February 07, 2011
Two Competing Views on America's Economic Future
Or, Palin and Eichengreen on Infrastructure Investment
In a recent speech, Sarah Palin, stated that:
... "The federal government is spending too much, borrowing too much, growing and controlling too much," she said.
Palin said Obama had revived the era of big government, and she ridiculed the infrastructure spending and investment he outlined in his recent State of the Union speech.
"The only thing these investments will get us is a bullet train to bankruptcy," the 2008 vice presidential candidate said in a speech at the Ronald Reagan Ranch Center in Santa Barbara, California, part of two days of festivities marking the late president's 100th birthday.
Figure 1: Log ratio of gross government investment in structures to GDP, both in Ch.05$, normalized to zero at 1967Q1. NBER defined recession dates shaded gray. Source: BEA, 2010Q4 advance GDP release (tables 3.9.4, 3.9.5), NBER, and author's calculations.
That colorful language, while not quite up to the level of "Don't Retreat. -- Instead, Reload", nonetheless inspired me to think a bit more about infrastructure investment. Writing on the challenges the Nation faces in the years to come, Barry Eichengreen observes in his new book, Exorbitant Privilege, the need for "tighter belts" (p. 170):
... increases in efficiency can't be willed into existence; they have to be achieved. And in order to deliver an improvement in the U.S. trade balance, they have to be achieved faster than in countries with which we compete.
Here the United states has some obvious strengths. It has large numbers of university- and industry-based scientists, many attracted from other countries. ... entrepreneurs and an agile venture capital industry ... flexible labor markets . . . abundance of fertile land . ...
But much of the country's physical infrastructure is antiquated and difficult to modernize, partly by virtue of the fact that it is under the jurisdiction of a multitude of state and local governments or in private hands. Freight railways own much of the track used by Amtrak, for example. Contrast the difficulty of building a high-speed link between Beijing and Shanghai -- or for that matter with France's, Germany's, and Spain's high-speed trains. China plans to build as much as 8,000 miles of high-speed rail by 2020. In the United States, meanwhile, intercity rail service is now actually slower than in the 1940's. ... Were Dwight Eisenhower to come along today and propose building the interstate highway system, no doubt he would be accused of socialism.
Professor Eichengreen worries:
... the United States is no longer the beneficiary of an increasingly well-educated labor force.
I think evidence supporting this last point is evident everywhere, including in political discourse.
Update, 6:25pm: I've been accused of cherry-picking data -- even though my standard is to plot data from 1967Q1 onward. Here is the entire span of available quarterly data. It does not change my views regarding structures-investment trends.
Figure 2: Log ratio of gross government investment in structures to GDP, both in Ch.05$, normalized to zero at 1967Q1. Tan shading indicates the Eisenhower Administration. Source: BEA, 2010Q4 advance GDP release (tables 3.9.4, 3.9.5), NBER, and author's calculations.
Posted by Menzie Chinn at February 7, 2011 11:14 AMdigg this | reddit
Sarah Palin is right.
Posted by: Ivars at February 7, 2011 12:25 PM
"Gross investment in government structures?"
Cherry-picking data much?
How much of Obama's $800 billion Stimulus 1, which was supposed to be heavy on "infrastructure," "investment," and "shovel-ready jobs," was gross investment in government structures?
And how convenient that you index your chart to zero = the Great Society.
Posted by: W.C. Varones at February 7, 2011 12:26 PM
Well, there are thoughts here on both deficit spending and infrastructure. Of course, these may be independent of each other.
The problem with trains is that they are expensive. Want to take an hour ride from Princeton to New York with your wife for dinner? Well, that's $60 for NJ Transit and $10 for the New York metro. (OK, you might take a taxi from Penn Station to the restaurant.)
Similarly, Amtrak NY to DC for tomorrow is $152 round trip, lowest price. Unbelievably, it's cheaper to drive! And BoltBus is even cheaper: $36 round trip. Why is Amtrak so expensive? No competition, strong unions, cross subsidization, and of course, state ownership. Would a bullet train be cheaper?
On the other hand, wait an hour in your car to get across the George Washington Bridge, or should you find yourself going nowhere fast on the Connecticut Turnpike...well, there's irr's aplenty there. I was once caught in traffic heading to New Haven. Since I had plenty of time to fume, I thought to calculate the social return on expanding the roadway. (And to think I comment on Econbrowser.) It's 25-33% ROI (not ROE!). That's like biotech returns. For asphalt, with literally no market risk.
Now, of course, if politicians were incentivized to grow GDP, this investment would be made forthwith. But they're not, so it won't be.
Posted by: Steven Kopits at February 7, 2011 12:55 PM
W.C. Varones It wasn't $800B. After taking away the AMT adjustment it was $710B. And 40 percent of that was tax cuts. And a bunch was support to states and local govts. A lot of the shovel ready projects were killed in order to get Blue Dog and GOP support. For example, the shovel ready project to revitalize and resod the nation's Mall was killed. The turf is worse than that at Soldier Field. But I took Menzie's point to be about the need for infrastructure investment irrespective of any role it could play as fiscal stimulus. In other words, Menzie is talking about a long term need for infrastructure spending.
Steve Kopits There are a lot of hidden costs associated with cars that people tend to forget about but might start thinking about when gas hits $5/gal. For example, taking the train from NY to DC allows people to work while traveling...something that you can hardly do anymore on a plane nevermind driving. And if you drive your car, then you've got to pay for parking. You do have a point about long distance bus service being a competitive option but you really can't move the volume of people on buses that you can with a train. So buses will never be more than a marginal answer. Buses might make sense between Madison and Milwaukee, but not between Minneapolis and Milwaukee. And buses are slower, which is a factor if your time is worth a lot.
We tend to think of transportation projects but those are only the tip of the iceberg. The nation's lock-and-dam system is in need of repair, as are sewer systems in many cities, flood control (becoming a huge issue in the midwest), and dangerously degraded interstate bridges (another huge issue in the midwest...almost every major bridge crossing the Mississippi River).
Posted by: 2slugbaits at February 7, 2011 02:59 PM
Sarah Palin is pretty much wrong. Infrastructure investment is really the only way to achieve our goals. 1. Reduce unemployment, put people to work in building projects that will stretch their skillsets and keep them acclimated to productive activities; 2. Improve efficiency. Our labor is expensive and we like it that way--nobody wants those lost jobs back at Chinese wages--so to compete we have to be cheaper in other ways. Investments in lower energy costs, better water use and efficient transportation are ways we can become more competitive without killing our wage levels. 3. The stuff we have is falling down as it is; does she propose we just let it fail or would she propose privatising these assets? 4. Which is better--new bridges acros America or new bonuses across Wall Street (or new replacement hips across Medicare boulevard)? Or does she propose wiping out all Federal programs other than defense and international relations and let the states worry about infrastructure, in which case I might agree?
Posted by: Pacer at February 7, 2011 03:23 PM
Sarah is Right.
Infrastucture is a loser investment when costs to business are not generated there. Costs to business (call it anti-hiring, anti-expansion - a recession) are generated by overly taxing tax policy (2nd highest corp rate in the world), fake dollars, and mindless regulations that no other country forces on businesses.
Nice how the Great Society is your starting point - Which reminds me of Detroit, now there is a story that no one wants to part of of.
Posted by: nope at February 7, 2011 03:45 PM
Yeah, FAR right!
Posted by: John D'oh at February 7, 2011 03:47 PM
Palin is right. We do not have the time or the money to invest in questionable high speed trains that will not be self sufficient. Our access to credit will soon be restricted and will force rates higher. Stimulus is stupid when you are reaching a limit to your borrowing. Watch the sovereign debt problem and watch Japan. Spain, Ireland, Portugal all have less debt relative to GDP than we do. How much time or space do we have? In fact watch Illinois, California, New York, New Jersey, Rhode Island, Nevada and Arizona. There is a limit to credit and we are very close to finding out what it is on various levels. High speed trains will only make sense in a few areas with high populations. It does not make sense in the midwest or the west and will not support itself. The last thing we need is something else to subsidize. Green energy does not make us more efficient either and the cost of energy is a critical issue for our competitiveness. We should choose our options carefully; we have little room to make more mistakes.
Posted by: Alex Sinclair at February 7, 2011 05:51 PM
@Steven Kopits - are you kidding me?
What do you want, the train to be free? Then in the same breath you talk about the ROI of expanding the road. LOL, seriously. Talk about Cognitive dissonance.
Meanwhile in your "analysis" don't include tolls for the myriad of roads, bridges and tunnels in order to get to NYC, wear and tear on your vehicle, parking costs and all the other ancillary problems with driving. The train in New York is a bargain. You could raise the price of the NYC subway to $5 per ride and it would still be a bargain, cheaper than BART and certainly cheaper than the London Underground, that's for sure.
And sure, if you're going to have 4 or more people in your car, then by all means drive. You'll do your wallet AND the environment a good service.
Posted by: MacroEconomist at February 7, 2011 06:25 PM
@Steven Kopits: No one needs to go from Princeton to NYC to eat dinner. There are plenty of restaurants in Princeton.
@everyone else: We're living in the 21st century, not the 19th. Moving people is passe. Moving data is the future. If we want to spend money, spend it on R&D credits for hi-res video conferencing in lieu of face-to-face meetings, wi-fi everywhere, e-readers for everyone (and proper formatting of the e-books please!), 3G and 4G wireless in rural america. Force the states to get rid of any and all legal requirements for use of hardcopy postal mail (certified mail) and hardcopy process service in favor of a mandatory electronic system. Those who can't afford or refuse to use the electronic system can get assistance at the local public library or a dedicated desk at the post office (which converts to a competitor for UPS/Fedex/DHL as first-class mail disappears). Force the states to move towards allowing all government functions to be performed via computer. Stop spending any more money on subways or passenger car infrastructure. The only infrastructure we need is for freight. In particular, shut down Amtrak and the other commuter rails and hand over their facilities to the bulk freight haulers, for whom 19th century technology is still appropriate. Make air transporation as unpleasant as possible, so as to encourage video-conferencing. Etc, etc.
Posted by: fred at February 7, 2011 06:50 PM
I find it rather amusing that everyone equates infrastructure to merely transport and mostly to train tracks to nowhere. Infrastructure also refers to things such as the electric grid, internet cables, improved roads, water pipes, waste management, underground mass transit rails, and much much more.
Take a look at a website on infrastructure by the ASCE: http://www.infrastructurereportcard.org/report-cards
Drinking Water D–
Hazardous Waste D
Inland Waterways D-
Public Parks & Recreation C–
Solid Waste C+
Posted by: Wayland at February 7, 2011 08:27 PM
Didn't the Chinese build mot of he US railways too?
Posted by: Bosc79 at February 8, 2011 03:03 AM
Fred is right, everyone should be forced to live in a cubicle apartment where his food and waste are added and removed via tubes and all business is done on the internet. Anyone contemplating travel, or even walking outside without having a 'manual laborer' work permit will be sent to prison. Which will be the exact same set up as your apartment minus the internet connections.
Posted by: dennis at February 8, 2011 03:45 AM
The M&A business is absent from consideration.In the 30s,the train transportation was the field of intensive horizontal consolidation through mergers.
Everything is working backwards in this great recession,let us see few comparative samples with the 30s:
Silver and gold were in a downwards path 1925 1930 and yet the banks in India and China had plenty in their coffers.
In its statement to the union, Hoover did not suggest any precise plan and yet the idea of setting the Emergency reconstruction corporation was floating.
Income tax increases were in force,tranches 2%,4%,6% (yes 2,4,6) but all incomes above 100.000$ would pay an additional tax of 37% up to 40%
Companies taxes to be uplifted to 12 up to 12.5 %
Public infrastructures a supplement budget of 250 mios $ (senator Mc Keller)
Similar features :
1930 Markets were driven to uplift the agricultural commodities prices (as the Farm relief act was short of funding the 500 million usd planed for this purpose, forward purchase were crowding in)
Equities markets, every morning JP Morgan and other associates purchased blocs of shares (not so high frequency but,still qualified for trading)
Hoover was under harsh criticisms for not bringing prompt remedy to the depression.
Adam Smith did not perform.
Posted by: ppcm at February 8, 2011 05:02 AM
Fred is right, if we are going to invest, it should be in the areas that increase productivity the most.
Unfortunately, Obama's 'investment' decisions are biased toward union jobs. More union jobs = more union dues = more union contributions to lib campaigns = more libs in congress.
Conservatives have their special interests as well. That's the problem. Our government bases 'investment' decisions on politics, not productivity.
Posted by: tj at February 8, 2011 06:30 AM
Two points to consider when it comes to the timing of infrastructure investments: (1.)from a cost perspective, the optimal time to invest in the nation's infrastructure is when construction labour is cheap and capital costs are low. Those conditions typically occur when when there is ample excess capacity in the economy,(2.) when the economy is operating with excess capacity, government investment is unlikely to crowd out private sector investment, maximizing the job creation impact of government investment.
Posted by: JA at February 8, 2011 06:45 AM
The point I'm making is that costs are incredibly out of line for Amtrak and NJ Transit. They're at least twice what they would be in a competitive environment. The train should be more cost competitive than the bus; instead, it's four times as expensive. Cut Amtrak and NJT prices by half, and then we can talk about new projects. But if you're not cheaper than driving, if you're four times as expensive as the bus, you have no value proposition as far as I'm concerned. A bullet train for super rich guys makes no sense to me.
And Fred -
I am agnostic on cars vs trains. I use the most economical and convenient method of transport--just like most everyone else. I do spend about 400 hours a year on NJ Transit; another 100 hours on the NY subway. But in the middle of the recession, NJT and the NY subway raised my annual commuting costs by $2,000. That's twice what I spend on gasoline.
And 2slugs -
To drive to NY from Princeton round trip: $15 in gasoline; $30 parking; $18 tolls. Tolls are more than gasoline. No hidden costs there. And 18% of the parking fee is tax, too. And then the streets of New York compare unfavorably to, say, Beirut during the civil war.
Posted by: Steven Kopits at February 8, 2011 07:24 AM
I'm somewhat skeptical of the economic benefits of increased public investment. Most growth studies that disaggregate public from private gross fixed investment find no statistically strong correlation between growth and public investment as a percent of GDP. Granted there are a few exceptions but even there the estimated benefit is usually quite modest.
Compared to the EU the US actually spends about the middle of the range (3.1% of GDP over 1995-2004, the exact same amount as France). True, what's appropriate for the US might be different from the EU. And it's hard not to notice that long run growth in the US slowed down a great deal after the great collapse in public investment in the 1970s. (Could this be part of the explanation for Tyler Cowen's "The Great Stagnation?")
The ASCE obviously thinks there's a great pentup need for infrastructure investment (it would butter their bread). And maybe there is given the record of the past 40 years. (Actually the economic/environmental case for high speed rail seems quite strong to me. It fills in the gap between air and auto transport by trip distance.)
Posted by: Mark A. Sadowski at February 8, 2011 09:09 AM
Is your graph showing anything more than the 'age of the auto'? Shouldn't we be moving away from building more roads and toward metering them instead? A Pigou tax on gas, raising the price at least to European levels, would be a nice first step, helping to reduce really bad U.S. consumption habits (such as the 'light truck' phenomenon) and help to bring back public transport.
Posted by: don at February 8, 2011 09:35 AM
And isn't spending on infrastructure one of the worst 'bang-for-the-buck' programs when it comes to employment effects? If we keep up with such inefficient ways of fighting unemployment with fiscal deficits (tax breaks are another very bad way to do this), we'll get all the bad from increased government deficits with little of the good. It's too bad for short-sighted voters and politicians that the easy and convenient way is not the right way.
Posted by: don at February 8, 2011 09:43 AM
That's my point. "Investment" to Obama is a euphemism for any kind of spending he wants. It's not limited to gross investment in public structures which Menzie is focusing on.
Posted by: W.C. Varones at February 8, 2011 11:25 AM
Another very amusing post. Pitting a political speech by a politician with a communications and journalism degree against an excerpt from a book by a left leaning Keynesian college professor that I am sure was researched and edited over a period of years is not really fair. After all, the politician is a mom who has not been locked away in an academic ivory tower, but actually lives in the real world. But that is a different issue.
Using a ratio of government's gross structure investments to GDP is actually not very meaningful since the gross investments number is in both the antecedent and the consequent. Additionally, since other government expenditures are included in the GDP number any time the government decides to spend on bailouts or other non-structure “investments” such as war, it will drive the ratio of structure spending down even if the spending does not decline. You might notice that the ratio dropped in periods with wars. I doubt that is because of a change in spending on structures.
You quote Eichengreen as writing “... increases in efficiency can't be willed into existence; they have to be achieved. And in order to deliver an improvement in the U.S. trade balance, they have to be achieved faster than in countries with which we compete.” He is correct of course that efficiency can’t be willed but I am not sure that has anything to do with the trade balance. More prosperous countries are normally greater consumers because they can afford to consume. Poor countries are usually producers because they do not have the resources to consume. GB was a net consumer in the 19th Century and the US was generally a net consumer in the 20th Century. A better way to improve efficiency would be to empower the private sector while reducing the public sector.
The government also should not take resources away from the productive sector of the economy and put them into activities that do not give a positive return. This would do more to increase efficiency than any other governmental action.
I do appreciate using high speed rail becuase it is a great example. There are only two HSR systems in the world that are reported to break even, Paris-Lyon and Tokyo-Osaka, but the French government has imposed a $40 toll on a trip by car from Paris-Lyon and Tokyo-Osaka has a $100 toll. In truth there is no high speed rail system in the world that breaks even.
You also quote Eichengree as writing, “Were Dwight Eisenhower to come along today and propose building the interstate highway system, no doubt he would be accused of socialism.” What you fail to note is that such an accusation would be true. When Eisenhower built the interstate highway system he essentially killed the passenger rail system. It was once again the actions of government confiscating wealth an destroying resources. The government subsidized the highway system actually building then maintaining the roads, but the railroad companies had to pay for their own railbed maintenance. Now after destroying the railroads, the government wants to rebuild them in a most inefficient way. The nation’s transportation system is the government at its most wasteful.
Finally, Eichengreen writes, “…the United States is no longer the beneficiary of an increasingly well-educated labor force.” David McCullough notes that in his research for his book “John Adams” that the state of Massachusetts had a higher literacy rate during the Revolutionary War than it does today. In a period when all schools were private, students were literate. Today US students have the highest self-esteem of any students in the world, but they can’t answer a simple math problem or write a complete sentence.
Posted by: Ricardo at February 8, 2011 12:47 PM
don: Let me address specifically your point about infrastructure investment and GDP and employment effects. You have it exactly wrong, as I have noted several times in the past. The most recent research just came out on this issue; see here and here.
W.C. Varones: While I did graph and discuss structures, I think that intellectually, it's reasonable to think of greater education spending as investment (in human capital, in this case); and R&D (say in photovoltaics) as investment. Indeed, economic theory would classify those expenditures as investment, even if not always done so in the NIPA.
Ricardo: Contra against your assertion the ratio drops during wars, let me just observe there was something called the Korean War and something called the Vietnam War, during the period of either rising, or high, government structures investment.
Posted by: Menzie Chinn at February 8, 2011 12:54 PM
It's easier to think of government spending as waste when we already have so much built by government. Our economy depends on the interstate highway system, financed by the federal government. While originally our ports were a mix of private and government interests, back in the age of sail, the federal government has long been responsible for maintaining harbors. The federal government is largely responsible for flood control. The federal government was forced by a combination of private failures - and the effect of the federally financed highway system - to become more involved in railroads. The railroads themselves were built with a huge assortment of federal and local subsidies involving giant grants of land to be sold, etc.
A state is necessary to finance improvements. The Erie Canal, back in 1817, was financed by New York but most major improvements have been federal and we take them for granted. Navigation on the Great Lakes and the St. Lawrence Seaway was federally built. Most of the great dams - like the Grand Coulee - were built by the federal government.
The internet was financed through a series of grants from the federal government. Most of the scientific research done in the country is financed by the federal government, which also then pays for the research facilities that employ huge numbers and which drive the economies of many areas - including those now outright hostile to the federal government. What would North Carolina's economy look like without the federal money put into the Research Triangle? Would Austin be a semi-conductor center if not for Sematech, which the federal government set up with 14 private companies to focus research? All those hospitals and medical research centers are federally financed, meaning that many thousands of jobs in places like Arizona, where support for the federal government has become next to anathema, depend on the federal government.
The very first wave of cuts from denying earmarks is being spread across the country. The reaction at the local level has barely been felt yet, but imagine how it will look when their universities start shutting down research and their economies drain away. All because the idea of tax increases is like saying you are Satan.
BTW, note that in Britain today, literally on 2/8, the British government announced they were increasing tax rates on banks by accelerating a tax increase put in the last budget. The tax increase is 800 million pounds or about $1.2B. British austerity includes tax increases. Here it means cut taxes and then say the problem is spending.
Posted by: jonathan at February 8, 2011 12:57 PM
This blog reminds me increasingly of the phrase "a series of tubes," which in this case describes the contraption through which most commenters are viewing the world and events.
And can someone tell me: when is the last time a non-office-holding talking head on the left received such an obsessive and pervasive focus from their ideological opposition as has Sarah Palin? One would think she is and for years has been the POTUS.
Posted by: Brad at February 8, 2011 01:32 PM
The most interesting aspect of American political identity is that the proletariat thinks like the bourgeoisie and everyone thinks that they fend completely for themselves.
Perhaps this is all a by-product of a unique span of history when America simply became so wealthy that everyone focused inwards. Wealth and independence are positively correlated (although causation is unclear.)I'm inclined to argue that some stiff international competition and some gravitation away from the idea of American exceptionalism will reorient the independently-minded to consider how much they can do themselves.
But looking at comments like Palin's it's only a solution if you correctly identify the problem.
Posted by: seito at February 8, 2011 01:59 PM
"don: Let me address specifically your point about infrastructure investment and GDP and employment effects. You have it exactly wrong, as I have noted several times in the past. The most recent research just came out on this issue; see here and here."
You have noted that I have it (?) wrong, or that infrastructure generates more jobs per dollar than, say, transfers to states?
"In brief, CBO found the following: A temporary increase in aid to the unemployed would have the largest effect on the economy per dollar of budgetary cost. A temporary reduction in payroll taxes paid by employers would also have a large bang-for-the-buck, as it would both increase demand for goods and services and provide a direct incentive for additional hiring. Temporary expensing of business investment and providing aid to states would have smaller effects, and yet smaller effects would arise from a temporary increase in infrastructure investment and a temporary across-the-board reduction in income taxes."
The study you cite goes against expectations, as construction spending is highly capital intensive. And as your first reference to the study notes (both references are to the same study), its results are subject to question. "Latest" doesn't mean "best." The authors use cross section comparisons of spending in different areas. They try to correct for the natural problem of reverse causality - areas with slower growth get more stimulus funds. But what do you think more probable - that they failed to solve this problem, or that highly capital intensive spending gives a better job impact than much less capital intensive spending? And what's with the negative coefficients they found for spending on teachers and police? Seems to require an explanation.
Posted by: don at February 8, 2011 03:26 PM
"The federal government is spending too much, borrowing too much, growing and controlling too much,"
There should be no dispute that the FedGov is spending too much... current expenditures are running at about 27% of GDP while revenues are at 15%. Obviously, excessive borrowing is corollary this imbalance.
I would take issue with the "controlling too much". Obviously, governmental regulatory institutions have been infiltrated and captured by corporate interests... the FDA, SEC, and FRB being the most spectacular examples. The issue isn't that the government is trying to control too much- its that the government doesn't discharge its regulatory function competently... The ultimate reason: our politics are corrupt.
Its ironic that Palin should voice her disdain for Federal deficits at the Reagan Ranch, considering that Ronald was responsible for the largest peacetime increase of the national debt at that moment in history.
America will have to choose between safe bridges and cardiac procedures... heated apartments and paved roads...schools and police. It will be interesting to see how these competing interests play-out over the next ten years. My best guess: The baby-boomer geezers will progressively care less about schools, roads and bridges, and more about hospitals, the stock market and their elusive eventual retirement in Florida.
Posted by: MarkS at February 8, 2011 09:56 PM
Ricardo: Contra against your assertion the ratio drops during wars, let me just observe there was something called the Korean War and something called the Vietnam War, during the period of either rising, or high, government structures investment.
Korean War 1950-1953
Vietnam War sometime around 1958 with combat troops inserted in 1965. Primary combat was in 1968 through peace accord in 1973.
You might want to check your graph again during these periods.
Posted by: Ricardo at February 9, 2011 05:08 AM
Since we agree that the structures graph is not really a relevant measure, how about graphing something that does include all of the wonderful thing government "invests" in (GMAC, AIG, Fannie, Freddie, student loans, etc.).
One data series that would capture all that would be total debt / GDP.
Would that graph lead to a different conclusion than your government structures graph? Perhaps lead to the conclusion that Sarah Palin is on to something?
Posted by: W.C. Varones at February 9, 2011 05:24 AM
We realized in the 1940s that rail was better used for freight than people.
Posted by: aaron at February 9, 2011 07:13 AM
The level of discourse on the Right-leaning comments is impressive in it's willful ignorance of externalities and the importance of largely invisible (to the Palin faithful) infrastructure.
And then there's the magical thinking that decreases in taxes lead to widespread prosperity. Here's a clue, the majority of the tax break ends up in the owner's pocket, not increased employment. This is especially true at the low levels of Business tax rates in the U.S.
Posted by: asphalt_juheesus! at February 9, 2011 09:22 AM
The issue isn't that the government is trying to control too much- its that the government doesn't discharge its regulatory function competently... The ultimate reason: our politics are corrupt.
While corruption and regulatory capture are certainly important, I do not see them as the primary issue.
Rather, because the government has no clear objective function, it becomes input, rather than output, oriented. For example, you'll hear politicians say something like, "And we increased spending on renewables by 50%"; but you'll never hear them say, "The IRR on our renewables expenditures averaged 22% over the last four years, outperforming even the stock market." It's about cost, not benefit; inputs, not outputs. As a result, regulation becomes about compliance, rather than risk management.
You have to empower regulators to use judgment to manage risk. But since there is no objective function governing their activity (eg, they're not paid for attaining outcomes), and since government is subject to multiple objective functions, regulators are not trusted by their own employers. Hence the focus on paperwork, not thinking.
If you put an incentive structure on top of the political decision-making process, then this problem can be readily solved: you can manage to outcomes rather than inputs. But without that, regulation remains a blunt tool. That's the problem.
Posted by: Steven Kopits at February 9, 2011 10:18 AM
Steven Kopits the government has no clear objective function, it becomes input, rather than output, oriented. For example, you'll hear politicians say something like, "And we increased spending on renewables by 50%"; but you'll never hear them say, "The IRR on our renewables expenditures averaged 22% over the last four years,
You might be right about the politicians, but I'm certain you are wrong about real analysts in the government. I'm one of those analysts and I can tell you straight up that there are plenty of worldclass Lagrange optimization models, Hamiltonian optimal control models, etc. all with "clear objective functions." Take any advanced operations research class at top tier universities and the professor is very likely to point to government optimization models as state-of-the-art. The practical problem is that it is almost impossible to communicate and explain those models to political appointees (I had a recent experience of trying to explain the results of a stochastic frontier analysis model of Army industrial operations...guess how that went). Another example would be Corps of Engineer BCAs for lock-and-dam projects. The Corps is capable of doing good work, but too often politicians tell them what the answer should be and the model parameters and assumptions get tweaked to produce the desired result. And the folks at forestry management have some amazing models on the economics of wood products. What we really need are fewer Republicans in Congress. Honestly, staffers for Republican congress critters have to be the stupidest folks alive.
We also need a citizenry with a time horizon longer than their life expectancy, which is a real problem when a disproportionate share of the electorate is retired with one foot in the grave. Medieval cathedrals that took 5 or 6 generations to build would never have been built if today's generation of greedy geezers had been around back then. Private discount rates for folks like that are too high. Government should use social discount rates that equitably cut across generations and account for regret.
Posted by: 2slugbaits at February 9, 2011 02:49 PM
Can someone explain to me the benefits of logging the y axis on these graphs? Why not just GovtInfrastructureSpend/GDP? over time
Posted by: Robert Wiblin at February 9, 2011 04:58 PM
And here's a partial list of GOP proposed cuts, as released on 2/9, with my comments added:
• A 30 percent cut to the Energy Department's Office of Science, which funds basic scientific research. Obama called for renewed emphasis on scientific research in his State of the Union speech last month. [Let's make America 2nd rate in technology and innovation and universities! Let's kill the job generation engine of the economy!]
• A 5 percent cut to a program that provides food for low-income mothers and children. [Take money from poor children rather than eliminate tax subsidies that allow multi-nationals to pay no income tax in the US.]
• Sharp cuts to several programs that help local governments upgrade drinking-water and sewer systems and fund improvements in poor neighborhoods. [Seriously? This is for stuff that can't be bonded. Is the idea to make states pay? I'm not sure I get this one.]
• Eliminating outright the $1 billion set aside for Obama's high-speed rail network. [I'm fine with this because high speed rail won't happen.]
• $2 billion in cuts from the government's $18 billion in job-training programs. [When you argue unemployment is structural, then retraining is necessary so you definitely should cut funding for that.]
• A 32 percent cut to the Environmental Protection Agency, which aims to regulate carbon dioxide and other greenhouse gases over Republican objections. [Theology wins! We are believers!]
• Cuts to an array of energy programs, from efforts to boost efficiency and renewable energy programs to nuclear and clean-coal programs. [The real moral: big oil wins!]
Posted by: jonathan at February 9, 2011 06:02 PM
Robert Wiblin: Both series are in Chained 2005$; ratios of such series don't have a natural interpretation. The log ratios can be interpreted as the differences in cumulations of growth rates (that have a ready interpretation).
Posted by: Menzie Chinn at February 9, 2011 08:23 PM
What Palin says, its not government and scientists who will dig the USA out, it must be left to less controlled but more innovative and motivated forces.
Currently things follow the Hoover actions ( deficit spending) with monetary extra easing correction (low rates) but its all moving in New Deal direction where government for the first time in the USA history took control over economy in unprecedented scale and managed to increase the length of depression to 13 years plus war, which was the absolute record compared to all previous crisis without heavy government intervention.
Posted by: Ivars at February 9, 2011 10:52 PM
That's a good start and I am glad to see that the Republicans are increasing the cuts to $100BN. I think they should also propose an additional 10% cut in every department until a clean audit is performed.
Posted by: Rich Berger at February 10, 2011 07:09 AM
I swear - a lot of the posters here would have been against sewers if they were transported back in time and some governments proposed them as an important step forward in public health.
Posted by: r doug at February 11, 2011 09:00 AM
You Palinites are being mislead.
What Palin says, its not government and scientists who will dig the USA out, it must be left to less controlled but more innovative and motivated forces.
How would this occur without substantial Intellectual Property and Patent deregulation? Please, be specific.
There's never a discussion of intellectual property deregulation with various Tea Party spokespersons. Never. Why? Because the current intellectual property regulatory framework rewards their wealthy sponsors.
Posted by: asphalt_juheesus! at February 11, 2011 01:00 PM
The reason America spends so little on infrastructure is obvious and economically rational: even if we had perfect up-to-date modern infrastructure with fast internet and brand-new roads and a totally reliably electrical grid, America still couldn't compete with the third world PhDs in the high-skill jobs of the 21st century.
Already, 70% of engineers with PhD’s who graduate from U.S. universities are foreign-born. Increasingly, these talented individuals are not staying in the U.S – instead, they’re returning home, where they find greater opportunities.
American engineers and scientists can't compete with their MIT and CalTech-trained counterparts in China and India because of global wage arbitrage. What corporation would pay an American engineer $40 an hour when they could pay an MIT-trained PhD in India $8 an hour?
There is no solution to this dilemma. American workers will only become competitive with PhDs and engineers and programmers in Mumbai when the wages of American PhDs and engineers drop to the level of the workers in Mumbai. This will require American workers to live like the workers in Mumbai -- in huts with dirt floors and no running water and no electricity.
In the years ahead, sizable numbers of skilled, reasonably well-educated middle-income workers in service-sector jobs long considered safe from foreign trade—accounting, law, financial and risk management, health care and information technology, to name a few—could be facing layoffs or serious wage pressure as developing nations perform increasingly sophisticated offshore work.
“Europe: The Big Squeeze,” Newsweek International Edition, 30 May 2010.
Martin Ford points out:
If employers were really suffering because of a skill mismatch, they could easily help fix the problem. They don't because they have other, far more profitable options: they can hire offshore low wage workers, or they can invest in automation. Re-training millions of workers in the U.S. is likely to make a killing for the new for-profit schools that are quickly multiplying, but it won't solve the unemployment problem.
Why are economists so reluctant to seriously consider the implications of advancing technology? I think a lot of it has to do with pure denial. If the problem is a skill mismatch, then there's an easy conventional solution. If the problem's a lack of labor mobility, then that will eventually work itself out. But what if the problem is relentlessly advancing technology? What if we are getting close to a "tipping point" where autonomous technology can do the typical jobs that are required by the economy as well as an average worker? Well, that is basically UNTHINKABLE. It's unthinkable because there are NO conventional solutions.
"Unemployment: The Economists Just Don't Get It," Martin Ford, 4 August 2010.
As Tim Duy remarks:
One interpretation of this data is that the failure to add capacity is actually a good thing, as a more rapid absorption of excess capacity will speed economic healing and provide the incentive to add additional capacity, providing a desperately needed boost to investment spending. Of course, this interpretation is completely at odds with history. Typical post WWII recessions experienced V-shaped recoveries even as capacity grew. Now we get jobless recoveries and no capacity expansion.
Another interpretation is that US firms have no intention of adding net new capacity, planning instead to source any excess demand from overseas. This implies that the manufacturing recovery will not be a net positive to US growth. It also implies that the trade deficit will widen further and that the challenge of global imbalances will remain unresolved. The rise of Dollar assets abroad will with either force a fall in the US dollar which would then create more incentive for export and import-competing industries or, more likely, encourage the accumulation of reserve assets among foreign central banks.
In short, I continue to worry that policymakers are ignoring the possibility that increasing reliance on external production to satisfy US demand has contributed significantly to the jobless recoveries we have seen this decade. Something is very different this decade. I think it is a mistake to write off this decade's shift in manufacturing as simply a repeat of the agricultural experience. At least agricultural output continued to rise as its relative employment importance fell. The capacity numbers are telling us the same can not be said of manufacturing any longer. And in the past, the relative decline in manfacturing jobs was matched by a more than corresponding increase in service sector jobs. No longer the case; job growth is flat for a decade. If we intend to ignore this issue, the supposed reality of tradable services had better get a lot more traction very quickly. Otherwise, we are further solidifying a permanent underclass of citizens who require the constant support of fiscal authorities.
"Anomalous Capacity Shrinkage," Tim Duy, 23 July 2010, Tim Duy's Fed Watch.
Posted by: mclaren at February 12, 2011 09:28 PM
One of the major problems is that Infrastructure 'investment' is often a sunk cost only needed to prevent future problems.
For example, I believe America is rapidly approaching a net-zero on infrastructure - investment is going to pay to keep up roads, bridges, etc., and the 'new' construction we see will be replacing old units.
The fact is China has almost a 'clean slate' and is building new, advanced, efficient infrastructure. The US and other Western nations are weighed down by their legacy costs.
And, the fact that Republicans have no vision other than saying 'No', and as pointed out above, if the Interstate Highway system were proposed today, it would be shouted down as more socialist spending.
Posted by: Jon R. Patrick at February 15, 2011 04:39 AM