Government Spending Spurs Not Growth but the Reverse
|August 15, 2014||Posted by Staff under Editorials|
This 2014 excerpt of the Financial Times, Aug 12, is by Matthew C. Klein.
A new working paper from the IMF suggests a “big push“ — government spending a lot of money on new roads, bridges, etc. — does more harm than good. Such major drives have been followed by slumps rather than booms.
Governments borrow money to spend on projects that aren’t worthwhile. At first, this boosts economic activity by putting more money in workers’ pockets — classic Keynesian stimulus. Once the projects are completed however, growth slows so much that the total average growth rate over the period is either the same or worse than it would have been without the bad investments.
Those loans would be easy enough to service if the investments boosted growth and tax revenues, but that usually doesn’t happen. So governments engage in growth-sapping austerity measures. Countries endure capital flights and lost decades.
When money is loose — government flush with fat loans — special interest groups press [for new infrastructure that rewards them]. Yet new roads have less impact than the initial roads that opened up access to major regions of the country.
Fast growth followed some investments — post-war reconstruction in Europe. However, during war, the bridges, roads, ports, and airports that were targeted tend to be those that are strategically and economically important. These structures tend to have high impacts when restored to operation.
Korea and Taiwan are two of the handful of formerly poor countries that managed to become rich in the 20th century. Contrary to popular perception, in Korea, “public investment has never boomed…staying at approximately 5 percent of GDP for several decades.” Taiwan did build out its infrastructure in the late 1960s and the early 1970s, but this was more in response to the needs of exporters facing capacity constraints after years of rapid growth than as an effort to jumpstart a weak economy.
Employing marginal people to build unneeded infrastructure might not be a great use of public funds, compared with giving money to people directly to spend on things they want.
Ed. Notes: All the exceptions, all the successful examples, relied on land reform, including Korea and Taiwan, indeed all the “Asian Tigers”. Taiwan even levied a significant land tax and enjoyed the most spectacular results. In Ethiopia, which in the 1990s performed well, its Regional Government, against the advice of the IMF, adopted a tax on land values and parcel size. The tax on structures inside city limits was drastically reduced.
If a nation were to recover all its rents for land and resources, it would not need to borrow to hand out cash to citizens; it would enjoy a surplus it could share as a dividend, a la oil-taxing Alaska or land-taxing Singapore.
What’s needed is not another study to conclude that waste and redundancy are worthless, but one to show that land justice is critical to success.