Who Should We Trust?

These may not be the times that try men’s souls, but they sure are times that confound economic policymakers.

We have one set of economists telling countries to implement austerity measures, and another group insisting that for now, stimulus is the answer. For those of us who are not trained in the “dismal science,” it’s increasingly difficult to distinguish between medicine and snake oil. Prescriptions sounding eminently reasonable to those of us unschooled in economic arcana turn out to be counter-productive in practice—case in point: research showing that so-called “right to work” legislation just depresses wages without generating the promised economic growth.

So where should we look for advice?

An October paper for the New America Foundation, by Daniel Alpert, Robert Hockett and Nouriel Roubini (not-so-affectionately dubbed “Dr. Doom” after he predicted the mortgage meltdown) proposes a way forward, and the logic seems—at least to this non-economist—pretty compelling.

The authors spend considerable space analyzing “how we got here,” and they note that digging out of the present crisis will be particularly difficult because, thanks to the entry into the world economy of “successive waves of new export-oriented economies,” and the concurrent, dramatic rise in productivity gains “rooted in new information technologies and the globalization of corporate supply chains,” the world economy now has excess supplies of labor, capital and productive capacity relative to global demand. Furthermore, the integration of new economies with competitive workforces has shifted the balance between capital and labor, resulting in income inequality as bad as—if not worse than—the gilded age.

The bottom line, as they see it: it will be difficult to sustain even current levels of consumption without improved wages and incomes, but such increases are unlikely due to the gluts of both labor and capital. In such a situation, austerity simply leads to a vicious downward cycle of weaker demand, weaker investment and more unemployment.

What to do? The authors lay out a three-part prescription: first, a “substantial” five to seven year public investment program to repair America’s crumbling infrastructure; second, a “comprehensive” debt restructuring plan; and third, global reforms to offset diminished demand in the developed world and correct the current imbalance in supply and demand.

The paper is long and quite detailed, and the descriptions of each proposal deserve to be read in their entirety, but I was particularly struck by the logic of the infrastructure recommendations.

  • Fixing infrastructure now would take advantage of a “historically unique opportunity” to put idle capital and labor to work rebuilding at an extremely low cost and with potentially high returns. Capital costs are now at historic lows, and labor is in abundant supply. It will never be less expensive to fix our decaying infrastructure than it is now.
  • The American Society of Civil Engineers estimates we need 2.2 trillion to meet even the most basic infrastructure needs. Less than half of that is currently budgeted.
  • Every billion dollars invested in infrastructure generates 23,000 well-paying jobs. Over the course of five years, such a program would create over 5.52 million jobs.
  • The CBO estimates that every dollar of infrastructure spending generates a 1.6 dollar increase in GDP.
  • Fixing our infrastructure is also essential to restoring American competitiveness. China invests 9% of GDP annually in infrastructure—we spend less than 3%. Public infrastructure investment lowers the costs of transportation, electricity and other core business expenses.

Even if these economists are overstating the case, what’s the worst that would happen if we took their advice? Our bridges might stop falling down? Pollution levels would abate? Workers with jobs might have money to spend?


  1. This is surely one of the best papers Ive read in recent memory on the best way forward. But I still think it could also be titled “The Bare Minimum To Keep the Global Economy from a Sustained Recession.”

    All of their suggestions are spot on, but only just even out the current economic imbalances in the world, and do not really set forward a new vision on how to create sustained growth in a globalized/high tech world with a growing population.

    I still havent seen a descent answer from any economist.

  2. Wild guess: This proposed solution would have to be done by a federal program with the typical margin of federal overhead and associated political winners and losers. It’s existence will be paid for by projected future savings instead of reducing other current spending.

    Didn’t we get into this mess in part based on assurances of the glorious results awaiting if we just “invested” (spent money we didn’t have)?: geopolitical skirmishes across the globe, everyone-can-own-a-home, and now the looming spectre of “Affordable Care”?

    If we could snap our finger to return to an era of American economic dominance- great. If we reduce the financial and regulatory burden of the federal government to allow the states or municipalties to initiate this rebuild- great. Otherwise, if we’re not reducing spending to pay for it, I don’t trust the CBO or Washington D.C. (and am a long way from being the only one).

    When we hear less finger-pointing and more grudging acknowledgment of collective sacrifice, then I’m more inclined to trust.

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