Monday, February 02, 2009

Fixing Underinvestment

Today brought a raft of comments and articles on the topic of investment in public goods, and the current opportunity to do something about this by way of the stimulus package. The best known prescription for pulling out of a recessionary economy which is too persistent to be solved by monetary policy is the Keynesian prescription for increased deficit spending, and the best option for that in terms of long term results is non-military investment in public goods.

Then, we have to build an economy that is green, innovative, efficient and equitable. These things improve the risk/return profile of the economy; they also allow you to have a successful economy for the long term.

These people get it:

David Leonhardt in the New York Times Magazine:

ONE GOOD WAY TO UNDERSTAND the current growth slowdown is to think of the debt-fueled consumer-spending spree of the past 20 years as a symbol of an even larger problem. As a country we have been spending too much on the present and not enough on the future. We have been consuming rather than investing. We’re suffering from investment-deficit disorder.

You can find examples of this disorder in just about any realm of American life. Walk into a doctor’s office and you will be asked to fill out a long form with the most basic kinds of information that you have provided dozens of times before. Walk into a doctor’s office in many other rich countries and that information — as well as your medical history — will be stored in computers. These electronic records not only reduce hassle; they also reduce medical errors. Americans cannot avail themselves of this innovation despite the fact that the United States spends far more on health care, per person, than any other country. We are spending our money to consume medical treatments, many of which have only marginal health benefits, rather than to invest it in ways that would eventually have far broader benefits.

Along similar lines, Americans are indefatigable buyers of consumer electronics, yet a smaller share of households in the United States has broadband Internet service than in Canada, Japan, Britain, South Korea and about a dozen other countries. Then there’s education: this country once led the world in educational attainment by a wide margin. It no longer does. And transportation: a trip from Boston to Washington, on the fastest train in this country, takes six-and-a-half hours. A trip from Paris to Marseilles, roughly the same distance, takes three hours — a result of the French government’s commitment to infrastructure.

These are only a few examples. Tucked away in the many statistical tables at the Commerce Department are numbers on how much the government and the private sector spend on investment and research — on highways, software, medical research and other things likely to yield future benefits. Spending by the private sector hasn’t changed much over time. It was equal to 17 percent of G.D.P. 50 years ago, and it is about 17 percent now. But spending by the government — federal, state and local — has changed. It has dropped from about 7 percent of G.D.P. in the 1950s to about 4 percent now.”


What will happen once the paddles have been applied and the economy’s heart starts beating again? How should the new American economy be remade? Above all, how fast will it grow?

That last question may sound abstract, even technical, compared with the current crisis. Yet the consequences of a country’s growth rate are not abstract at all. Slow growth makes almost all problems worse. Fast growth helps solve them. As Paul Romer, an economist at Stanford University, has said, the choices that determine a country’s growth rate “dwarf all other economic-policy concerns.”

Growth is the only way for a government to pay off its debts in a relatively quick and painless fashion, allowing tax revenues to increase without tax rates having to rise. That is essentially what happened in the years after World War II. When the war ended, the federal government’s debt equaled 120 percent of the gross domestic product (more than twice as high as its likely level by the end of next year). The rapid economic growth of the 1950s and ’60s — more than 4 percent a year, compared with 2.5 percent in this decade — quickly whittled that debt away. Over the coming 25 years, if growth could be lifted by just one-tenth of a percentage point a year, the extra tax revenue would completely pay for an $800 billion stimulus package.

Yet there are real concerns that the United States’ economy won’t grow enough to pay off its debts easily and ensure rising living standards, as happened in the postwar decades. The fraternity of growth experts in the economics profession predicts that the economy, on its current path, will grow more slowly in the next couple of decades than over the past couple. They are concerned in part because two of the economy’s most powerful recent engines have been exposed as a mirage: the explosion in consumer debt and spending, which lifted short-term growth at the expense of future growth, and the great Wall Street boom, which depended partly on activities that had very little real value.

Governor Schweitzer of Montana in the Daily Kos:

Schweitzer: What they did 25 years ago is they demagogued "environmentalists" and people who were pro-environment as people that are going to take away your logging job and your mining job. Well, as it turned out it wasn’t environmentalists who took your job away. It was mechanization and trade policy. My gosh, in Butte we’re mining as much ore with 380 as we did with 30,000 people in 1920. It’s mechanization. The timber industry—it’s mechanization and it’s cheap B.C. wood.... But, the Republicans managed to message it that it was environmentalists who took away your job, and it was always a question of the environment or your job, and people had to choose. And people chose, in big numbers, their jobs, and blamed it all on Democrats and on environmentalists.

All right. I don’t use those terms. [I say] "You’re going to be in a position where you can hand Montana off along to your grandkids in as good or better shape as when we found it." Now that doesn’t sound like a guy whose going to take away your job. And I’m not. In fact, with our restoration economy in Montana, heck, we’re creating jobs like crazy, cleaning up the messes from the past. Making the rivers cleaner, making the fisheries better. Improving the roads that we have in the forests so they don’t increase siltation and kill bull trout. All those are jobs. Heck, there’s as many or more jobs doing that than there was digging the holes or cutting down the trees in the first place.... So it turns out it was all a lie—jobs or the environment. To a large extent, what’s driving Montana’s economy today is people moving here to live in close proximity to those wildlands.

Barney Frank on This Week:

These people do not.

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