Tuesday, December 9, 2008

Loans for infrastructure stimulus

In his Sunday New York Times column, Thomas Friedman called for the government to direct its stimulus "investments" towards projects with significant social, economic, and technological pay-offs, that is to make genuine investments. Some of the areas he would target include batteries for cars and "green" energy infrastructure. He also recommends adding a carbon tax to redirect consumer demand towards these greener alternatives.

One thing that isn't discussed is how the investments should be structured. The government should consider using loans rather than outright grants to make many of these.

Loans would take advantage of the government's good credit and ability to borrow at low rates. They explicitly address the "credit crunch" aspects of the current downturn. And the low rates end up effectively subsidizing the investment projects.

Loans also acknowedge that one way or the other, the funds that are going toward the stimulus will need to be paid back. If the money is really going toward economically worthwhile investments, the direct returns on those investments should be the source of repayment.

As William Nordhaus has long argued, fiscal deficits, including deficits directed toward "induced innovation," should be viewed in terms of their investment components. Why not go one step further and structure the spending the way that businesses and private parties would structure their investments?


von Nostrand said...


With regard to the talk about stimulus as a whole, two questions (actuallly... more like two groups of questions... sorry):

1. People like Krugman are basing their stimulus numbers on the desire to bringing unemployment down to 5%, which they say is the natural rate. But a decade ago the natural rate was supposed to be around 6% and the Clinton economy proved that assumption wrong. Why not assume the natural rate is 2%, or, better yet, 0%? Don't we always have, as Krugman has also suggested, monetary policy at our side just in case we get too aggressive? Of course... assuming a much lower natural rate of unemployment means the stimulus can/should be much bigger than has been suggested by the most aggressive stimulus proponents.

2. Also related to the stimulus in general. I know that one of the main goals is to give money to people who will spend it, but isn't there a good chance that even middle and lower income beneficiaries of stimulus jobs might act similarly to the way the bailout banks did? That is to say, isn't it possible that the middle and lower classes might not spend stimulus money as aggressively as we think they have to? After all, many are in a deep hole of debt, and may end up spending any wage/income gains paying credit card bills, which I'm guessing won't give us a big enough bang for our stimulus bucks.

I guess my two general questions lead to an obvious third question: Might we not need a stimulus that is much, much greater than anyone is talking about in order to produce desired results?


Dave Ribar said...


With respect to the natural rate, there probably is one even if we can't quite pin down what that rate is. People become unemployed for lots of reasons, and it takes some time for them to find (search for) jobs. A person can become unemployed instantly or nearly so; however, not every unemployed person can be instantly matched to a new job. So, even in a robust economy, there will be some unemployment.

We don't seem to be anywhere near the natural rate right now. Also, unemployment is headed up. The likely impact of an immediate successful short-term stimulus would be to mitigate the growth in unemployment.

With respect to the second point, the basic Keynesian model assumes that people are going to save some of the money that they receive and spend the rest. Savings rates fall with income, so, low income households (especially those who are currently unemployed or under-employed) are likely to spend much of what they receive.

It's still an open question, though, whether a stimulus package would really change the course of the economy. Japan has spent an awful lot of money to stimulate its economy since the 1990s with relatively little (except some great infrastructure) to show for it.

An argument for an "infrastructure" stimulus is that we've under-invested there. The infrastructure is going to be needed regardless of where the economy goes or how fast it recovers. Investments here would be a two-fer: they fix something that needs fixing and they might stimulate the economy. It's important to recognize though that any such stimulus comes at a cost, and that is that somehow we eventually have to pay the money back.