Internal contradictions in progressivism
By Scott Sumner
Matt Yglesias has a very good post where he casts a skeptical eye on some of the proposals for infrastructure spending.
Something like the Silver Line in D.C. has been much more of a mixed bag. Not only did it cost a lot of money, but it’s just a poorly conceived project that’s actually reduced capacity on the Blue Line and therefore made transit service in the region worse in some ways. The Obama era brought us a lot of mixed-traffic streetcars that do absolutely nothing to improve transportation, and I suspect in many cases diverted local funds from what could have been bus lines.
There are various useful things one could do in intercity passenger rail. But is Amtrak actually prepared to do any of them?
My broad view is that on the transportation side, despite endless rhetoric about “crumbling bridges,” we mostly have structures in place where either significant expansion is undesirable (highways) or the existing institutions are mismanaged or incompetent.
At the same time, he’s not particularly concerned about financing issues:
I acknowledge that this is a somewhat pedantic point, but I do want to insist on it. If you want to renovate your house but you don’t have the cash, there’s a difference between getting a renovation loan and hiring contractors who you then stiff. Paying for things with borrowed money is a way of paying for things, not an alternative to paying for them. King put it more squarely, which is that the difference between debt financing and tax financing is whether you try to constrain current consumption to pay for investment or future consumption. And I think the right answer is future consumption.
Another thread of progressive thought focuses on the downside of laissez-faire economic policies. Progressives often cite a 2013 study by Autor, Dorn, and Hanson, which showed that freer trade with China may have led to painful economic restructuring in industrial areas that compete with imports from China. Subsequent studies have questioned certain aspects of this research, but the basic finding seems intuitively plausible. Those who accept this critique of import competition often conclude that public policy should aim to reduce the trade deficit. To do that, you need to either reduce domestic investment of increase domestic saving. That’s because the current account balance is equal to domestic saving minus domestic investment.
In fact, all the recent energy among progressives has been in exactly the opposite direction, that we should borrow more to finance current consumption. In the very short run, those policies might boost real output. But over any meaningful period of time an expansionary fiscal policy will boost consumption at the expense of investment, or else create a larger trade deficit. And that’s what pundits are currently predicting:
The US macroeconomic policy stance is more aggressive than elsewhere. The Organisation for Economic Co-operation and Development estimates that President Joe Biden’s $1.9tn American Rescue Plan could raise US output by around 3% to 4% on average in the package’s first full year. Many forecasters project US growth of 6% to 8% in 2021. . . .
The US was running current account deficits of around 3.3% of gross domestic product in the second and third quarters of 2020. Its merchandise goods deficit was nearly two percentage points of GDP higher.
The OECD has estimated Biden’s fiscal package could raise the US current account deficit by three-quarters of a percentage point through the first quarter of 2022. That could mean a US current account deficit around 4% of GDP in 2021.
Suddenly all this hand ringing about free trade costing jobs in manufacturing seems to have gone by the wayside. Progressives have a bad habit of focusing on an outcome that seems “nice” in isolation, without considering the opportunity cost of various public policies. That’s one reason I liked the Yglesias post; he discusses how the Silver Line expansion hurt commuters on competing lines. But I wonder if Yglesias fully understands the opportunity cost of focusing public policy on boosting current consumption. I don’t doubt that more consumption makes us happier in the short run, but what about the long run opportunity costs? And why have progressives stopped talking about deindustrialization? Is the trade deficit no longer a problem?
PS. In past posts I’ve argued that trade imbalances are not a problem. For me, the actual cost of budget deficits is higher future taxes, which slow economic growth.