This is one argument against the stimulus, but in the short term, it's pretty weak. Demand for anything other than government debt is practically nil--look at how much Pfizer is paying to acquire Wyeth.
Over the longer term, it has more bite. The government will eventually have to roll over all this debt, at which point it will undoubtedly be a) more expensive and b) more prone to crowd out private demand for funds. But the supporters can plausibly argue that if we get ourselves stuck in a liquidity trap, the investment climate will be even worse.
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Re: The government will eventually have to roll over all this debt, at which point it will undoubtedly be a) more expensive and b) more prone to crowd out private demand for funds.
That was true of the WWII debt also, which was a far larger % of GDP than anything we're likely to do now. Yet the ensuing years were not short of investment funds-- and that despitet he fact that the rebuilding of japan and parts of Europe were also consuming a lot of money. If we can get the economy back on sound footing (that's a big if) we should be able to service our public debt easily.
The government is just a conduit. I believe the debate is whether government spending crowds out private investment and consumption, i.e., labor and capital consumed to build roads and bridges is labor and capital not consumed to build factories, so the bridges had better be more productive than the factories they displace.
y81: Everywhere I've been that's seen a highway gets built out. Put a new exit off the toll road through the woods of ME, and within a few years there's a shopping center, a factory, or something else there that benefits from the proximity of transportation.
So it makes sense that investing in transportation systems would create development corridors for people looking to locate business. The highway and bridge improvements help stimulate the business by easing transportation issues.
Or that is the hope. But there are also a lot of empty industrial parks around the nation (or at least my neck of it.)
y81 I'm confused. How does a publicly funded bridge in St. Louis crowd out Apple's privately funded (if they so choose) iPod factory in Alabama? Seems like both could happen, especially when there's a labor surplus. Unless your argument is premised on the govt capital coming from Apple's taxes that if left with Apple could go toward the factory?
But that seems like an elementary argument to make given the reality of taxes in economic theory.
k1
ryanculver.blogspot.com
I'm confused, but that's just par for the course. If we spend X on green energy, in order for us to move towards greater aggregate demand, wouldn't the labor need to be currently unemployed? I don't see my friends who do residential construction getting into the green energy thing.
Right now there seems to be a great deal of cash sitting on the sidelines. The question is how best to move it back into the investment market. Right now, much of that cash is buying up government debt, and willing to lend to the government at a very low rate of interest Does that factor into things?
We may not have to wait long to find out the answer. The amount of new debt and the amount of old debt that needs to be rolled over is higher than it has ever been in the history of the US, and interest rates on the long end are starting to come back to life the last week or so. With trade contracting worldwide, and every country with a surplus with the US looking to stimulate, too, I wonder just how much real demand there is for all the new debt. If the Fed has to begin quantitative easing and buying the debt itself, then, yes, this is crowding out by definition.
I don't have much financial expertise.
I'm confused by the term "roll over". So short term interest rates are low. Long term interest rates are high. So why can't the government just continually receive funds through short term bonds.
"So short term interest rates are low. Long term interest rates are high. So why can't the government just continually receive funds through short term bonds."
First, short term rates can rise at any time (the yield curve can either invert or shift up). With long term borrowing, the rate is locked in. By rolling over - issuing new short term debt to replace the old - you constantly have to pay the current short term rate, whatever it is.
Second, liquidity can dry up so that suddenly, whoever is relying on rolling over short term debt is in a crisis. That's what really brought down the investment bank Drexel, which thought it was clever by borrowing at the low end of the yield curve in the 1980s. In the last couple of years, those that were relying on short term borrowing have been pretty much wiped out, simply because they couldn't roll over their debt as everyone fled to Treasuries.
Of course, we may argue that the US Treasury is immune to this, but I'm not sure....
Spending on, say, infrastructure might be a good long term investment, but it's not likely to get into the economy in time to do much stimulus. The argument for rushing this through now is mainly political - we can keep people from looking too closely if we scream that it's an emergency, so there's no time for oversight.
Other projects, such as sodding rather than seeding the National Mall, seem to be the old Keynesian 'pay some to dig holes and others to fill them up again', based on what David Obey said about the goal being simply to put people to work any way they can think of. Are we really sure that pointless make-work is the best way to deploy resources?
And then there's subsidies for the National Endowment for the Arts, etc., that are just spending priorities for politicians that they're afraid they might not get through later. For politicians (at least those in power), this is the best Christmas ever, because they can drag out every silly project that couldn't get through before, and rush it through now on the basis that this is a crisis. Luckily for them, there's a long-gone economist that once argued that pointless spending was a good idea in this situation.
In the short term we're all dead, Megan.
Wait...
"I don't see my friends who do residential construction getting into the green energy thing. "
Very poor example. In fact, a lot of unemployed and underemployed contractor labor could be reused very easily in the installation of green energy projects, since a large chunk of same involve construction at or near homes.
In other words, electrician who used to work on new homes now works wiring up residential solar, for instance.