StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Larry Summers Joins the Build While It's Cheap Chorus

09 Oct 2010
Posted by Andrew Samwick

On his way out the door, Larry Summers joins the Build While It's Cheap Chorus.  Writing in The Financial Times, Alan Rappeport reports:

Larry Summers, the outgoing director of the White House National Economic Council, said the US must ramp up spending on domestic infrastructure to drive the economic recovery.

Speaking at the Financial Times’s View from the Top conference in New York, Mr Summers called it a “short-term imperative and a long-term macroeconomic imperative” that the US government increase infrastructure investment. He said that a combination of low borrowing costs, cheap building costs and high levels of unemployment in the construction sector made this the ideal time to rebuild roads, bridges and airports.

 I presume that Summers did not come to this view just as he thought about leaving.  But it is worth pointing out that he was one of the chief proponents of "timely, targeted, and temporary" as the recession was beginning.  Consider this op-ed, reprinted from The Financial Times, from January 2008.  Of the three criteria, the first two are benign -- who would do something that would be untimely or untargeted?  Here's what he wrote about "temporary:"

Third, fiscal stimulus, to be maximally effective, must be clearly and credibly temporary – with no significant adverse impact on the deficit for more than a year or so after implementation. Otherwise it risks being counterproductive by raising the spectre of enlarged future deficits pushing up longer-term interest rates and undermining confidence and longer-term growth prospects.

This paragraph is motivated by the idea that what the government should be aiming to do primarily is to restore aggregate demand.  The argument then considers possible fiscal changes based on how much they boost aggregate demand.  I think that's a bit of a trap -- estimates of fiscal multipliers and the like are quite imprecise.  More importantly, the deficit gets larger for dubious purposes.  My view, in contrast, looks for opportunities to implement a set of prescribed spending (here, infrastructure for which the government takes responsibility anyway) at the time in the business cycle when it is most advantageous to do so.  That is when prices go down or factors are idle -- triggers that are much easier to diagnose.  And once you start the spending plan, you boost aggregate demand as a by-product.

(I've been blogging ad nauseum nauseam about this.  But if this is the first time you are reading my views, go here and here for the original presentation of the ideas.)

It's "ad nauseam," professor.

It's "ad nauseam," professor. Refresh your Latin.

ad nauseam

Fixed.  Thanks.

Build While It's Cheap

This absolutely makes sense. Invest today in need infrastructure that makes our economy more efficient when costs are low. Basically advance these outlays from future years into the present.


1) They blew it by first passing a stimulus package that spent too much and invested too little. Now the public is fed up and not willing to listen to reasonable ideas. Who is going to pay for the extra cops or firefighter grants now that the stimulus money has ended?

2) They will build the wrong things. High speed rail, light rail in sunbelt cities are absolute boondoggles. They end up not adding economic value and they require continuous tax subsidy forever. Spending on brown field sites do nothing to increase our global competitiveness which should be the first priority.

Politicians simply are too irrational to select the type of infrastructure projects that would properly be classified as an investment. Such a pity.

Best way to build cheap is to repeal Davis-Bacon

If union operations can't compete on price for public projects, they should lose the job to non-union operations. If you level the playing field, you will get more return for tax dollars spent.

Spent too much the first

Spent too much the first time, you have to be kidding, About $300 billion per year in 2009 and 2010, 40% of which was tax cuts? That in the context of a $14 T economy? Cuts in S&L spending have offest about half of that, so you are down to about $150 B per year of actual stimulus, or just over 1% of GDP. In case you had not noticed, the Federal Budget deficit is falling, through the first 11 months of the year it is over $100 B less than in FY 2009. That is not exactly great news when the consumer is trying to deleverage, and thus save and not spend. In such an envoronment businesses have no need to invest, regardless of the cost of capital. We need more stim, and infrastructure would be a great way to do it.

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