Tuesday, 1 October 2013

Infrastructure spending is NOT A GOOD WAY of curing recessions.

Every time there’s a recession, hoards of economic illiterates come out the woodwork claiming that increased spending on infrastructure would help solve the problem. Aziz trotted out this myth or something very close to it in the last 24 hours or so.  For the billionth time, the flaw in that idea is as follows.

Infrastructure spending JUST CAN’T by increased and decreased at the drop of a hat: relevant skilled labour may not be available and relevant capital equipment may not be available. Or in more general terms, CONCENTRATING stimulus spending on a few sectors of the economy is totally daft. It’s far better to spread stimulus spending relatively widely: throughout the public AND PRIVATE sectors.

And before some twit accuses me of saying we don’t need more infrastructure spending, I’m not saying that. I.e. it may well be that we need more infrastructure. But if we do, the best policy is to increase infrastructure spending relatively GRADUALLY over the next 5 years or so.

The New Economics Foundation makes much the same mistake: they advocate spending stimulus money on SPECIFIC AREAS or sectors of the economy. Completely daft.


  1. I'd go further than that and say that public infrastructure investment should be covered by taxation in a balanced way. Not necessarily hypothecated but covered.

    That's because we need that investment regardless of economic conditions. School investment relates to the number of pupils expected, not the current weather in the City of London.

    The counter-cyclical response should come from another mechanism - preferably enhanced automatic stabilisers.

    1. Neil,

      I’m a bit sceptical about “enhanced automatic stabilisers”. What do you mean by the phrase? If by that phrase you mean a big increase in unemployment benefit, that is problematic in that it decreases the incentive to look for work.

      A decent job guarantee scheme would be a better automatic stabiliser.

      Another possible form of enhanced automatic stabiliser would be an automatic increase in the deficit by X% for every percentage point by which unemployment exceeds Y%. But that has problems as well.
      Obviously the higher is unemployment, the larger the deficit needs to be, but isn't it better to leave the EXACT SIZE of the deficit to the central bank interest rate committee and/or the finance minister and/or some sort of fiscal responsibility committee? If the decision on the size of the deficit is left the latter committees / individuals, they then they POTENTIALLY have the ability to do something more refined than the above X% and Y%. E.g. they can look at the extent to which inflation is cost push rather than demand pull and adjust the deficit accordingly.

    2. Infrastructure spending is just better than other nefarious ways of increasing demand in the economy. Dianne Abbott suggested paying the public sector higher wages.


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