What’s going on with the stock market? Here’s one piece of it. The International Monetary Fund (IMF) issued its World Economic Outlook last week, titled “Global Growth Disappoints, Pace of Recovery Uneven and Country-Specific.” The title gives away the IMF’s economic forecast: disappointment, slowdown and uneven recovery.
To address this, the IMF called for “an increase in public infrastructure investment,” particularly in the U.S. and Germany, saying this “could provide a boost to demand in the short term and help raise potential output in the medium term.”
Oddly, many if not most outlets reported this projected sluggishness with a “new normal” narrative, while mostly or completely leaving out the IMF’s call for (and report on the benefits of) increased public spending to fix it.
For example, the New York Times introduced a video accompanying their article on this, “IMF downgrades global economic outlook,” by saying, “The IMF lowered its economic growth projections for the third time this year, warning of weakness in core eurozone countries as well as Japan and emerging markets like Brazil.” The video did not mention the IMF’s call for increased government spending.
The Guardian headlined, “IMF says economic growth may never return to pre-crisis levels,” mentioning at the end of the sixth paragraph that the IMF called for Germany to increase spending – leaving out that the IMF also called for the U.S. to do the same.
In “IMF Cuts 2015 Global Growth Forecast to 3.8%,” the Wall Street Journal barely mentioned the call for increased infrastructure investment, and only for Germany, reporting “regional powerhouse Germany should stimulate growth through new infrastructure projects, the fund said.”
CNBC’s article, “‘Weak and uneven’: IMF cuts global growth forecast,” mentioned the need for “fiscal policy and structural reforms” but did not detail what those “reforms” should be.
IMF Calls For Increased Government Spending On Infrastructure
The IMF “slowdown” report linked to another current IMF report, “The Time Is Right for an Infrastructure Push,” from September 30, stating that investment in infrastructure costs nothing because it both boosts demand in the short term and boosts the economy in the long term. It states that because of the stimulus such spending provides, it is better to borrow to pay for this investment than to cut other spending or raise taxes. And finally, the return from the economic boost provided by modern infrastructure combined with the stimulus from building or maintaining the infrastructure reduces longer-term debt.
The study finds that increased public infrastructure investment raises output in the short term by boosting demand and in the long term by raising the economy’s productive capacity. … an increase of 1 percentage point of GDP in investment spending raises the level of output by about 0.4 percent in the same year and by 1.5 percent four years after the increase … In addition, the boost to GDP a country gets from increasing public infrastructure investment offsets the rise in debt, so that the public debt-to-GDP ratio does not rise.
Germany’s “5 Wise Men” Call For Increased Spending On Infrastructure
Germany’s Council of Economic Experts – known as the “Five Wise Men” – have called for an immediate burst of spending on infrastructure to stimulate their economy. From the Telegraph’s “Eurozone on cusp of triple-dip recession as German exports crumble,”
The Wise Men said in a joint report that the German economy is now in “stagnation”, with unemployment likely to rise next year. “There are no signs of the long-awaited recovery yet. Corporate investment fell in the second quarter and there is hardly any evidence to suggest that this cautious approach to investment will change in the near future,” they said.
They called for a burst of spending on roads and key infrastructure, criticising the balanced-budget mantra of finance minister Wolfgang Schäuble. “The German federal government is not making enough use of its financial scope to invest,” they said.
However Germany’s bankers and leaders continue to insist on following austerity policies, even as their economy crumbles. Reuters’ Noah Barkin explains, in “The Slowdown Could Force Germany To Reconsider Its ‘Schwarze Null’ Policy“
For now, the top economic priority of Merkel’s government is to deliver on its promise of a “schwarze Null” – a federal budget that is in the black, or fully balanced – in 2015.
That goal, spelled out in the coalition agreement struck last year between Merkel’s conservatives and the center-left Social Democrats (SPD), is described by officials in Berlin as a political “holy grail” – a historic achievement that would carry huge benefits for both ruling partners if reached.
It is largely due to the constraints of this budget target that Merkel has repeatedly rebuffed calls at home and abroad for Berlin to splash out more public money on infrastructure.
In Germany is killing its economy – and Europe’s, too at The Washington Post, Matt O’Brien describes current German austerity policies as “an austerity suicide pact.” He notes that, ‘after accounting for wear and tear, its net government investment in the economy has been negative the past 12 years.”
Germany should stop obsessing about its short-term deficit, and start spending more on roads and bridges and schools instead. Markets are all but begging it to. Indeed, investors have actually been paying Germany to borrow over two years — that’s right, a negative interest rate — even before inflation.
But out of some misplaced sense of fiscal self-righteousness, Germany would rather let its critical infrastructure fall into disrepair than take this free money. And in the long run, it would be free. That’s because, as the IMF argues, better infrastructure could boost the economy so much in the short-and-long-runs that it would almost pay for itself as long as borrowing costs are so low.
But Germany is stubbornly sticking with spending cuts instead, and it’s making the rest of Europe do the same.
The country is “obsessing about its short-term deficit” and that is keeping it from doing crucial things that would help people and its economy. Does that sound like anyone you know? Just in case it does not, Kevin Drum drives it home at Mother Jones:
It really is stunning to watch this play out. Germany is playing the same role that Republicans played in the U.S. in the aftermath of the Great Recession, except that Europe’s economy is in worse shape than ours was and Germany’s enforced austerity is worse than anything even the tea party was able to achieve.
Summers Calls For Increased Spending On Infrastructure
Former Clinton Treasury Secretary and Obama’s Director of the National Economic Council Larry Summers discussed this call for infrastructure investment in a Washington Post op-ed, “Invest in infrastructure that pays for itself,” calling it “a remarkable and important document.” Summers wrote, “Stated boldly: Public infrastructure investments can pay for themselves.” Summers demonstrates with some math:
Consider a hypothetical investment in a new highway financed entirely with debt. Assume — counterfactually and conservatively — that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 percent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 percent of the amount invested, since government claims about 25 cents out of every additional dollar of income. Real interest costs — that is, interest costs less inflation — are below 1 percent in the United States and much of the industrialized world over horizons of up to 30 years. Thus, the infrastructure investment actually makes it possible to reduce burdens on future generations.
That’s a bit complicated; basically Summers shows that with borrowing rates low, the return from infrastructure investment actually lowers future tax burdens. (He later points out that not maintaining infrastructure adds to future burdens.)
Summers then takes it further, arguing that there is a current stimulative effect from the hiring and purchase of supplies from doing the work itself. This itself has “possible long-run benefits that come from combating recession.” And then, on top of that, “by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt.”
Summary: we have 1) high unemployment, 2) low borrowing costs, 3) aging infrastructure, 4) a stagnant economy. Borrowing now to fix the infrastructure puts people to work (which boosts the economy now), costs less than the return (which boost the economy in the medium term) and boosts economic capacity in the long term.
Podesta Calls For Increased Spending On Infrastructure
Next up, John Podesta, also in The Washington Post, writes that the reasons people were afraid of high deficits have gone away. In the short term, we have reduced deficits by more than half in dollar terms and much more than that as a percent of GDP from where Bush left them. In the long term, Obamacare has fixed the problem of rising health care costs. But “we still need to do more to repair the damage from the Great Recession, to grow wages and help middle-class families feel secure, and to invest in the future.”
Podesta’s prescription is 1) Raise the minimum wage to $10.10 so 28 million people would get an immediate raise, boosting the economy. 2) Ditch the “sequester” spending cuts (that cut spending on things like ebola prevention) because it “make[s] it more difficult to fund strategic, job-creating investments in education, infrastructure, research and development, and clean energy.” 3) Build things – “roads and bridges, transit and utility infrastructure. Building infrastructure creates jobs and makes our economy more competitive.” 4) Fix immigration. Aside from the terrible human cost of the current system, fixing immigration “would boost growth in the near term and bring down deficits in the future.”
Unfortunately, Podesta also falls for the D.C.-elite view that we need to “reform” (read “cut”) corporate taxes. He calls for “common-sense business tax reform that further accelerates growth and is revenue neutral in the long term.” In other words, more tax cuts for the rich.
Times Editorial Board Says More Infrastructure Spending
In “A Global Economic Malaise” last week, the New York Times Editorial Board wrote,
There is a lot governments and central banks could do to avoid another recession. For example, a recent I.M.F. report showed that increasing government spending on public investments like roads, ports and railways can help stimulate the economy immediately and for several more years. If done right, such spending could generate benefits that more than offset the costs, particularly in developing nations like Brazil and India, which suffer from high inflation in part because of the high cost of transporting food and other goods on traffic-clogged roads.
[. . .] Earlier this year, the International Labor Organization estimated that there were 202 million unemployed people in the world in 2013, up five million from 2012. The I.L.O. forecasts that the number will grow to more than 215 million by 2018 if political leaders and central bankers keep failing to revive their economies.
Obama Calls For Increased Spending On Infrastructure
President Obama addressed “mindless austerity” a few days ago when he spoke at Northwestern University, describing all the ways that the economy has improved since he took office.
So here’s the bottom line: For all the work that remains, for all the citizens that we still need to reach, what I want people to know is that there are some really good things happening in America. Unemployment down. Jobs up. Manufacturing growing. Deficits cut by more than half. High school graduation is up. College enrollment up. Energy production up. Clean energy production up. Financial system more stable. Health care costs rising at a slower rate. Across the board, the trend lines have moved in the right direction.
That’s because this new foundation is now in place. New investments in energy and technologies that create new jobs and new industries. New investments in education that will make our workforce more skilled and competitive. New reforms to health care that cut costs for families and businesses. New reforms to our federal budget that will promote smart investments and a stronger economy for future generations. New rules for our financial system to protect consumers and prevent the kinds of crises that we endured from happening again.
But more is needed, specifically infrastructure:
If we rebuild roads and bridges – because we’ve got $2 trillion of deferred maintenance on our infrastructure – we won’t just put construction workers and engineers on the job; we will revitalize entire communities, and connect people to jobs, and make it easier for businesses to ship goods around the world.
The president also laid out an economic agenda similar to the one Podesta laid out, including make it easier for “first-time” homebuyers to get a loan, investing in clean energy technology, make high-quality preschool available to every child, redesign our high schools to “graduate more kids with the real-world skills that lead directly to a good job in the new economy”, “invest more in job training and apprenticeships”, “make it easier for students to pay off their college loans”, “fix our broken immigration system”, raise the minimum wage, “make sure a woman is paid equal to a man for her efforts” and paid leave so people can take care of new kids – pretty all of which have been obstructed by Republicans.
Unfortunately, even though maintaining and modernizing infrastructure pays for itself, Obama says, “And we can pay for it with tax reform that actually cuts rates on businesses, but closes wasteful loopholes, making it even more attractive for companies to invest and create jobs here in the United States.” In other words, bribe businesses with tax cuts in hopes they will let us, We the People, fix our infrastructure. Because it’s good for businesses.
Increasing Consensus Across The Globe
There is an increasing consensus across the globe, even among some of the most conservative sources, even the formerly austere IMF, even Germany’s “Wise Men,” even former austerity advocates like Podesta and Obama that we have to spend money on infrastructure to both create jobs now and boost the economy in the future. (To Obama’s credit, the initial stimulus included infrastructure spending, and he has repeatedly advocated this, even while calling for budget austerity.)
As Summers put it, “Stated boldly: Public infrastructure investments can pay for themselves.” There is simply no reason not to launch a massive infrastructure maintenance and modernization effort right now.