The latest jobs report has some good news; the economy is still growing. It also has some bad news; the economy isn't growing as fast as we would like.
This begs the question, "What can be done about it?" The good news is that there is one very obvious solution that would give the economy a real boost. The bad news is that this solution is so politicized that it will be tough to move it along.
This obvious solution to give the economy a boost, while addressing real needs, is to spend significant additional federal money on long deferred maintenance and upgrading of our nation's infrastructure. Our roads need upgrading - according to surveys, Wisconsin has the third worst roads in the nation. Many of our bridges need repair; some are unsafe. Additional high speed rail would make transport more efficient, and would benefit those who don't even use it by making our highways less congested.
International travelers affirm that American airports are among the dingiest and least efficient in the developed world. Much of rural America lacks access to broadband. Our big city water supplies are ancient, and of questionable safety. Our national parks, annually visited by millions of Americans and international visitors, have been too long neglected. An estimated minimum $12 billion is needed, much of this for road work surrounding our national parks.
Direct federal spending and federal assistance to state and local government would directly create employment of engineers, plumbers, carpenters, technicians, craftsmen and construction workers of all kinds. These jobs are local and cannot be exported. The demand for construction equipment from firms such as Deere and Caterpillar would support additional good-paying manufacturing jobs.
The local employment would create a multiplier effect through what economists refer to as "induced by" effects and "stemming from" effects. "Induced by" effects refer to induced demand for labor, supplies, and materials related to these projects. "Stemming from" effects are those following the spending, such as increased spending on goods and services that would not have occurred in absence of these projects.
Improved infrastructure would make the private sector more efficient. Civil engineers remind us that as maintenance is deferred, future costs of repairs increase at an increasing rate. Since these costs must eventually be borne, and it is less costly to do such maintenance and upgrading now rather than wait, we should embark on these tasks immediately. The clincher is that interest rates are at historic lows. To the extent that federal borrowing is required, it makes sense to do it during periods of low interest rates.
This brings us to the contentious matter of federal debt and borrowing. Let's remind ourselves that the economy is functioning below capacity. As pointed out in my previous columns, federal spending is a rational policy to create the income with which to purchase the full employment level of production. In other words, it is rational for the federal government to increase spending if private spending is not sufficient to support the full employment level of output.
While individuals and businesses need to curb spending during recession, the same does not apply to the federal government because the primary responsibility of the federal government is not to have zero debt, but to do what it can to maintain full employment. As employment and tax collections increase, the federal public debt will decrease relative to size of our economy, if not decrease in absolute terms.
Let us recall that even the most profitable corporations carry debt in the form of corporate bonds. Most wealthy individuals carry some debt. It often makes more sense to carry debt than to sell off assets for the purpose of reducing business and personal liabilities to zero. What's important is the purpose for which debt is incurred, and the ability to carry it. Incurring debt to repair and improve infrastructure and increase employment makes sense for all the reasons cited above.
Does this mean that debt management is unimportant? Of course debt management is important. There are times when it makes perfect sense to reduce the public debt, in relative if not in absolute terms. Such a time was during the federal budget surpluses during the last four years of Bill Clinton's term. There was even some talk of paying off the federal debt. But invasion of Iraq, the Great Recession beginning in 2007, and haste to "give this money back" to the taxpayers in the form of tax cuts ended that discussion.
Let's go back to our WWII example when federal spending on war material pulled us out of the Great Depression and created full employment. As it was impossible to finance the war entirely through taxes, the federal government borrowed heavily through issuance of war bonds. Those war bonds served a purpose beyond financing the war. Those bonds accumulated by individuals, banks, and businesses represented "forced savings," or deferred consumption.
At war's end, annual federal deficits approached thirty percent of GDP, a seemingly terrible burden. But it really wasn't the problem it would seem at first glance. Those war bonds represented liquid assets, money that could be spent as the economy returned to peacetime status.
Nobody wanted to return to the dismal days of the Great Depression. And we didn't have to. The transition to civilian production and employment, and liquidity augmented by those bonds, making demand effective, ushered in a prolonged period of prosperity. By the 1950s annual federal deficits had decreased to around 3 percent of GDP.
The situation today is nowhere near our situation after WWII. With the Great Recession beginning in 2007, annual deficits increased to around 10 percent of GDP. With even a slowly recovering economy, we are back to around 2 to 3 percent of GDP, totally manageable.
Rebuilding our infrastructure is not a "magic bullet" or the complete solution. But it can and should be a key element in our macroeconomic policy.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Fridays in The Monroe Times.
This begs the question, "What can be done about it?" The good news is that there is one very obvious solution that would give the economy a real boost. The bad news is that this solution is so politicized that it will be tough to move it along.
This obvious solution to give the economy a boost, while addressing real needs, is to spend significant additional federal money on long deferred maintenance and upgrading of our nation's infrastructure. Our roads need upgrading - according to surveys, Wisconsin has the third worst roads in the nation. Many of our bridges need repair; some are unsafe. Additional high speed rail would make transport more efficient, and would benefit those who don't even use it by making our highways less congested.
International travelers affirm that American airports are among the dingiest and least efficient in the developed world. Much of rural America lacks access to broadband. Our big city water supplies are ancient, and of questionable safety. Our national parks, annually visited by millions of Americans and international visitors, have been too long neglected. An estimated minimum $12 billion is needed, much of this for road work surrounding our national parks.
Direct federal spending and federal assistance to state and local government would directly create employment of engineers, plumbers, carpenters, technicians, craftsmen and construction workers of all kinds. These jobs are local and cannot be exported. The demand for construction equipment from firms such as Deere and Caterpillar would support additional good-paying manufacturing jobs.
The local employment would create a multiplier effect through what economists refer to as "induced by" effects and "stemming from" effects. "Induced by" effects refer to induced demand for labor, supplies, and materials related to these projects. "Stemming from" effects are those following the spending, such as increased spending on goods and services that would not have occurred in absence of these projects.
Improved infrastructure would make the private sector more efficient. Civil engineers remind us that as maintenance is deferred, future costs of repairs increase at an increasing rate. Since these costs must eventually be borne, and it is less costly to do such maintenance and upgrading now rather than wait, we should embark on these tasks immediately. The clincher is that interest rates are at historic lows. To the extent that federal borrowing is required, it makes sense to do it during periods of low interest rates.
This brings us to the contentious matter of federal debt and borrowing. Let's remind ourselves that the economy is functioning below capacity. As pointed out in my previous columns, federal spending is a rational policy to create the income with which to purchase the full employment level of production. In other words, it is rational for the federal government to increase spending if private spending is not sufficient to support the full employment level of output.
While individuals and businesses need to curb spending during recession, the same does not apply to the federal government because the primary responsibility of the federal government is not to have zero debt, but to do what it can to maintain full employment. As employment and tax collections increase, the federal public debt will decrease relative to size of our economy, if not decrease in absolute terms.
Let us recall that even the most profitable corporations carry debt in the form of corporate bonds. Most wealthy individuals carry some debt. It often makes more sense to carry debt than to sell off assets for the purpose of reducing business and personal liabilities to zero. What's important is the purpose for which debt is incurred, and the ability to carry it. Incurring debt to repair and improve infrastructure and increase employment makes sense for all the reasons cited above.
Does this mean that debt management is unimportant? Of course debt management is important. There are times when it makes perfect sense to reduce the public debt, in relative if not in absolute terms. Such a time was during the federal budget surpluses during the last four years of Bill Clinton's term. There was even some talk of paying off the federal debt. But invasion of Iraq, the Great Recession beginning in 2007, and haste to "give this money back" to the taxpayers in the form of tax cuts ended that discussion.
Let's go back to our WWII example when federal spending on war material pulled us out of the Great Depression and created full employment. As it was impossible to finance the war entirely through taxes, the federal government borrowed heavily through issuance of war bonds. Those war bonds served a purpose beyond financing the war. Those bonds accumulated by individuals, banks, and businesses represented "forced savings," or deferred consumption.
At war's end, annual federal deficits approached thirty percent of GDP, a seemingly terrible burden. But it really wasn't the problem it would seem at first glance. Those war bonds represented liquid assets, money that could be spent as the economy returned to peacetime status.
Nobody wanted to return to the dismal days of the Great Depression. And we didn't have to. The transition to civilian production and employment, and liquidity augmented by those bonds, making demand effective, ushered in a prolonged period of prosperity. By the 1950s annual federal deficits had decreased to around 3 percent of GDP.
The situation today is nowhere near our situation after WWII. With the Great Recession beginning in 2007, annual deficits increased to around 10 percent of GDP. With even a slowly recovering economy, we are back to around 2 to 3 percent of GDP, totally manageable.
Rebuilding our infrastructure is not a "magic bullet" or the complete solution. But it can and should be a key element in our macroeconomic policy.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Fridays in The Monroe Times.
