Let's Start Spending
Leading economist and deficit hawk Robert H. Frank signs on to The Daily Beast manifesto calling for more government stimulus and tax credits to put America back to work and he explains why more spending is the way to get us out of this dismal recession. Another 30 economists signed the manifesto Tuesday. Plus, read the complete list of manifesto backers.
The deficit hawks are killing us. No, wait! I’m a deficit hawk. So let me rephrase that: Some of the deficit hawks are killing us. Like other deficit hawks, I believe we need to start paying down the mountain of debt the federal government has been running up. But not now, not as we continue to struggle to emerge from the deepest downturn since the Great Depression. Cutting spending now is the very last thing we should do.
“Deficits undertaken to finance productive investment not only do not impoverish our grandchildren, they actually enrich them. More important, they also help put the unemployed back to work.
The only reason we’re in a downturn is that there’s not nearly enough total spending to put everyone to work. The $787 billion economic stimulus bill passed in 2009, which many economists at the time warned was too small, is running out. Its effects are being offset increasingly by massive cutbacks in state and local government spending. And now many deficit hawks want us to cut spending further.
• Read The Daily Beast Manifesto—and the List of Economists Who've Signed OnThis is lunacy. The right kinds of deficit spending not only would help speed economic recovery, they would help bolster the nation’s long-term balance sheet. Yes, any additional current borrowing must eventually be repaid—or, equivalently, the interest on it must be paid forever. That fact has provoked countless protests about government “bankrupting our grandchildren.” But the consequences of running bigger deficits depend on how we spend borrowed money. Spending more on consumption would make our financial picture worse, but spending more on productive investments would make it better.
The $5 trillion run-up in national debt during the Bush administration paid mainly for an unproductive war in Iraq and tax cuts that went largely for additional consumption. Our grandchildren indeed will be forever poorer as a result of that borrowing. But the reverse would be true if government borrowing were used for productive investments.
After decades of profound neglect of the nation’s infrastructure, investment opportunities abound that promise high annual returns. According to a Federal Highway Administration estimate, for example, more than 50 percent of our major roads and highways are in backlog, meaning that they are “cracked, crumbled and overdue for repaving.” Potholes and other road surface irregularities cause an average of more than $100 in damage each year to every car and truck on the road, not to mention many needless deaths and serious injuries. And when road maintenance is postponed by even two to three years, the cost of repairs more than doubles. Spending $1 now on road maintenance thus keeps us from having to spend $2 three years from now. Even if we ignore the savings from prevented pothole damage, deaths, and injuries, that’s an investment with a rate of return of more than 18 percent a year.
The interest rate on 10-year Treasury bills is now only about 3 percent. Borrowing at 3 percent and investing at more than 18 percent immediately makes the nation’s balance sheet stronger. Any private business would leap at the opportunity to make such an investment. In short, deficits undertaken to finance productive investment not only do not impoverish our grandchildren, they enrich them. More important, they also help put the unemployed back to work. And the extra spending made possible by their paychecks puts still others back to work, and so on.
At some point, we’ll have no choice but to repair our roads and bridges. If we wait, costs will continue to escalate sharply and we’ll also need to bid for workers who are busy again doing other useful tasks. In contrast, if we tackle this task now, we’ll reap enormous cost savings and put skilled people to work who would be idle otherwise.
Infrastructure investment is by no means our only attractive option. Elsewhere I’ve described several other simple steps that would stimulate extra spending and employment right away while simultaneously improving the nation’s balance sheet. This is not rocket science. Economists since John Maynard Keynes have understood that government spending is the only effective remedy against deep downturns like the current one.
Yet deficit hawks, bizarrely, want us to cut government spending. If they get their way, the downturn not only will be much deeper and longer than necessary, but we’ll also be saddled with an even bigger debt burden.
Robert H. Frank, an economist at Cornell University’s Johnson School of Management, is the co-author, with Ben S. Bernanke, of Principles of Economics.