There is a degree of public perception that deficit spending of any sort — whether on health care, education, stimulus, infrastructure or otherwise — is a pernicious act wringing out the magic of unfettered markets which, if only allowed to work, would be the panacea so deeply desired.
So muddles along the debate over whether government spending of any kind can help our economy grow.
Recently, the U.S. deficit, the annual difference between federal government expenditures and receipts, fell to 2.8 percent of gross domestic product. This marks the fastest and most stark change to our government’s fiscal status in 46 years.
Decreasing the overall debt, which represents accumulated deficits, is an important objective for our nation, albeit a non-linear one. Cutting public expenditures and gross investment, which represents roughly 18 percent of national income in the U.S., can be harmful depending on the state of the business cycle.
A change of one dollar in the debt does not have the same impact on our economy for every level of debt and every stage of the business cycle, expansion to contraction. Similarly, not every dollar spent is tethered to the same expected return on investment.
One area, however, that may present immediate gains in national income and provide a longer-run platform upon which regional businesses may thrive is in public investment spending on infrastructure. Think roads, bridges, airports, broadband and so on.
Charles Evans, Federal Reserve Bank of Chicago president, has recently echoed the view that “infrastructure projects may be
able to play a role in buffering the economy during economic downturns.”
Evans cites the current economic environment of low borrowing costs and labor market slack as rationale for such policies. The federal government can currently borrow a dollar for ten years at about 2.58 percent. The average rate over the last three decades is 5.6 percent.
Accounting for inflation, the interest rate on 10-year Treasuries is 0.43 percent! This suggests that the private sector offers a relatively low opportunity cost for using borrowed public funds.
Furthermore, Bloomberg News reports that 82 percent of 44 economists polled at a University of Chicago Booth School of Business survey agree with a statement asserting that “the federal government has an opportunity to increase average incomes by spending more on roads, railways, bridges and airports. The rest of the respondents were uncertain or had no opinion.”
Although the economy has been expanding at roughly 2.2 percent on an annualized basis over the last two years, there remains a significant output gap.
The difference between current real gross domestic product and what could be produced using available resources and technology is 3.6 percent. This is a very large gap. In addition to slack in the broader economy, there is also a high degree of slack in labor markets. The labor force participation rate remains historically high at 62.7 and 3 million people have been unemployed for 27 weeks or more.
Recently, the IMF acknowledged that its austerity prescriptions entailing expeditious contractionary fiscal policy (decreased spending) for advanced economies in the aftermath of the global financial crisis was “premature’ calling the approach “less than fully effective.”
I applaud the IMF for reconsidering their view on policy prescriptions during depressed states in the face of evidence.
Infrastructure spending targeted at regional economies might be a good idea. Britain is pushing for funding what they term, “Enterprise Zones.” The idea is that business success benefits regional economies and businesses need things like high quality roads, reliable transport of goods and people in and out of the region, and highly accessible, consistent broadband Internet.
Deeply-rooted ideologies that manifest themselves as notions about what economic policy should entail appear to supersede data for some Americans. This is unfortunate for our nation. Normative assertions are best levied when underpinned by evidence, not feelings.
Dr. Nicholas Mangee is an assistant professor of economics at Armstrong State University and can be reached at Nicholas.mangee@armstrong.edu.