Monday, December 08, 2008

Zombie infrastructure

If John Maynard Keynes had lived during a period of high labor specialization, and high Federal taxes on labor, he would not have recommended "digging a ditch and filling it up again" as a useful target of deficit spending during a recession. Under Keynes' GT, the goal is to increase aggregate demand by increasing the Federal deficit, and this can be done through lower taxes, higher spending, or both. The key is to raise the deficit as quickly as possible in ways that also increase real goods and services available to the economy. In Keynes times, this was hiring men to work the land with shovels.

Fast forward to 2008, aggregate demand is falling, and the Government wants to run deficits to boost it. So, academic economists, who have never had to make a payroll never mind handle a shovel, dust off their old copies of the General Theory, and parrot back "infrastructure spending". "Infrastructure spending" has become this talismanic utterance, bested only by the more potent phrase "shovel-ready infrastructure spending", that if repeated often enough will result in magical economic growth.

Japan has tried this for the past 20 years, and failed. The US is going down the same path as Japan by propping up zombie firms, and expanding the monetary base in half hearted ways which do not, net, increase aggregate demand or increase the amount of real goods and services available in the economy.

If Keynes was alive today he would not call for "infrastructure spending", he would call for the Government to pick up the tab for FICA taxes, and to keep picking this up until CPI began to tick up in a serious way.


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