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Friday, October 31, 2008

Infrastructure Spending vs. Tax Rebates

With all due respect to Mankiw's "Let States decide" what kind of stimulus they get (which seems to me would be a political nightmare for numerous Governors, many of which may be new to office by the time the stimulus passes), there is good reason to favor direct spending such as via infrastructure a la a "New" New Deal as opposed to further tax rebates.

Firstly, there is significant evidence that consumers and firms are saving good chunks of their income due to the uncertainty of the market. In so far as that money is hoarded or used to pay off bad or old debt, then a rebate will do little to stimulate new investment and consumption. In so far that it is thrust into the financial sector via the purchase of bonds or stock etc., there is good chance that the money would be 'tied up' with the rest of the money that banks refuse to lend. It is true that lending is loosening, but it is still a problem.

No, the only way to guarantee an actual stimulus in this climate is through direct spending. Cut out the financial intermediaries and eliminate the potential for leakages and directly pump money into new investment projects - investment projects that sadly have been crowded out over the course of a number of decades due to the massive expense for the sake of "national defense" (or offense, as the case may be).

4 comments:

Sheng Fulai said...

very interesting. any thoughts on direct spending on environmental/climate technologies?

Garth said...

Of course that is the downside to spending - deciding what to spend it on. Spending attracts lobbying and interest groups. Personally, I think one of the first things an Obama administration should do is focus on his plan to add up to 5 million 'green' jobs via new 'green' projects backed by the government. This kills many birds with one stone: economy, environment, social cohesion, dependency on oil, etc.

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