be a free lunch. That is because it is impossible for the private sector to allocate resources perfectly rationally and efficiently.
Of course, in order to assume that government spends money rationally and efficiently, one has to ignore public choice theory. A bridge to nowhere is not a free lunch. A huge loan guarantee to a “green energy” company that goes bankrupt is not a free lunch.
In the real world, human fallibility does not disappear when the decision-maker crosses from the private sector to the public sector. In my area, a highway called the “Inter-County Connector” has cost billions of dollars, caused construction-related disruption for years, and carries almost no traffic. A “transit center” near where I live was structurally unsound, and the excess costs probably will be in the billions. No free lunches there, either.
But, why, Dr. Summers, are resources “unemployed?”
We can admit that there are surpluses (particularly noted in large production and distribution enterprises) which are substantially “sequestered,” by managerial motivations (reserves for future power, avoidance of risks, avoidance of exposures of innovation limitations, etc., etc.).
And where there is not absolute or total sequestration, the redeployment flows are slow and hesitant.
Why are we not discussing those features and their causes, let alone possible “remedies?”
Summers is engaging in the usual “blackboard economics,” to use Coase’s terminology. Assume perfect rationality and the absence of any form of government failure and an omniscient decision maker will allocate our public resources in an optimal manner. It’s sad to see someone with Summers’s background and intellect engage is this form of “analysis” or rhetoric.
“It’s sad to see someone with Summers’s background”
On the other hand, you might say that the background explains the approach. With his lineage, his choices may have been to keep the unrealistic assumptions or leave the family.
Summers has been conspicuously and publicly active lately, and I think his standards of rigor have slipped in these presentations. It’s fun to speculate on what his latest game might be (the NYT describes his new role as a ‘provocateur’).
For example, his latest paper says the Treasury produced ‘crosswinds’ against the Fed’s efforts to shape the bond yield curve by taking advantage of low rates and issuing more long-term notes, thus undermining the intended impact by about a third by increasing the supply.
But … this doesn’t seem to make any sense. The Treasury has to fund the deficit, and it is easily foreseeable that they would be financially strategic in their selection of a maturity profile.
On the other hand, as Scott Sumner says, “The Central Bank always acts last,” and just as it can always neutralize any undesirable inflationary impact of Fiscal Stimulus produced by Congress (which I think Sumner says neutralizes the stimulus itself), it can neutralize any undesirable maturity portfolio distortions produced by the Treasury by buying up what it deems to be excessive supply.