Monday, October 13, 2014

Summers on infrastructure

Larry Summers has been on a roll. First, there has been been his arguments on the secular stagnation. Then there has been his paper with a set of authors discussing their thesis that government debt policy has offset the impact of quantitative easing. Now there have been editorials for infrastructure development. Summers has been a one man crew supporting Keynesian policies. While there are other who have espoused Keynesian views, Summers has been using his intellectual prowess to provide a research foundation for his activist views. They should be listened to.

Of course, his infrastructure views is just highlighting the key view of the IMF in their latest WEO report which focuses on infrastructure development as a means of helping global growth. This viewed as a major turn-around for the IMF which has usually focused on austerity as a means of solving problems.

His current view, which is arguing the IMF point, is that this is a great time for infrastructure development for three reasons. One, infrastructures helps increase the productivity of a economy. Two, infrastructure can provide strong fiscal stimulus. The multiplier when you are in a liquidity trap and have output gaps is much greater than what would be case under normal times. It may be as high as 3. Three, the crowding out at current market levels is limited. If you can finance at low rates, you will get paid back in full. Anytime you can finance at rates below the long-term growth rate of the economy, do it. This could be considered a free lunch.

Global growth will continue to be slow in a world of further delevering. If growth is expected to increase and output gaps closed, there needs to be more fiscal work and less focus on monetary policy. A financial rally would continue if we can get a change in fiscal policy.

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