When private investment won’t step up…

June 15th, 2016 at 4:45 pm

…public investment must do so.

I published this piece in today’s WaPo arguing that based on recent global dynamics–very low interest rates, strengthening dollar, capital flows, larger US trade deficit–the Fed must be very careful about raising rates. What they intend to be a tap on the brakes could end up being more than that.

To their credit, they decided not to raise in their meeting this month, citing weak inflation and a slower “pace of improvement” in the job market. Surely the possibility of Brexit and the significant interest rate divergence I cite in my commentary are also weighing on their thinking.

At the end of the piece, and in tons of other writings I’ve recently posted, I stress the need for infrastructure investment, including transportation, schools, water systems, and all the stuff Elizabeth McNichol talks about here.

Here’s a slide I’ve been touting in this regard.

Source: BEA, CBPP

Source: BEA, CBPP

Without even trying, I can think of three good reasons to invest in public infrastructure right now. First, as the figure on the left shows, real private investment is stuck way below its pre-crash trend (the figure takes logs of an index of real spending on business investment and draws a trend using data through 2007).

The post-2007 gap is clear, but it’s also pretty remarkable when you consider that the price of investment capital has been so low for so long. For whatever reasons–hangover from the Great Recession, inequality, stagnant incomes–private investment ain’t steppin’ up even at bargain-basement prices (the Fed commented on this too today: in the near term “business fixed investment has been soft”).

Second, as the figure on the right shows, the need is there: the funding gap–the gap between what we spend and what we need to spend–on transportation, schools, and water systems is large.

Third, like I just said, borrowing is so damn cheap. Under the assumption that these investments are at least mildly productive–and I’d argue that not poisoning kids with lead-infused water is a lot more than that–to not make these investments at today’s borrowing costs is economically…well, we’re not allowed to say “stupid” in my house, so let’s just say “shortsighted.”

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4 comments in reply to "When private investment won’t step up…"

  1. Tom_in_MN says:

    I’m at a loss to understand how Rs are against this spending. If not now then when? We had a supposed budget surplus in MN this year but the whole $2B could have been spent just getting rid of deferred maintenance at the U of MN (our building, with 3rd floor classrooms got fire alarms in this century!). And this year’s bonding bill did not get passed due to fights over spending on transportation; I guess we don’t really have enough potholes. And we are a very blue state, so how bad is it elsewhere?

  2. Peter K. says:

    Hillary’s plan is much too small. Sanders’s was better. Same with monetary policy.

  3. Smith says:

    Eduardo Porter weighs in here:

    The size and scope of Clinton’s program seems set in stone, designed to not alarm centrist Republicans with large programs that could eventually lead to significant tax increases, (normal) inflation of 3 to 4%, and a tighter job market that raises wages and eats into profits. She is running as an incumbent for Obama third term. It’s hard to see how Clinton could deal with any economic reversal or slowdown before the election with the strategy that’s been adopted. The economy must hold together until the election.

    This strategy worked once in the last 50 years, the first Bush able to extend party control an additional 4 years. This is very much about economic cycles, and country’s inclination to blame the party in power, to seek change. The Trump factor will cut both ways.

    Republican 8 years Eisenhower
    Democrat 8 years Kennedy Johnson
    Republican 8 years Nixon Ford
    Democrat 4 years Carter
    Republican 8 years Reagan
    Republican 4 years Bush {exception to switch no later than 8 years)
    Democrat 8 years Clinton
    Republican 8 years Bush
    Democrat 8 years Obama