Final Response to the Stimulus Debate

Round One (John)
Round Two (Pablo)
Round Three (John)
Round Four (Pablo)
Round Five (John)

Ok, so this is my final response to the stimulus debate. There is a lot more both I and John could say, but, alas, there is other fish to fry. I think John wanted to debate tax policy next. I want to make sure that it is clear in the minds of everyone that I am not excited about government spending as a tool for stimulating the economy. The problems with those kinds of stimulus packages are that they often lead toward a more entrenched government. In normal times, I would advocate other tools (monetary policy, tax cuts, and deregulation). However, we are not in normal times. John asserts that the recession ended. Yes indeed. However, I think that most economists worry that we are dangerously close to double dipping backing into recession. Europe is even closer to the edge and as John rightfully says – our ailments are global and are related to the Euro crisis. I want to leave this debate stating one way in which I think John is right and one way in which I think I am right.

Stimulus Debate: Round five

Round one (From John)

Round two (From Pablo)

Round three (From John)

Round four (From Pablo)

First, this whole stimulus debate got me thinking of a video published earlier this year by Econstories. If you haven't yet seen it, this is a great time:

Now, on to Pablo's post:

Pablo makes an important point about transportation and how there are more "shovel-ready" projects when it comes to highways. These projects take less time to plan, in particular if they only involve reparations, and they can indeed be highly economically efficient. I agree it's hard (although not impossible) for the private sector to build roads and highways, although I believe the private sector to be fully able to build and maintain railroads and airports (since it's easy to restrict access to those, which is not the case with regular roads).

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).

My response to Pablo

Recently I wrote a post about David Frum and criticized him for his view on the deficit. Frum argued that the deficit is not an urgent issue, but rather something we can deal with when we want to, when we happen to feel for it, sometime a few years from now or so.

First of all, I'm happy Pablo took the time to respond. I really want us to have more intellectual debates here at RightSpeak and I know that both him and I are trying to contribute to that. Pablo is a fellow conservative whom I respect a lot, in particular for the fact that he always expresses his views even when he knows that they are unpopular.

Now, to the subject:

Pablo assures me that government borrowing to invest in infrastructure would have a positive return, far above 2 %, but ignores one very important thing:

It is impossible to stimulate the economy by investing in infrastructure.

This is because infrastructure investments take so long time. You can't just build a bunch of airports in the middle of nowhere and think that that will somehow help the economy, you have to plan where to build them, how big they should be, how many terminals and gates they should have etc. If we decide to build an airport today, it may well take five years or more before it's actually finished and actually contributing to the economy. Since the point of stimulus is to help the economy NOW, not in five years when the economy might have recovered on its own and might be on its way to becoming overheated, it doesn't really work.

Yes, we'll create a few jobs for architects in the meantime, and after they've made the layout for the airport we'll create a few more jobs for construction workers, but the real contribution to the economy that an airport provides comes once it's finished - and like I said, that's way too late to be considered an efficient stimulus in a recession.

The same goes with railroads (where to put them, how to deal with houses that might be in the way etc), roads (where, what kind of roads etc) and basically every other infrastructure investment. They're too slow.

David Frum is wrong: Deal with the deficit now

David Frum is a moderate Republican. That's not news to anybody. Yet, recently in an interview he was quoted as saying something that most Republicans (even those who think so - and there are a few) wouldn't dare say aloud: That the US shouldn't really care about the deficit right now and instead focus on creating jobs - ie, more stimulus.

He said, and I quote:

"There's lots of time to worry about the deficit. The world is happy to lend the United States money for 10 years at less than 2%. I say keep borrowing as much of that money as you can and use the money to address the immediate trauma of an economy in crisis..."

So, that sounds reasonable enough, doesn't it? If the world is willing to lend you money at less than 2 %, then why not just do it before they change their minds?

What Frum says makes perfect sense in corporate finance. A company can issue bonds (which means borrow money) today and buy back their own stock if they believe the return they have to pay on the bonds are less than the return they have to pay on the stock. You can also borrow money even if you don't need it desperately, just because the rates you can get are really low right now and so you'll certainly find something you can invest in and get a better return on the money than the interest rate. For a company, there is typically an ideal debt level or an ideal debt-to-equity ratio (and the ideal amount of debt is very rarely zero).

For a country on the other hand, you're not really borrowing to get an absolute specific return - who can tell how much return, in %, you get from borrowing and investing in infrastructure? If you can borrow at 2 %, is it then worth it because an investment in infrastructure will yield a return of more than 2 %? Who's to tell? It's obviously a lot trickier for a government than for a private corporation. A government may borrow money for non-financial reasons; it may believe that it is the state's responsibility to provide infrastructure and so borrowing to invest in it becomes justified even if it's not justified financially. The goals of a government are so much more complicated than the goals of a company, and that makes everything governments do more complicated than when companies do the same thing.