Imagine this. In December of 2008, rather than arguing as he manifestly did that a fiscal stimulus of $800 billion spread out over three years was the perfect medicine for what ailed the U. S. economy, Lawrence Summers had stated what was already obvious—that the stimulus that the Obama Administration wanted was too small and that all of the $800 billion should be disbursed over the first 100 days of the Obama presidency. Yes, there would have been political pushback. There was already political pushback. And carrying water for politicians wasn’t his job. His job was giving economic advice not lending his PhD in economics to strength the president politically.
Apologists for the Obama Administration retort that we didn’t know how deep the recession was in early 2009. True enough. But we knew that there had been shortfall of more than 2% which is what the stimulus represented.
That’s why op-eds like this recent one in the Washington Post from Dr. Summers bother me:
There is a compelling case that infrastructure investments pay for themselves by expanding the economy and increasing the tax base. The McKinsey Global Institute has estimated a 20 percent rate of return on infrastructure projects. If the return is only 6 percent and the government collects about 25 cents on every dollar of GDP, the government will earn 1.5 percent on investments. This far exceeds the real cost of borrowing even over a horizon of 30 years. Debt financing of new infrastructure investment over the next few years would be entirely reasonable.
As my former business partner used to say, I agree with what he says but I will deny to the death his right to say it. Why wasn’t he pushing for more stimulus when it could actually do some good?
In Keynes’s thinking there was no “better late than never”. If shortfalls in aggregate demand were not compensated for on a timely basis, structural changes would take place in the economy. Hasn’t enough time passed? We’re in the long run and, believe it or not, Keynes said things other than that in the long run we’re all dead. If he taught that stimulus spending could increase aggregate product, I missed that.
Meanwhile, some other quibbles with Dr. Summers’s claims. Does he think that all spending is investment? Or does it matter where the investment is placed? Given the changes in personal transportation on the horizon, e.g. autonomous vehicles, ridesharing, over the life of a highway how much spending is investment and how much is just plain deadweight loss?
I also am skeptical about his ability to predict real interest rates 30 years out.
I found the source on the 20% return:
“MGI estimates that infrastructure typically has a socioeconomic rate of return of around 20Â percent. In other words, one dollar of infrastructure investment can raise GDP by 20Â cents in the long run. These economic effects stem mostly from making a given region more productive through means such as reduced travel time and costs, access to reliable electricity, and broadband connectivity that allows individuals and businesses to plug into the digital global economy.”
Bridging Global Infrastructure Gaps (June 2016) (pdf)
No wonder Summers reduced his expectations to six-percent returns, the optimal place for infrastructure spending is probably a third-world country.
While we’re making up numbers, why not .6%? Or .06%?
As I’ve written before, I think it’s more likely that the U. S. is overbuilt than underbuilt. We already have an interstate within 20 miles of every city of 100,000 population or greater. IMO the idea that we’d get the same (or greater) rate of return by building interstates for every city of 50,000 population or greater is suspect.
We have 152 bridges that cross the Mississippi. What’s the ROI on the 153rd?
Apologists for the Obama Administration retort that we didn’t know how deep the recession was in early 2009. True enough.
Horseshit. It was already clear that it was the worst economic crisis since the 1930s, and held that distinction by a wide margin. All the bullshit “we didn’t know how bad it was” is either the people in power not wanting to admit that their policies suck, or admitting that they’re clueless fucking idiots and that all their rhetoric in 2008 was just for show, and that they didn’t mean it. (The truth is probably that their policies are SOLID GOLD, because the billionaires and politicians all got richer, and most of the rest of us took it in the ass. Which for them is probably the best of all possible outcomes.)
Either way, the bastards need to be hung with their own words. And otherwise, for that matter. Let’s start with the economists. They won’t expect that, but they never expect anything that actually happens, so it will be par for the course for them.
My point was that defenders of the Obama Administration’s actions in 2009 are instantiating the “black or white” fallacy, i.e. the only alternatives were to be completely right or completely wrong.
Somewhat relevant, the local newspaper ran some numbers on federal highway spending in an article about the stoppage of a new interstate running from Alton (St. Louis) to the Quad Cities for lack of federal funding.
The head of the Department said that the federal funding that comes to Illinois for transportation projects is split 80 to 20 percent, with Illinois paying the entire project cost and the federal government reimbursing the state for 80 percent of it. “In the past, Brauer said, IDOT was able to use 73 percent of its budget for maintenance, 19 percent for congestion and the rest for new projects. Right now, the agency must use 93 percent of its budget for maintenance, he said, meaning a smaller slice of the pie for what are termed “expansion†projects, or those that upgrade existing roads like U.S. 67.” Link
I found the maintenance, versus congestion, versus new projects interesting and useful. I would like more arguments for increased highway spending to reference which is being discussed.
To provide a little context for PD’s comment above, Alton’s population is under 30,000 people. Davenport, the largest of the Quad Cities, has fewer than 100,000 people. The largest city between Alton and the Quad Cities is Quincy, Illinois with a population of around 40,000.
I’ve driven between Alton and Quincy on occasion. It’s not an easy drive but IMO if the ROI on building a highway between them had been 20% or 6% it would have been done long ago.
The article cited by PD does not specify whether the changed distribution was due to a change in federal or state requirements. My impression is that it’s a change to state requirements.
UPDATE:
It’s a federal requirement and is summarized here (PDF). It’s a provision of the FAST Act (Fixing America’s Surface Transportation, PL 114-94).
Take a ride through Kentucky. The whole damned state highway system is under construction. The ROMMV is huge.
The return on Mitch MConnell vote that is….
It’s good to be king. Or Senate Majority Leader which amounts to the same thing.
Dave: “The article cited by PD does not specify whether the changed distribution was due to a change in federal or state requirements. My impression is that it’s a change to state requirements.”
Good question; I asked my relative in IDOT and he didn’t know, but he pulled out some plans for a road resurfacing job for a U.S. (non-interstate) route and on the top corner it said the fed/state share on the project is 90/10. I thought it was interesting to have blueprints with that information on the first page, and reinforces my view that how the feds pay/reimburse highways are creating important incentives. The highway in this plan is in no less a remote area of the state and is having one-inch of asphalt stripped for resurfacing, probably _in my speculation_ because there are projects with less of a rate of return than 90/10 for the State.
I just saw the update; will take a look at it.
Way too long to read, but if the feds are requiring more attention to maintenance of existing highways, then sounds great. That seems to be the correct response to the complaint about crumbling infrastructure. But that’s not going to create the ROI comparable to connecting people in third-world countries to larger trade networks. And maintenance is something that needs to be done regularly and cannot be done too frequently without waste.