Stimulus vs Public Investment

A column by Nobel Prize winning economist Joe Stiglitz in the Financial Times makes what I think is an important point.

The current debate over fiscal policy for the US, Europe and Canada is often characterized in the media as one between advocates of  higher deficits from Keynesian style stimulus measures,  and advocates of lower deficits through public sector austerity.  Within this frame, the advocates of austerity are, of course, generally portrayed as “fiscally responsible.”

While progressive economists in the current context of very weak recovery certainly favour measures to create jobs and expand demand which may entail increases in short-term deficits,  the real need is  for a sustained public investment led recovery.  Beyond jobs now, we also need investments to boost medium and long term potential growth. Higher growth will reduce debt in a far more positive way than up front spending cuts.

New public investments can also be financed through fiscal measures, notably progressive tax reform,  which have a neutral impact on the deficit, but positive impacts on output and jobs.

Stiglitz writes:

“(t)he real answer, at least for countries such as the US that can borrow at low rates, is simple: use the money to make high-return investments. This will both promote growth and generate tax revenues, lowering debt to gross domestic product ratios in the medium term and increasing debt sustainability. Even given the same budget situation, restructuring spending and taxes towards growth – by lowering payroll taxes, increasing taxes on the rich, as well as lowering taxes for corporations that invest and raising them on those that do not – can improve debt sustainability.”

In my presentation to the PEF sessions at the recent CEA meetings I spoke to three major areas of public investment that could significantly boost potential output, generate high rates of return, and be close to self- financing for governments. These are investments in basic transportation infrastructure; in mass transit, and in child care and early learning. High returns are indicated by the mainstream economics literature. Other examples could be added.

It is fiscally irresponsible not to make major public investments which can be financed at record low interest rates, would generate immediate jobs, would boost our medium-term growth prospects, and which would lower rather than increase public debt.

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