Bastiat is rolling over in his grave, and shredding whatever remains of his attire on the shards of all the broken windows, because Mr. Obama’s former Treasury Secretary and the former President of Harvard, Larry Summers, says there is a free lunch with intelligent spending in infrastructure by the government. He cites the recent report by the IMF and concludes:
What is crucial everywhere is the recognition that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions. The IMF, a bastion of “tough love” austerity, has come to this important realisation. Countries with the wisdom to follow its lead will benefit.
Mr. Summers thinks the IMF is actually too conservative in their assumptions (assuming no stimulative benefit of the spending, but rather only a 6% real rate of return on the public investment), but this will lead to
the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.
There we have it. A free lunch, with interest. If this were actually true, perhaps even Bereans would go to lunch with Mr. Summers. But here are several reasons to doubt this analysis. First, Mr. Summers assumes a 6% real rate return on intelligent public investment in infrastructure. Although he says this number is “a very conservative assumption given widely accepted estimates of the benefits of public investment,” I wonder how he feels about the return on all the green energy projects (which were undertaken while he was Treasury Secretary), when we saw hundreds of millions of dollars squandered on
political boondoggles. 6% return? I would have loved to have had just half the money actually returned. How do you say Solyndra? Second, and related, Mr. Summers assumes that wise investment decisions will be made based on the public interest. This is stunning naivete from a political insider; he knows full well that to get funding through the K-Street lobbyist and beltway processes without money being steered to crony interests is….unlikely. Third, he assumes that there are idle resources that can be steered towards this government spending. Yet, even in the depths of the crisis, the resources used for Mr. Obama’s first stimulus were not necessarily those laid off from the housing bubble collapse. Unfortunately, carpenters and plumbers have a different skill set than bridge architects. Which is one reason the unemployment rate continued rising at a far greater rate than what Mr. Obama’s team said would happen if we did nothing. Fourth, serious economic research has
much lower estimates for multipliers than this, and tax cut multipliers are significantly more powerful than spending multipliers, as Mr. Obama’s first chair of the Council of Economic Advisors Christina Romer
has shown. But for some reason (hmmm?) Mr. Summers doesn’t recommend tax cuts.
Why is this important for Christians? Well when bad economics continues to be pushed, asking for more of the same despite its past failures, we have to rightly ask why. One thing we know for sure: more borrowing will have to be paid for by someone…and it won’t be the politicians or IMF officials. And if government activity crowds out private activity because of Bastiat’s broken window, we would be condemning those currently unemployed or underemployed with less opportunity going forward by taking yet more private sector resources in pursuit of fantasy. I don’t find that very compassionate.
Bert Wheeler
Jeff Haymond
Marc Clauson
Mark Caleb Smith
Tom Mach