Infrastructure is not fiscal policy
By Scott Sumner
A recent comment started off as follows:
Suppose someone had a fetish for fiscal policy and infrastructure
Using the construction of infrastructure for fiscal policy purpose does NOT get you any more infrastructure than not using it for fiscal policy purposes. It gets you a more countercyclical timing of infrastructure spending. Thus you do more infrastructure spending than usual when unemployment is 10%, and less infrastructure spending than usual when unemployment is 4.9%. The average level of spending is unaffected. At least that’s the standard Keynesian model. If you do more infrastructure spending at all points in time then that’s no longer fiscal policy, as the term is normally defined. It’s no longer countercyclical.
I do recognize that many Keynesians no longer look at things this way—that ad hoc models have been created to justify a preference for more infrastructure. But I think we need to be very careful here.
Economics will never be taken seriously if it becomes a set of “now more than evers”, that is, if we ex post adjust our models as needed to justify our current policy preferences.
Economics as a field needs to have well established models that can be taken off the shelf during a recession, and used in the fashion envisioned by the model builders. Thus over the two decades prior to 2007, I wrote papers on the following:
1. Target NGDP.
2. Target the forecast, preferably using market forecasts.
3. Japan’s liquidity trap was actually an excessively tight money policy.
4. Central banks never run out of ammunition.
5. Monetary policy is preferable to fiscal policy at the zero bound.
6. The current setting of monetary policy matters much less than changes in the expected future path of policy.
7. Temporary currency injections will have little or no impact on the price level.
When the Great Recession hit, I was able to take these models off the shelf, and use them in my blog.
In contrast, prior to 2007, no one (AFAIK) was suggesting that infrastructure spending is a sensible countercyclical tool when unemployment is 4.9%. And if someone did recommend it, they almost certainly recommended LOWER than usual spending at 4.9% unemployment.
None of this means the current proponents of infrastructure spending are necessarily wrong. Just that (unlike market monetarists) they cannot point to a pre-existing set of published papers that justify their views. Their recommendations are ad hoc, in the worst sense of the term.
For example, one recent justification for more infrastructure spending at 4.9% unemployment is to raise the Wicksellian equilibrium nominal interest rate. If you had polled 100 elite economists back in 2007, and asked them “what is the best way to raise the Wicksellian equilibrium nominal interest rate”, I’d guess roughly 100 would have suggested a higher inflation target, and roughly zero would have recommended more infrastructure spending at 4.9% unemployment. Today there would be many economists on each side.
I have more confidence in their 2007 views—and mine.