A2 Macro: Evaluating Keynesian-Style Stimulus - Fixing America’s Roads

When Robert Skidelsky gave his talk on Keynes here in Madrid last October, he spoke at length about the importance of effective government spending emphasising that the focus of the spending should be on capital rather than current. Yes, when aggregate demand is lacking, the government should increase spending on capital projects, even if that means deficit spending, in order to kick start the economy with the accompanying multiplier effect on output, jobs and growth.

This New York Times article takes up the Keynesian argument concerning the economic benefits of starting an “accelerated program of infrastructure repairs” throughout the US and and urges both Obama and the Republican hopeful Mitt Romney to listen up.

Apart from the impact such a program would have on jobs, $335 in annual damage per vehicle on the road caused by substandard roads would be saved. According to a report by the American Society of Civil Engineers, there’s more than $2 trillion in long-overdue repairs. These add to business costs, not to mention injuries and deaths caused by the roads, therefore by fixing them up, the government will also be improving the supply side even if that means increasing indebtedness.

“When prudent investment opportunities arise, families, businesses, and governments can and should spend more than they take in. “

An excellent article which can help A2 pupils when looking for some context when answering questions related to this topic. This also reminds me of this Q&A blog post from Geoff a while ago as it includes some great analysis and the following evaluation points of such infrastructure projects (relating to road building in the UK):

1. Skills shortages and spare capacity– the effectiveness of the investment might depend on whether the UK road building industry has sufficient skilled workers and spare capacity to successfully bid for and deliver the contracts to build new roads. If there are persistent skills gaps perhaps due to structural unemployment, wages will be bid higher and firms may have to depend on net inward migration.

2. Government spending on capital projects will help raise AD but needs to be supported by other policies to improve the human capital of the workforce and improve their job prospects

3. No one can be sure about the likely size of the fiscal multiplier effect – for example the propensity to consume domestically produced goods and services of the people and businesses employed to build the new roads

4. The medium term effects of increased government borrowing to fund major roads – might interest rates and taxation have to edge higher – putting a squeeze on the economy?

5. There might be more effective policies in the medium term – for example spending the same money to fund student enrolment at college or university so that they build up their skills?\

6. Long time lags on transport investment projects - see the comment below on the impact of planning objections and delays