...against fictions and other tall tales

Monday, 21 November 2011

Crescenzi watch: Public investments boost our standard of living

In a previous post, I criticized Tony Crescenzi, author of PIMCO's Global Central Bank Focus column, for depicting Keynesian-inspired policy remedies as wasteful and ineffective. So I was surprised to discover that the November edition of Crescenzi's column contains one of the most spirited pleas in favor of increased public investment that I have read in recent weeks.

Here is an excerpt from Crescenzi's column,
The vigor and verve with which Franklin Delano fought the Depression today is sorely lacking in Washington, which through its self-aggrandizing and ignorance spits with contempt at fires that rage across the U.S. economic landscape, leading Americans to feel anxious and helpless. This anxiety is present throughout the world, which perceives U.S. leadership to be adrift and intensely polarized. The same goes for European leaders. [...]

U.S. policymakers made one of their first serious blunders in this crisis in 2009 when they crafted an economic stimulus plan targeting consumption rather than investment. The benefits of the stimulus therefore faded rather quickly, which is to say the stimulus had a low or negative fiscal multiplier. The money would have been better spent on investments, which tend to have longer-lasting benefits that boost the national standard of living

Consider this example. When Uncle Sam divvies out stimulus checks to consumers it leads to increased purchases of pants, socks, shoes, a hamburger, a garden hose, you name it, but the purchase of these and other everyday essentials do nothing for America’s long-run growth potential. Investments, on the other hand, have longer-lasting benefits. Consider the benefit of investing in a highway, or an energy grid – it lasts years. In other words, an investment of this sort has a relatively high fiscal multiplier – it is the gift that keeps on giving. (emphasis added)
I agree entirely with this view of public investment. In fact, the papers by economists David Aschauer and Alicia Munnell linked to my previous post support the claim that public investment results in a net benefit to society in the long-run.

That said, I am a somewhat puzzled by Crescenzi's contention that the recent US federal stimulus did not significantly enhance the level of public investment. As you can see from the charts below, whether you look at total (federal, state and local) nondefense public investment as a percentage of gross domestic product (Chart 1) or public investment as a percentage of private nonresidential investment (Chart 2), the US federal stimulus initiated at the onset of the last recession resulted in a very large increase in public investment.

Chart 1: Public investment as a percentage of GDP, Source: St. Louis Fed

Chart 2: Public investment as a percent of private investment, Source: St. Louis Fed

Finally, in regard to Crescenzi's point about public investment being more effective than measures that boost private consumption, one could argue that government intervention aimed at increasing private consumption is not necessarily detrimental if it is accompanied by a decline in household indebtedness (see Chart 3). As the great economist and disciple of Keynes, Lorie Tarshis, once wrote in relation to remedies for recession (or Depression):
The general objective is clear: to increase employment, we must either increase the propensity to consume or increase investment. And, as a matter of fact, there is no reason why we should not try to increase both. (1947:570) (emphasis added)
But, on the whole, I am willing to agree with Crescenzi that, given the current state of US public infrastructure, increasing public investment would be more beneficial than measures aimed at increasing consumption.

Chart 3: Financial Obligations and Debt service to income, Source: St. Louis Fed


Tarshis, L., The Elements of Economics (Riverside Press: Cambridge), 1947


  1. very good post, circuit, and i am quite pleased that crescenzi is honestly rethinking his optics on public-x. your perseverance is paying off. stay the course.

  2. Nod to Crescenzi!!! and to you circuit for suggesting an alternative course to the plaintiff.
    Bells are ringing and the kettle is whistling. Great work! Real good.

  3. Thanks guys. JH, my perseverance is in solidarity to the perseverance of the jobless. I'm trying to contribute what I can. BTW, it looks like Tony's not the only one reading FRB. Check out Krugman today:

    "Future historians will look back in astonishment at the Great Pivot of 2010, in which all the Very Serious People on both sides of the Atlantic– and, sad to say, in both parties in the United States — decided that in the face of high unemployment, weak growth, and low inflation, what the world really needed was austerity. I’m actually having trouble writing about all this; it’s just too depressing"

    FRB on May 8: "...it's also quite sad. I'm convinced that one day, say, thirty or forty years from now, economists will look back at today's policymakers and be astonished by the lack of action on their part. Talk about a missed opportunity."

    Ok, I know...it's just a coincidence...But you can't blame a guy for dreaming, right? (though I have been regular hits coming from his blog, thanks to y'all. Nod!)

  4. You're not dreaming...mais on a tous manque le bateau. Je suis d'accord avec certains de vos lecteurs (gc,mi,swells, jh,juo qui, en passant, ont influence la formation d'un 'Squall Watch') le squall s'en vient.