Building stuff is better than nothing

John Cochrane, the University of Chicago Booth Business School finance professor and blogger, has an op-ed in the Wall Street Journal about fiscal stimulus. Cochrane thinks stimulus isn’t the answer, and cites his own research to show that the economic models used to justify stimulus spending are on shaky ground. Instead, he thinks that erratic government policy, taxes, regulation, and ham-handed attempts at redistribution are to blame.

I’m sure a lot of bloggers will jump in to counter Cochrane’s points ― David Glasner, for example, has a rebuttal already. I could write an article about how I agree with some of his points (I like his paper on New Keynesian models) and disagree with others (the alternative explanations he suggests have trouble explaining the Great Recession itself).

But I’m not going to write that article, because, frankly, this debate is kind of over.

There’s very little use in arguing about Keynesian stimulus spending, because no new Keynesian stimulus is on the table. In fact, there hasn’t been serious consideration of a major new stimulus for years now.

What’s more, I think we’re starting to understand the political economy of stimulus itself ― when it is and isn’t feasible. Basically, when output is collapsing ― in the first few scary days of a recession ― we always do some kind of stimulus. Bush did it, Obama did it. As legendary macroeconomist Robert Lucas put it: “I guess everyone’s a Keynesian in the foxhole.” But once the economy is out of the foxhole, support for Keynesian spending dries up ― witness the failure of Clinton’s attempt at stimulus in 1993 (two years after the end of the 1991 recession). Also, observe that despite repeated calls for new stimulus by Paul Krugman and Larry Summers ― almost certainly the world’s two most famous academic economists ― the Obama administration has given no sign of listening. Even back in the 1970s, when Keynesian economics reigned supreme, the idea that Congress could stabilize the economy had mostly been set aside in favor of the notion that this was the Federal Reserves ’s job.

So whether Cochrane or Krugman is right, stimulus of the pure Keynesian kind just ain’t happenin’. We need to think about what can be done to pull the economy out of its slump. Cochrane and his fellow-travelers propose a sweeping program of deregulation and dismantling of the welfare state, but that is also politically unlikely. One measure they endorse ― the ending of extended unemployment benefits ― has already been done, but so far doesn’t seem to have forced many people back to work.

So what to do? Well, there is one idea that has the potential to appeal to both Keynesians and structuralists: repair our infrastructure. This is what Larry Summers is pushing for right now:

Who here is proud of Kennedy Airport?” Summers asked the audience. Not a hand went up ... Summers seemed almost incredulous that the nation isn’t taking a golden opportunity to fix its crumbling infrastructure: “At a time when we can borrow for way below three percent and construction unemployment is high, why aren’t we building?

If infrastructure spending happens, people will undoubtedly label it “stimulus,” but the truth is that it’s something else entirely ― you don’t need a Keynesian multiplier to make it work. Let me quote Cochrane himself, from 2012:

Let’s be clear what the “fiscal stimulus” argument is and is not about ... (it is not) about debt financing of “infrastructure” or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn’t justify all “infrastructure” roads and rails to nowhere, of course.

So there are at least two big non-Keynesian reasons to unleash a wave of infrastructure spending right now. The first is that interest rates are low. Interest rates represent the government’s cost of capital, and as every MBA knows, you invest when the cost of capital is low. Second, America has an infrastructure deficit, as this McKinsey report makes clear. Some countries, such as Japan, spend too much on infrastructure, but we spend too little, and our roads, bridges and airports are in disrepair.

Now, conservatives and structuralists will naturally worry that infrastructure spending will be distributed inefficiently, going to wasteful pork instead of productive uses. That’s a valid worry, and it’s a reason why we should also try to encourage private investment in infrastructure, as Summers suggests. It’s also a reason to have organizations such as the American Society of Civil Engineers help oversee infrastructure-spending decisions. Another worry is the high cost of infrastructure in the U.S.; bringing costs down will actually involve making a lot of reforms that conservative structuralists like Cochrane probably would like, such as shortening environmental reviews and administrative costs, and allowing infrastructure contractors to pay lower wages.

So there is the chance here for a bipartisan deal on a policy to help boost our economy out of its continuing doldrums. Infrastructure spending can appeal to both Keynesians and anti-Keynesians. Let’s do it!

By Noah Smith

Noah Smith is an assistant professor of finance at Stony Brook University. ― Ed.

(Bloomberg)