Thursday, December 29, 2011

The Debate Over Stimulus Continues (Round Four)

Round One (From John)
Round Two (From Pablo)
Round Three (From John)

I am pretty sure nobody is paying attention to John and me anymore, but I think this is an issue that ought to be hashed out among conservatives. A little review first. John has made the assertion that the United States government should not borrow any more money. His argument rests on two ideas. First, infrastructure spending does not stimulate the economy. Second, our debt will not be paid off and thus we will lose our low interest rates. I agree with some of the points that he makes and I disagree with some. Let’s start with the first argument.

John states that infrastructure spending cannot work because it takes too long to implement. He gives us two examples to prove his point: airports and railroads. Agreed. Neither of those are “shovel-ready” programs. But this is not a good argument against infrastructure for many reasons. First, there are many “shovel-ready” programs that John doesn’t mention, like America’s decaying highway system. Building an airport takes a lot of time, but John only mentions the really long-term projects. Our roads require immediate attention and add millions of jobs in the short term. Second, those long-term projects are needed as well. As I mentioned in the last post, the American Society of Civil Engineers, who gave the United States an overall D on its infrastructure, has already detailed the cost to American taxpayers if we don’t repair and improve our infrastructure now. This goes beyond the immediate here and now of stimulus spending to prudent planning for the future (and long-term savings).

John rightly says that political corruption diminishes the effects that infrastructure spending could have. In all honesty, this is the part that causes me the most concern. President Obama spent $787 billion on a stimulus package. Roughly 1/6th of that package was spent on infrastructure. Only $48 billion was spent on transportation. The rest came in the form of tax cuts and “earmarked” buy-offs to individual congressmen. The problem with a stimulus package is that any president will need a majority in Congress to pass the bill and that often includes congressmen from opposing parties. As John points out, passing bills often involves buying congressmen off. This, however, is a political problem, not a policy problem. Creating and executing an effective infrastructure package will require a leader who is honest and who is adept at working across the aisle (who does that remind you of?).

Curiously, John argues that markets are better at determining infrastructure spending than the government. Normally I would agree with him. However, John’s position is more free market than Adam Smith. Even the father of capitalism believed that government must perform three functions: national defense, internal security, and the funding of public works. That last category is essential: private industries do not have an incentive to build interstate highways because they won’t make money off of it. That’s why Smith allowed for a government to take that responsibility. There is a reason why our infrastructure is lagging behind. Both the private and public sector have neglected it. If John is right about the free market, then we would never see roads deteriorating. But we do because the free market is not equipped to handle that kind of investing.

This all brings me to John’s second focus: the coming doom from borrowing. He criticizes me for not offering an explanation for why demand for debt is so high. I don’t offer an explanation for two reasons: (1) I agree with John’s assessment (i.e. there are no other options for investment among investors) and (2) why demand is high does not really interest me. The bottom line is that the United States has an opportunity to borrow money at a low rate. If or when this rate rises, then the United States would have a different deck of cards to play. But right now, their playing with a good hand. They should seize the day.

John says that people are getting used to government spending and so the US government will have a hard time shaking off its bad habits. He is right. This is why I have proposed that any stimulus package must come with a bipartisan, long-term debt-reduction plan. John is right to say that such a deal will be difficult given the bitter partisan environment. However, much like how only Nixon could open relations with the Chinese, the Republicans (Romney) will be in a prime position to work with the Democrats on introducing a VAT along with cuts to government spending. This is going to require a leader who can work with his opposition. Such a deficit reduction plan will help to mitigate the potential rise in interest rates in the long terms that John rightly worries about.

The weakness of my position on infrastructure spending and continued borrowing is that it would require bipartisan leadership. However, I don’t think we have any other choice. We are facing a crisis unlike anything that we have seen since the 1930s. We need a government that functions and that can bring people together. Even though I believe that I am right on the policy, I am worried that the partisan atmosphere in Washington has brought us to the point of no return.

Well, John, it is back to you. Note: I will need to get back to you on your comment regarding nations whose debt is over 90% of their GDP. I need to do some more thinking on that as well as read the paper that you linked us to.


Alan said...

I am following the discussion, and I have left comments before.
If government stimulus worked, we would be chugging along at high growth after a trillion in stimulus. Look at Japan, which has borrowed and stimulated for decades, and she still has a flat economy (not the fault of the tsunami). Take a look at the article by Mike Shedlock over at Townhall (Japan is a Powder Keg).

John said...

Thank you Pablo! I really enjoy this debate. It's great that we both manage to stay civil and find points of agreement. I seriously think the rest of RS has something to learn from us...

Today I'm going to travel north to attend an ice hockey game. My team is playing away and me and the other supporters will travel by bus to watch them. I'll be home sometime after midnight (swedish time) and so I don't know whether I'll have enough energy to finish my answer. I've began writing it and might have it finished before I go, but otherwise you'll get it on the 31st.