Tuesday, November 08, 2011

The market's saying: borrow and invest

There are macroeconomic reasons for the federal government to run a deficit right now: slow growth, high unemployment, interest rates near zero. In the current environment fiscal policy is needed to stimulate the economy, as argued by Paul Krugman, Brad de Long, Mark Zandi, and others. Note that Zandi is chief economist at Moody's, and people pay good money for his forecasts. Among prominent pundits, Krugman has the highest accuracy rate in economic predictions.

There is also a microeconomic argument, as Ezra Klein explains today. The real interest rate on ten-year treasury bonds is negative. We have more than a trillion dollars in identified infrastructure needs. State and local governments have limited borrowing capacity, but the federal government doesn't. Not only are borrowing costs low, so are construction costs. For example, the highway construction cost index was about one-third higher in 2007 than it is now. The low borrowing cost says government investment now will not crowd out private investment. The low prices for construction indicate there are few alternative uses for construction companies, construction equipment, and construction workers right now.

Any public sector construction that's on the planning agenda for the next ten years should be shifted forward. Any roads that would need to be repaved next year or the year after - repave them now. Any major school renovations planned for two or three years from now - move them forward. Any bridges that are planned for replacement in the next three or four years - get going now. Any expansion of transit service or any replacement of rolling stock scheduled for the next two or three years - bring it forward.