Lind makes the case for massive infrastructure spending to create jobs

Yes, yes, and yes it all I have to say, Can infrastructure-led growth save the economy?

The debate about American economic policy can best be understood with the help of a remark by the fictional detective Sherlock Holmes: “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” When you have eliminated impossible policy options, whatever options remain, however difficult, must be pursued.

In the case of the economy, the problem is the weakness of private domestic demand in the U.S. The purpose of the tax cuts in the stimulus bill and “cash for clunkers” was to increase consumer demand until it revived to lead a recovery. But most businesses met the additional demand without new hiring and many Americans used the money to pay down debt or increase savings. The other parts of the federal stimulus — spending on infrastructure and aid to the states — were too small and largely counteracted by the contraction of state and local economies.

Where will the demand needed to induce businesses and banks to invest their hoarded cash come from? Wage-led private domestic demand drove American economic growth in the Golden Age of the 1940s-1980s. Debt-led private domestic demand drove American economic growth as well as the world’s in the Bronze Age of the 1990s-2000s. Now private domestic demand is weak and likely to remain so. In the Iron Age of the U.S. economy that has followed the collapse of the asset bubble of the last decade, American households are gradually reducing their debt-to-income ratio. To judge by the experience of other countries that have suffered from asset bubbles, the entire process might take 10 years, even 20. In the meantime, some driver of American growth other than private domestic demand must be found.

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If neither foreign private demand nor foreign public demand can compensate for the loss of American private domestic demand, then the only possible source of increased demand for American goods and services that remains is public domestic demand. American government at all levels may need to provide much of the missing demand for American businesses and labor, for the decade or longer that is needed for private sector deleveraging in the aftermath of America’s asset bubble.

To avoid competing with private enterprise, the government should produce public goods that increase overall productivity and that the private sector has no incentive to provide, in good times or bad, such as infrastructure and social services like policing, health care, education and care for the young and old. In addition to mobilizing idle resources and labor directly, both infrastructure and public service spending could help business in general by boosting the purchasing power of Americans who are now unemployed.

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Infrastructure projects that enhance American productivity should be paid for by borrowing, with their costs repaid more rapidly over decades or generations with the help of the more rapid economic growth that they make possible. If more federal borrowing is blocked by the irrationality of deficit hawks and the ignorance of many populists who do not understand public finance, then money for infrastructure should be raised by tax-favored municipal bonds, like Build America Bonds (BABs), and/or by the creation of public investment banks, like a national infrastructure bank, that can raise funds by issuing their own government-backed but off-budget bonds.

Deficit hysterics to the contrary, U.S. federal, state and local debt, along with the “agency debt” issued by government-sponsored enterprises, will continue to provide desirable, safe investments for investors at home and abroad. Investors may gamble in emerging markets, but where will their money be safer than in the U.S.? In demographically declining Europe, suffering from misguided austerity programs? In dictatorial China, where oppressed workers are rioting and committing suicide? In authoritarian, secretive, insecure petrostates?

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The very idea of a “stimulus” was always misconceived. It assumed that government action was needed only temporarily, until private domestic demand returned the U.S. economy to something like the pre-2008 status quo. What is needed, however, is not a brief episode of intensive care for an otherwise healthy patient, but a pacemaker and an artificial hip for a patient who cannot emerge from a coma without radical, reconstructive surgery. If the Iron Age of the economy is to come to an end, the expansion of public domestic demand must be large enough that it can play much of the role in the American economy played by wage-led private domestic demand in the Golden Age of the 1940s-1980s and by debt-led private domestic demand in the Bronze Age of the 1990s-2000s. Even the conservative ideologue Amity Shlaes, in her anti-Roosevelt screed The Forgotten Man, concedes that massive public investment worked in 1936: “The spending was so dramatic that, finally, it functioned as Keynes … had hoped it would. Within a year unemployment would drop from 22 percent to 14 percent.”

In the summer of 2008, Lawrence Summers, now President Obama’s chief economic adviser, declared that any stimulus should be “timely, targeted and temporary.” He was wrong. The expansion of public domestic demand that America needs must be prompt, productive and prolonged.

Bring on a 21st Century WPA!