Fostering Economic Growth

At Atlantic former Fed Governor Narayana Kocherlakota states the problem:

During the last two U.S. presidencies, from the end of 2000 to the middle of 2016, the most important measure of prosperity — economic output per capita — has grown at the anemic pace of less than 1 percent a year. Over roughly the same period, median inflation-adjusted income has actually fallen for several major demographic groups (including by a shocking 10 percent for black males).

and then proposes his solutions. In reference to his statement of the problem I suspect that if you consider only black males who are not college-educated immigrants or the children of those immigrants, the number is much higher. Sadly, two of his three proposed solutions will do very little for that group.

His proposed strategies for fostering growth are:

• Infrastructure spending
• Suspending all or part of the payroll tax
• Provide a small guaranteed annual income

In his remarks on infrastructure spending he relies on the ASCE report. As I’ve pointed out previously, the report is misleading because it only analyzes the condition of individual roads and bridges rather than whether they’re worth restoring. Consequently, the report tends to overstate the problem. There are thousands of rural roads and bridges that are in disrepair for a good reason: they’re unused.

For an infrastructure building program to provide stimulus, it needs to be a federal program funded by expanding the money supply, i.e. “deficit spending”, given as block grants to the states. For it to be prudent the projects funded need to be worthwhile.

Take the case of the “Hillside Strangler”—the interchanges at the intersection of I-88 and I-290 here in suburban Chicago. Billions have been spent rebuilding those interchanges to practically no effect because it’s not an infrastructure problem but a classic case of just plain too many cars. The most it accomplished was pushing congestion to the east.

I would also caution that infrastructure spending just isn’t doesn’t provide as effective a fiscal stimulus as it used to because we no longer build roads with large gangs of workers armed with shovels. More could probably be accomplished if Davis-Bacon wage rules were suspended but that’s political kryptonite.

Turning to the proposal to suspend the employer portion of FICA, I’ve advocated that for years. I think that one of the greatest errors of the Pelosi-Reid Congress was reinstating the payroll tax. Its suspension was the most effective stimulus applied during the Great Recession.

The final guaranteed annual income proposal would be most effective as fiscal stimulus if provided via deficit spending. If, as has been suggested, low growth is not due to inadequate personal consumption expenditures but due to too much debt (“balance sheet recession”), a more targeted approach would probably be more effective.

Stimulating personal spending isn’t as effective a fiscal stimulus as it used to be, either. We just don’t make enough of what we consume and because of the changes in distribution, inventory, and sales of the last twenty-five years, retailers don’t add capacity when sales go up. Manufacturers in Germany and China do.