Does inefficient risk-bearing change the opportunity cost of government borrowing?

Let’s say the private sector is using a hurdle rate of five percent and the government a rate of one percent.  (Those numbers are illustrative only.)

Furthermore say the private sector uses five percent because it faces private risk which is in fact not social risk from a welfarist point of view.  In other words, the private sector ought to use a one percent hurdle rate, even though it does not, but people worry about their own portfolios rather than the broader social portfolio of projects in toto.  If the private sector switched to the one percent rate, of course, it would invest much more and lower the marginal rate of return on capital from five percent down to one percent, adjusting for all the required adjustments (taxes, transactions costs, etc.).

In such a world, if a new government project displaced private capital, the opportunity cost would be one percent at the margin.

But we are not in such a world, even if you think we ought to be.  If a new government project displaces some private sector capital, the marginal cost there is still five percent.

You can read Brad DeLong’s take on my post yesterday on the opportunity cost of extra government projects.  Brad longs for that cross-sector equalization down to one percent on both sides of the ledger and he makes many fine points.  But there is nothing in his argument which rebuts, or even tries to rebut, the claim that, given current imperfections the marginal opportunity cost is still five percent.

So the message of my original post stands as well, and you will note that is simply the mainstream micro take on this question which has been around since the 1970s, with the commonly understood answers pretty much crystallized by the early 1980s.

Addendum: Here is me, from the comments: “It is amazing how much “free lunch” economics one can read in these comments. Of course we should in fact apply multiplier analysis to the percentage of previously unemployed resources targeted by the new project, and a higher hurdle rate to the rest. You can argue over what is the percentage mix here, but please don’t pretend scarcity is no longer a ruling economic principle.”


It's a big bad world. Did huge Chinese borrowing for their economic projects (good and bad) ever actually limit the ability of Ford or GM to float a bond?

I'm glad somebody else is first for once.

A study on the related theme of "crowding out" found that US government borrowing back in the 1980s did not result in crowding out in the private sector. Whoever wanted to borrow money back then did so, regardless of the huge US government deficits. This is consistent with the boom and bust nature of fractional reserve banking: usually banks can borrow and lend up to the limit of their reserves*. During boom times, they do so, during bust times, they don't. (I wish I could find the stats for what percentage of money lent to reserves is during different years; I've been looking for this stat for quite a while but haven't found it).

* reserves: (Investopedia) "Banks with less than $15.2 million in assets are not required to hold reserves. Banks with assets of less than $110.2 million but more than $15.2 million have a 3% reserve requirement, and those banks with over $110.2 million in assets have a 10% reserve requirement. "

I think that is what I figured, and the fact that it is a multiple currency, international, banking system is underrated.

All the more complicated because both currencies are special cases. One is the main international reserve currency and the other difficult to trade in much volume outside of the country that mainly uses it but represents the main locus of increasing economic activity and demand.

This week's Economist has a good primer on the Keynesian multiplier that speaks of crowding out as well, relevant to this post, see here:

1. China may borrow a lot of money for their economic projects but they are net lenders, buying US Treasuries and other assets.

2. The 'crowd out' would be marginal. In a full employment world, gov't borrowing would presumably raise interest rates a bit which means some things at the margin wouldn't get funded. The theory is the opportunity cost is the reduced purchases from those who would have borrowed as well as the value of the investments they would have made. If growth was, say, half a percent higher since the 80's we would be in a nicer place than we are now, that doesn't mean 'now' will necessarily be some type of hell hole.

Two issues though:
2 a. Borrowing also happens for consumption, Is what gets crowded out really investment or simply changing the balance of consumption?

2 b. Are we ever at full employment? One reading of Keynes is an advanced economy can never generate enough demand to keep itself at full employment. Gov't always has to add to demand to keep full employment. It can add via consumption or investment.

2b would seem to be consistent with observations. Can anyone here cite me a single example of a country that has gotten into massive debt trouble who also borrows in their own currency? Can anyone show that the US, for example, ever paid an economic price for all the debt it ran up in WWII?

re: 2a/2b - No, I don't think we're ever that close to full employment. The federal government would have to set the money on fire, or spend it on explosives to blow up factories, or something like that for it not to cycle back through the economy.

I think the closest we've been to full employment was 2000, where 82% of 25 to 54 year olds were actively employed -- not the best measure, but I think it works.

Interestingly enough, the late 1990s was the last time where monetary policymakers decided to not wring their hands and let growth rip. Greenspan muttered something in 1996 about 'IT productivity growth' and let rates stay low...and (shock!) inflation didn't pick up and we had a massive boom.

@Nickbradley - you have with your monetarist outlook a logically consistent model, like (in another way) Marx did (with his labor theory of value, which is of course flawed but internally consistent). But consider that money may be neutral. It makes the "Free Silver" and William Jennings Bryant issues of the late 19th century look about as relevant as the Prohibition movement is today, that is, despite the good arguments made, pretty much a red herring and non-issue. But, like Marxism, I think the only way to convince people that hare-brained schemes like Sumners NGDPLT and other such 'print money to create a boom' monetary schemes are nonsense is to adopt them. So let the printing press fly! It won't make a difference IMO (money = neutral).

No - it employs idle resources as long as there are idle resources - - always has.

We've been undershooting inflation targets for so long that our models aren't really credible anymore - the supply side can scale quite rapidly to meet new demand, and free trade vents off any price pressure for imports.

So yes, Larry's "pressure cooker" economy would work very well

The 60s were dark times. Tyler sees the 60s as worse than the depths of the depression from 1930 to 1935. That time was fantastic because returns on capital were soaring in real terms. The bank's 40% ownership of real estate soared to 60% then 80% then 100%. The wealthy who were capital rich got much richer. That is Trump's point about how recessions are great and how the deeper the recession, the higher the returns.

Trump's complaint is Obamomics is bad because he hasn't been able to profit from no recession.

"Marx did (with his labor theory of value, which is of course flawed but internally consistent)"

So, you think labor value is wrong so an economy where all workers are replaced by robots so there is no labor value will be an extremely efficient and productive economy with 100% return to capital and clearly high gdp growth?

By the way, who buys what is produced? The capitalist with the robot building robot sells those to everyone who still has money from working and they build all the robots they need to produce everything they consume and then try to sell the excess. Any price higher than zero will be too high for anyone who no longer has left over money from when labor had value. Anyone with money selling robot production can produce everything he needs using his robots. If your robots produce superior goods, he will buy from you but you will not buy from him, so once you take all his money, any price higher than zero is too high.

If capital replaces all labor, consumption goes to zero, and thus production goes to zero. Nomadic hunter gathers with no contact with "economies" consume zero and produce zero. They live on $0 per day.

Those with infrequent contact produce objects economies consider art and place a price on so that a knife with a price is traded, thus the nomads are said to live on $50 per year. Or maybe they produce some rare product of marginal value to them, but highly valued by industry, say rare plants or bugs.

No one is interested in nomads as customers. Rather, nomads are viewed by capitalists as people to be killed so the capitalists can take and profit from their land and forests and minerals. And to the degree that people prevent capitalists from profiting, people are liabilities to be eliminated, and socially acceptable mass murder is in high demand.

@mulp - in a robot society where capital is 100% of factors (labor is zero), you are describing the Land of the Lotus Eaters (Google this) and in this Star Trek economy of post-scarcity, the value of labor will be as slaves or as sycophants (see Tyler's book, "Average is Over"). So you, mulp, will be in demand as a rich quadrillionaire's pet. Same life as that of a modern lap dog actually.

Two faulty arguments. First, "hellhole" is relative and subject to status quo bias. We won't think the "now" of 2100 is a hellhole, but the counterfactual world that grew at 4% compared to our 1% would think so. Second, as the issuer of a currency, you are able to debase your currency as much as you want. If this had no cost, then every issuer of currency would be infinitely wealthy. Obviously the magical-Keynes thinking fails somewhere between reality and 0 cost production of units of goods and services.

"Did huge Chinese borrowing for their economic projects (good and bad) ever actually limit the ability of Ford or GM to float a bond?"

Wrong question!

Tyler is asking whether the Chinese economy wouldn't be better off with 800 million farmers instead of only 500 million farmers because the farmers produce a 0.1% return on capital at $200 contribution to gdp while the extra 300 million factory and construction workers return 0% on capital for their $10,000 contribution to gdp.

With 300 million fewer workers (farmers are not considered workers) and much less gdp, China would have a much more economically efficient economy based on higher rate of return on capital.

Tyler wants lower gdp growth in the US just like the Tea Party, Wall Street, conservative Republicans. By reducing production, scarcity creates pricing power which allows extracting higher rents and monopoly profits so on a stagnant or even shrinking economy, returns on capital can rise.

Government investment has been shrinking for most of the 21st century, and much of the past 30 years, but in the past 8 years the shrinkage in investment has resulted in record high returns on capital.

All investments, public or private, will drive down returns on capital. It is impossible to expand production and increase scarcity profit when scarcity is declining.

Thus Tyler argues for no investment at all.


"Tyler wants lower gdp growth in the US just like the Tea Party, Wall Street, conservative Republicans. By reducing production, scarcity creates pricing power which allows extracting higher rents and monopoly profits so on a stagnant or even shrinking economy, returns on capital can rise.

Government investment has been shrinking for most of the 21st century, and much of the past 30 years, but in the past 8 years the shrinkage in investment has resulted in record high returns on capital."

Why do left leaning economists never recognise upfront the huge agency risk of government works. I mean stories on bridges to nowhere have hardly been kept secret. So even if there were a theoretical case for public investment having a lower hurdle rate it would likely be swamped by the malinvestment risk of porkery. It's funny because generally speaking post investment they tend to be the most outraged by too close ties between private companies and politicians.

Let's not build any more fire stations then.


Some interesting ideas there, about who is first contact with the homeless, for example.

But probably the biggest error is in misunderstanding reserve capacity. The article states "In Los Angeles, Chicago and Miami, for example, 90% of the emergency calls to firehouses are to accompany ambulances to the scene of auto accidents and other medical emergencies"

Dude. Six major fires now burning in California. I think LAFD has responded to at least six in 2016

The fire trucks are there for when things burn. Day to day activities just try to further amortize the resources.

I've known several firefighters, and every one of them had a second job.

The job isn't nearly as hazardous as a lot of jobs, like cops. But they typically get paid commensurate with cops, because everybody loves firefighters, while most people (including me) are ambivalent at best about cops.

The other jobs might have more to do with the week on, week off, cycle than that there aren't enough fires.

Personal experience tells me that anything managed by government is usually at least twice as expensive as a privately done project. But that is just an anecdote. So let's just ignore all future claims of graft in Government. After all the only people who go into government are saintly types with impeccable morals.

I know of an aircraft company that sold a $50,000 part to my buddy the scrap merchant for pennies on the dollar, on a handshake that he'd sell it back in a month. It let them meet their numbers. But that is just an anecdote.

I think I actually have a fair position, backed by experience, that all human organizations are messed up in some way. The left who thinks it's only corporations, or the right who thinks its only government, each put one hand over one eye.

Open both eyes.

Except corporations are subject to financial incentives unlike any government for government employee. The only way to make money in government is by selling taxpayer dollars at a discount like Hillary Clinton did.

How many 'bridges to nowhere' are there? Before you answer I'm going to restrict you from citing anything in Alaska.

My sister designed a pedestrian bridge to nowhere, cost is just a bit high of 1 million after all the permitting and artist and scope additions. I've worked on some temporary roads that met codes for building an airstrip. These are in one city in 3 years, and I'm sure there's plenty more going on I don't know about. If you factor in not just roads but streetcars and airports, more wasted money. If we move beyond transportation, there's seemingly no end to the wasted money I can point you at.

I'd say 'bridges to nowhere' or their equivalent probably account for at least a tenth of gov't spending.

What is the cost of a 'temporary road' compared to an airport? Do you really think I could have a new airport for the price of ten 'temporary roads'?

He said 'airstrip'. A temporary road would never have the need to be built at the specs of an airstrip, even if it were used as such. All waste.

Also, didn't we see a host of stories about sidewalks to nowhere? Built in places where no one would ever use?
Like in my town now. Fed and state money to resurface roads with ridiculous bike lane provisions. Road now handle 50% of traffic they used to as bike traffic will never reach 1% of car traffic, but now they have half the road.

Private bridges to nowhere don't make the news. They get covered up in the reports of firms that go out of business and are never heard of again. Or are embarrassing things to sweep under the rug as a part of larger firms.

Well, in public spending I guess there are different decision making processes so this will affect the ways in which we try to minimize the number of bridges to nowhere. But if you're going to build a bridge to nowhere, you may as well put it somewhere worth going, no?

Yes. YES! The glimmerings of logical thought, of a touch of reality.

Firms go out of business. That is exactly the point. The people who make bad decisions lose money. They lose. Investors lose. It keeps a limit on the stupidity.

There is no limit to the stupidity of government. Really, are people arguing here that Bush and whoever followed should have borrowed another couple trillion dollars to build Iraq? Interest rates are low, there is almost no cost. There is no rational reason not to do it.

Is that what you are saying?

No, I wouldn't suggest to spend $2 trillion to repair Iraq. But if money is going to be spent there it would be better to involve local firms, in part for purposes of capacity building, etc.

The point was that you don't here about dumb projects in the private sector because most often it will never get reported in the news.

Actually, in the private sector people who lose lots of money often make off with a lot of money, sometimes when little or none of it was theirs in the first place. In the public sector, there's a pretty firm limit on how wealthy someone can get while running a situation into the ground. Anyways, I buy the basic logic of the market side of the argument, I'm just saying it's not nearly as obvious as it might seem.

If the CEO of a failed private venture makes awful lot of money investors lose money. Investors are incentivized to do due diligence. As for government, the clintons have accumulated two billion dollars thus far selling taxpayer dollars and government decisions. 2 billion dollars and they never made a single thing for a single person. Amazing.

The option to fabricate numbers exists.

Look up the actual number on Clinton wealth, think of how many people are wealthier on the basis of throwing around a ball or strutting around a stage. Not that anyone needs $100 million either, but it's not a phenomenal amount for probably the most influential duo of the last generation or two, considering that people actually do pay money to hear them speak. If you do a $20,000 speech once a week, you're already at a million a year. And he often gets more than that and can speak more than once a week. No dirty conspiracies are required to explain their wealth.

I'm referring to their real wealth which is their private equity fund/ intergenerational nobility grant/ charity.

It's not an asset if you cannot buy it and sell it. Ergo their charity is not counted to their wealth. However, their influence over that money would bother me if I thought they would do bad things with it.

Private companies go bankrupt if they build bridges to nowhere. It's not that they are smarter it's just that firms that do dumb things don't survive. So most private companies don't do obviously dumb things and fire people who do them. Unfortunately winnowing of poor decision makers in government bureaucracies only takes place over very long time scales. Hard decisions are not made if easier ones are possible, this is a simple fact of human life.

That's why private developers do not build bridges, and roads and water and sewer and schools to vacant tracts of land in nowhere and then build large tracts of housing to sell to people looking for housing.

In California, there is plenty of land to build housing on. All developers need to do is build transportation to nowhere, before building housing to make nowhere a great place to live.

About a century ago, land developers built light rail from the cities to nowhere and paid for it buy selling land and building stuff they paid for enough to pay to extend and run the light rail. Once they reached the limit of the land they controlled, they abandoned the light rail to fools who tried to run it for profit. Eventually government was forced to take it on and ended up ripping it up from the streets so the streets could carry more car traffic. Now cars take longer to cover the distance than the light rail.

So, government builds no new roads, bridges, water, sewer, schools, police stations, fire stations, buys no police cars or fire trucks, pay no money to have fire hydrants installed, and instead requires any housing developer to pay to build everything. And if not built to the standards of the government so government is not required to immediately rebuild it at the demands of the new residents and taxpayers, then the developer must maintain it all by charging the people he sells housing to.

So, why are conservatives batching about the high cost of developing housing lots? To prevent wasteful government spending, government is simply requiring the private sector provides EVERYTHING government wastes money providing for the new housing.

Government not being driven by return on capital has no problem wastefully building water and sewer capital assets that will produce zero return over its hundred year useful life.

Why does the private developer have a problem running a private for profit village for 100 years charging it's customers enough to generate 5% or 10% annual return on the hundred million investment in infrastructure, plus enough to pay interest and pay off the debt, and compete with wasteful government by offering lower prices and better customer services than government?

Why aren't there thousands of EPCOT cities as Walt originally imagined?

Governments do not crowd out capital; they don't push Boeing out of a plant to make widgets for the people. They may crowd out investable funds, but in a world where Google/Apple/friends sit on multi-billions of USD, that's not looking very likely at the moment, is it? Forgive us if everyone doubts that the macroeconomic consensus of the 80s still applies.

I mean, during World War Two Government Spending crowded out the private sector. But every economic resource was fully employed

Suppose we didn't have WWII. Instead suppose the gov't embarked on a massive private stimulus project equal to WWII levels. Huge amounts of borrowing to fund super low taxes, cash aid for the poor and so on. What would happen?

Instead of making tanks, Ford's factories would be making cars. Boeing passenger and freight airplanes. We would have had economic growth and full employment but make stuff that we would all enjoy using rather than weapons that kill and destroy.

Would we have had 1960 in 1948 though? I'm not so sure. A lot of innovation based growth came from our military spending (jets, computers, nuclear power, medical care).

Yes I 100% agree with you. But the political will to make it happen - the massive deficits, the tax hikes, price controls to prevent inflation when we're at "real" full employment - is simply not possible outside of a war setting.

In 1943, the Federal deficit was 27% of GDP; that's the equivalent of borrowing over $5 trillion dollars in one year in 2016...and its nearly triple what we borrowed in 2009 (we should have borrowed a lot more but ZOMG hyperinflation!!!)

Price controls to prevent inflation are a terrible idea.

Inflation happened in WWII because demand exceeded capacity. One way they dealt with it was price controls, another was pushing people to 'buy bonds' which essentially got them to forgo consumption today for the promise of more consumption tomorrow.

Heh. Just think of all the growth opportunities for landfills! All those things with value that would be thrown out.

I have a simpler idea. Abolish the EPA. Both would create an environmental disaster and waste of epic proportions, but the latter wouldn't burden future generations with extraordinary levels of debt on top of the environmental disaster, and they maybe would have the resources to clean it up.

This would all be extraordinarily amusing except I think that we are reading government policy that will be implemented over the next decade.

We had 98% marginal tax for income above $250,000 in 1945 to pay for WWII.

The 98% tax rate didn't pay for WWII. At least if you mean by that the debt the US gov't issued during the WWII years got paid off, it never did and is still be rolled over today.

Also your grandfather's marginal tax rate isn't your marginal tax rate today. Decades ago the tax law had a huge amount of various deductions, shelters, and loopholes (for example, credit card interest used to be deductible). A well paid man making $250K+ in 1945 would have paid much less than 98% on his income, even his income above $250K.

More mystical thinking. We would be richer by virtue of the increased production of goods and services, not by the doling out of dollars. In today's world, a trillion dollars of bailout means 90% to crony firms that produce politically appealing things that no one wants , 1% on infrastructure, .5% on goods (The left in another context, "our society is so consumerist, I mean, do you really need a 3000 sq foot house and 3 cars?"), and the remainder on Clinton Foundation initiatives, like subsidizing brutal third world dictators in exchange for mining rights for a friend.

Yes. Enough of the lump sum investing fallacy. There is no fixed amount of investment available.

Yes, there is. If there were unlimited investment available, we could invest infinite resources at any positive return and consume the Universe this afternoon

Why would Boeing be the company to see credit disappear?

Why was the other example Ford?

Wouldn't we see credit disappear at the lower ends of quality?

Say, restaurants or food trucks or something like that?

It dawns on me what this is. Now that Trump is toast, the right leaning are lining up generic arguments against what they fear is Hillary's generic spending.

Just don't.

This cycle stand for good governance. Oppose bad plans or programs, sure. But don't repeat the error of 2009 and set yourself up to oppose everything, good and bad.

Be the solution.

The problem comes when so much of what is proposed is bad governance. Take proposed gun laws for example - anything that the Rs and Ds would agree on gets demolished because the Ds insist on throwing a gun registry in at the last moment. I agree that the 9 million votes to repeal Obamacare were pure virtue signalling (I don't think anyone in congress has the cajones to actually repeal it).

I think good governance can come easier from removal of existing laws than from addition of new.

I promise to be against the really stupid stuff. And I have heard some, like universal forgiveness for college debt. Terrible opportunity cost and monumental moral hazard on that one.

Semi automatic rifles with 50 round clips are absolutely needed for hunting to comply with ADA. How else can blind hunters be successful unless they fire 50 rounds at the sound that they think is a rabbit or deer?

Besides, how else can higher taxes be justified to pay military contractors to armor up the beat cop with body armor, ballistic helmets, long guns with 50 round clips, rpgs, grenades, ....

No shiny new fun stuff for government (no tax cuts either.) Sorry. Numbers don't add up. More belt tightening, government permausterity- entitlement tsunami around the bend.

I've been saying this for years.Nothing to do with Trump, who is as problematic as Hillary in this regard.

I'm quite happy with the government we've had since 2013. The private sector has added 15 million jobs in six years, government zilch. Thanks Obama! Keep it coming and maybe we can outrun the tsunami. Continued divided government is our best bet.

Republican treatment of Boehner was ridiculous. The GOP has never gotten past their post war 'minority party' mentality. Oh well.

The left needs to realize that the New Deal is over. They won. It started in 1935 with Social Security. In 1965, we added Medicare. And in 2010, Obamacare. Also, along the way, we added UI. Throw in universal public education, and there's your cradle to grave safety net.

Not as comprehensive as some European welfare states, but those are either small, cohesive high-trust societies or slowly going bankrupt societies.

Still, it's pretty shiny. Not bad. Congratulations. Your work is done. Our society devotes enormous resources to these programs. In the years ahead, the entitlement strain will ratchet in one direction. If we can't control these costs in some fashion, well, there's your crowding out.

We can actually test programs. If someone says more spending will improve schools, we can demand results. Data driven government is expanding.

An IBM whitepaper is here.

As a moderate I am not generally for throwing money, but I believe some studies have shown that "more money" improves health or education, a suggesting that spending levels are low in some situations.

But I wouild distrust a Progressive who says "always more" just as much as a Conservative who says "always cut." Let's just all get on board to testing over ideology.

Sounds like New Federalism, states as laboratories. Keep 'em small and contained though. Respect the taxpayer, please.

And honestly, I'm pretty skeptical about motivated reasoning in empirical social science work. The fog of war is as nothing to me compared to the fog of empirical social science. So easy to kick up dust. Complex systems are a devil. And of course the acrimony surrounding any of these debates.

So yes, of course, let's learn as much as we can about how to spend money effectively to help people. I guess I'm skeptical of huge breakthroughs, though- humanity has likely already stumbled upon most of the low-hanging fruit.

I mean, for example, Social Security. This was behavioral economics from before the term was invented.

But one time they spent millions of dollars on pools and flash architecture for some black kids and their grades didn't go up much, so we can safely conclude that putting money into education is just a waste.

The easy way to demand results is to start by indicting Clinton.

You are talking about an imaginary world where politicians are honest and bureaucrats have the interest of the people as their top priority.

There is a really easy solution. Make the payment of taxes optional.

Then you can borrow all the money you want.

Gotcha. Throw Clinton in prison and make payment of taxes optional and everything will be peachy. Somehow.

This is all a very pointless and autistic argument when we are this far from 100% capacity utilization. Government borrowing for infrastructure projects puts X workers and Y real capital and z raw materials to work that would otherwise be idle. Crowding out is not a "thing" in the American Economy - at least not since 1945 when we were in a 100% utilization war economy and had a closed system.

Only as we approach full economic employment does crowding out actually become a thing. And with free trade this is even harder to accomplish--another factory simply comes online in China, which is essentially a bottomless pit of industrial capacity for the next 50 years or so.

To quote someone making my argument more formally, Economist Laura D'Andrea Tyson wrote in June 2012:

"By itself an increase in the deficit, either in the form of an increase in government spending or a reduction in taxes, causes an increase in demand. But how this affects output, employment and growth depends on what happens to interest rates. When the economy is operating near capacity, government borrowing to finance an increase in the deficit causes interest rates to rise. Higher interest rates reduce or “crowd out” private investment, and this reduces growth. The “crowding out” argument explains why large and sustained government deficits take a toll on growth; they reduce capital formation. But this argument rests on how government deficits affect interest rates, and the relationship between government deficits and interest rates varies. When there is considerable excess capacity, an increase in government borrowing to finance an increase in the deficit does not lead to higher interest rates and does not crowd out private investment. Instead, the higher demand resulting from the increase in the deficit bolsters employment and output directly, and the resulting increase in income and economic activity in turn encourages or 'crowds in' additional private spending. The crowding-in argument is the right one for current economic conditions."

But Tyson is wrong when she says: "when the economy is operating near capacity, government borrowing to finance an increase in the deficit causes interest rates to rise. Higher interest rates reduce or “crowd out” private investment, and this reduces growth. " - again, the upstream comment by me, that a study found during 1980s boom times NO such 'crowding out' despite record US govt deficits. Money expands endogenously, so that more demand means more money means no crowding out (a corollary of this is that money is neutral, but that's more controversial).

Corporations are sitting on trillions of dollars with a zero yield. You're being dumb here

If a deficit, being borrowed money, does not affect the interest rate because the economy is not at full capacity, then the interest rate must never organically change except in those occasions where we move to or from full economic capacity.

If borrowing x -> i increases 0% -> borrowing yx -> i increases 0%. x > 0, economy not at capacity.

This seems bizarre unless we assume that, to a lender, the value of deposits stays constant as the amount of deposits decreases. This is certainly not true for an individual, nor presumably then a firm. Does your definition depend on a government lender? Also, we know that ceteris paribus, an increase in in demand increases inflation. Given that the government lender determines interest rates by fiat, mostly in reaponse to inflation, what value does a definition that depends on such an actor, but ignores half of this actors behavior have?

Also, if your definition is true, why not deficit spend to full economic capacity?

I don't think you're being intentionally dumb, but if you think about it, obviously the fact of being able to take up some slack without having to pull that hard does not imply that you can just as easily go all the way once the slack is up.

Eventually, interest rates would be affected. Presumably the effect is generally non-zero, and higher in some conditions than others.

Thomas, we should deficit spend to full economic capacity!

This is a fairly textbook prescription for an economy operating below full employment

The only reason we don't is because of some mumbo jumbo about rational expections - you know, Joe the carpenter is going to curtail his borrowing today because he knows his taxes will be eased in 30 years.

LOL they won a Nobel prize for that!

Why need infrastructure for the country to be productive. What better time to build or repair than when costs are low?

Does the whole opportunity cost argument mean we should never have built the interstate highway system? Would be a richer country without it?

If markets are efficient, all risk adjusted returns should be equal. If they weren't, rational investors would buy the highest risk adjusted return assets, lowering their expected return. You can't just look at the raw expected return numbers, you have to consider risk. This is relevant to the question of returns on govt debt v equity in figuring opportunity costs.

Because the economic right lives in a fantasyland where markets really are broken, and operate as if we are always at full employment and near full capacity utilization.

We built the interstate highway system, and the Eire Canal, and the transcontinental railroad, all at a time when Green madness had not yet taken control of the Democratic Party. Try to do any of that sort of thing today and you will be buried alive under a mountain of environmental impact statements. If we let government spending increase under Clinton we'll just get more payoffs to liberal interest groups and more useless Green boondoggles such a windmills..

Bah poppycock! The interstate highway system, the erie canal, and the transcontinental railroad were boondoggles that provided no economic value to anyone. it represented a misallocation of resources away from, well, i don't know; but the austrians tell me that it was a misallocation of somethingsomething.

More seriously, we didn't actually stop building the interstate highway system. New routes and improvements to old are added every year.

Windmills? There isn't one answer, it varies with technology, place, demand. I bet they pay on Maui.

The system was officially complete in 1992, and has tailed off considerably since then, and has been funded by separate bills.

The point is green-mad Democrats have not actually blocked progress. We add "an average of 6,500 miles of new roads each year."

(reply to comment below) - I know - Democrats are actually the pro-growth party now. The GOP is the party of Austrian economics and unhinged white racial fury.

Are you sure? The Democrats are defined by a hostility to business, to investors profiting on increasing capital per worker, to investing for profit in the abstract, to profit in the abstract, to saving at the individual, firm, and sovereign level, to fast and liquid trading markets, to pride in business ownership, to product variety, to consumerism, to new construction, to nuclear power, to economies of scale, to farm science, to small business, to blue collar work, etc.

I could go on and on and on. The Democrat party is some confused lump of every possible hatred of markets and an utterly cliched SWPL aesthetic. They'd prefer a victorian home with a 24/7 furnace and a "Beat Climate Change" sticker over a 20 unit building - unless it's low income housing for single mothers, built by $60/hr union labor, at a cost of 5x normal construction, in a different part of town, paid for by a special levy on commercial property.

Can you name a single unequivocally pro-growth Democrat policy?

P.S. I'm reminded of a previous post in which Boonton mocked the tendency of people to imagine themselves with more money in the future. The left hates poor people who don't know their place almost as much as it hates the newly rich. Sums up the left on "growth".

P.S. I’m reminded of a previous post in which Boonton mocked the tendency of people to imagine themselves with more money in the future. The left hates poor people who don’t know their place almost as much as it hates the newly rich. Sums up the left on “growth”.

The sun will burn out and swallow the earth long before you get any economic growth from the imaginary businesses started by the 'Joe the Plumber' or Trump University graduate types.

These types are hardly trying to 'break out of their place'. If anyone has a 'place' for them it's the GOP which would rather see them grumble about estate taxes and immigrants.

The guy in my neighborhood with a road construction company is unfamiliar with the concept of recession.

The assumption is that America has poor infrastructure.

This assumption is not correct, for the most part. (Please, no links to the civil engineers endless D+ report cards...even after stimulus, we still got a D+.)

Now, there probably are some infrastructure projects including repairs we need.

(as an aside, California has radio political ads saying we should pay more taxes to repair the highways of California. What is not said, is that why can't California repair these roads with existing funds. California is already high taxation, and road maintenance is a core function of government. So why new money? Because they spent the old money on a high speed rail corruption project, didn't invest in water infrastructure (greens opposed it, too.) and instead gave out pensions and salaries that are embarrassingly high.)

But even then, there are projects: maybe burying power lines on the East Coast. Or replacing lead pipes in Flint.

Tyler, in your original post your wrote, "Opportunity cost is ultimately defined in real resource terms, converted into value." But there are no real resource constraints. There is more than enough asphalt to build roads, more than enough labor to push the buttons on the road-laying machines, etc. etc. -- all the way down the line, back into raw materials production, The logic supporting this becomes clearer as we proceed further into the era of automation and computers. The "conversion into value" is the conversion into money, which is kept artificially scarce under the expectation that there would be free-riding and inflation if money were not kept scarce. The artificial scarcity of money increasingly appears to be the remaining linchpin of the economist's logic. Therefore, opportunity cost will ultimately NOT be defined in real resource terms, except for historical studies of a passing era in which production was both more rudimentarily mechanical and required much more human physical effort.

So you're on team robosocialism too?

You are already using the technology called "language" and you didn't send this by smoke signals, so disparaging the continuous move into weightlessness and effortlessness is probably not your best move, here.

I'm not disparaging anything. I am on team robosocialism

@Lee A. Arnold - Contrary to your misunderstanding (I like to start off on a friendly tone), information takes energy to produce, to disseminate. For this reason even the Bitcoin 'miners' who use GPU cards of the kind found in your PC to crunch numbers find that it's best to locate in Greenland, where the weather is cool year round, to save money on their electric bill and speed up calculations due to the massive heat generated by such cards. The cards will compute slower and hence burn even more energy if they 'overheat', hence Greenland. So as the population grows, resources will again, Club of Rome style, come to the fore.

TC is right about no free lunches, but I think we're not close to that resource limit level yet (or rather the headwinds generated by such resource constraints are very tiny in the First World today)...maybe we'll get to that limit in another 50 years once Africa, India come online?

Cowen's new best friends, Eugene Fama and his son in law John Cochrane, have been making the crowding out argument since the beginning of the Great Recession. The advantage of making one argument is that, eventually, it must be right. But it wasn't right in 2007 and it isn't right now. Maybe one day they will be right and Cowen and friends will be vindicated. Good for them when vindication arrives, but ignore them now. There's hope: if Bruce Bartlett (Bruce Bartlett!) can abandon tax cuts and Reagan Worship, Cowen can abandon crowding out.

It is amazing how much "free lunch" economics one can read in these comments. Of course we should in fact apply multiplier analysis to the percentage of previously unemployed resources targeted by the new project, and a higher hurdle rate to the rest. You can argue over what is the percentage mix here, but please don't pretend scarcity is no longer a ruling economic principle.

Economic "scarcity" in the OECD has been exaggerated for most of the post-war era, and he haven't really approached "scarcity" in the US in 70 years.

Furthermore, the birth of global free trade makes scarcity even less of a factor. Of all people, I would think you would champion this. If we "run out of factories" or "Workers", or whatever it is you think economic scarcity looks like, the work will simply be off-shored to Asia (China + SE Asia), where they haven't even scraped the surface of their production potential. We then import those goods, and resources are freed up to do other, more important things.

output gaps are the enemy of productivity gains.

There ain't no such thing as a free lunch -- but there are clearly such things as cheaper lunches. And they become ever cheaper. Where do you draw the line that says, "scarcity rules, beyond this point"?

It's Saturday, 8pm. You need a (_______). Like, now. Once you've got your guy, why don't you come back and talk to us about scarcity being exaggerated. How much is your $50 plumber on Saturday evening? How about your $100 programmer? Or even someone to look after the kids for a couple hours while you take care of it yourself?

It's mid-February. It's been several degrees below average temperature almost continuously for 6 weeks. Spot prices on gas contracts are double what they were a month ago. But scarcity is exaggerated?

If the nation can't turn the thermostat up a few degrees without doubling the cost of gas, I don't think you can write off scarcity.

So, you say, we can build more for the longer term about this particular thing. But what if this is one of 100 competing priorities, and in fact capacity does not increase much and we remain in the situation that if the entire nation turns up the thermostat a few degrees for the month of February (or it gets colder outside) that gas prices will go up a lot.

Kind of quibbling, but not really ... scarcity remains very real. No matter that we can satisfy out basic expectations for many things which were considered a mark of privilege as recently as just a generation or two ago, we run up against very real limitations all the time.

Why not move the NASA Mars mission forward a few years? Scarcity, opportunity cost. You don't need any fancy math and I think you can basically draw the picture. Not that many people are trained to do that stuff, and they can do other things too. You could invest in training for more people to do that stuff, but they could do other things too.

Funny you mention natural gas. Read up on the economics of that industry and why there is an ample supply right now, and explain how government policy created it.

Supply is ample ergo will always be ample. The markets will fix everything. By raising the price. This happens sometimes, right? If gas were not scarce, the price would not rise. Obviously. The point is that at many times the effect is far from marginal. And the point is intended in general, so basically any example would suffice at least a bit.

Nonsense, straw-manning. Above the hurdle rate does not mean free.

Name five big investments that didn't happen because of crowding out since 2008. Driverless cars?

Q2 GDP of 1.6%.

The Chinese government massive borrowing for state owned enterprises has generated investment in Vancouver real estate.

Only a blithering idiot would ask 'name five big investments that didn't happen'.

Hoverboards? Space tourism? Any evidence at all that the private sector was gagging for these?

People challenge: where is the breakthrough technology that isn't here because of crowding out? Technology isn't something you can just throw money at. It is limited by the spontaneous creativity of individual human minds. Crowding out would certainly be marginal across the economy.

'Crowding out' with interest is a creative misdirection anyway. From all directions the government discourages entrepreneurial investment. Price controls, fees, licensure, tax complexity, labor taxes, often excessive zoning, make work projects and inefficient discretionary spending competing for goods and services against legitimate business. If there is no crowding out, part of the reason is the ever rising barrier to entry which both prevents new entrants from actualizing their capital demand, and protects entrenched firms' profits.

I'm sorry, but you are the one with the free lunch thinking here.

So, resource X is not employed by the government. Who employs it? We have two hypothetical non-'free lunch' sources. We have some capital currently employing some other resource, netting us a 0 sum game, or we have the capital buying the gov bonds who have a preference for low risk low return investments.

I am not much of an economist, but I do think it is funny to quote "free lunch" in a world with existing negative interest rates. It does indeed seem a well worn hobby horse, rather than a nimble adaptation to the times.

Interest payments as a percent of GDP are at a 55 year low. about 2.5%, and they've been at that level since 2004! So it isn't just some artifact of the Great Recession; money is cheap, and ideologues are halting progress.

Interest rates are low because there is very little growth. There is plenty of growth in regulation (which ever makes industries less profitable and more safe from new entrants), and adverse rulings by the administration against businesses of all kinds. Not to mention a generation of children told that whatever they achieve, "you didn't build that".

Interest payments as a percentage of GDP have been at the same level since 2004

But borrowing at 0.5 per cent literally murders unborn investments that would have yielded 7 per cent.

If you don't get that government borrowing takes resources away from other uses, maybe you should get out more.

that's simply not true unless we are at full resource utilization

That's only true if the cost of resource utilization stays exactly the same until maximum utilization. Basic economics of the firm is that resources get more expensive to utilize. Maybe instead of marginal improvements across the economy, we get 50 cents on the dollar utlization of resources for rural highways, 3 cents on the dollar for sugar subsidies, and - $2 on the dollar for studies on the feminist interpretation of, and relationships with, glaciers.

Government borrowing provides depth and liquidity to capital markets in a way that may facilitate many other investments. That having been said, I don't think this argument applies at the margin in any situation present in the West.

Since such basic topics as opportunity cost are on the table, "thinking on the margin" might be worth a revisit. Certainly, many possible areas of government borrowing which have more costs than benefits to society, after considering potential for crowding out, should be expanded and increasingly exploited until costs equal benefits, just like in private markets. However, the calculus of costs and benefits are more complicated because political animals are not ruled by dollars and cents alone.

It is also striking how many of you cannot focus on the real resources, rather than "the funds." Plus a bit of mood affiliation here and there!

Real resource availability correlate with interest rates, ie prices, very well

What about their allocation? Towards a 10% private return with externalities meaning that the net social return is only 5%? (Perhaps there is air or noise pollution, etc.) Towards a 5% internal return on a public sector project with a 10% net social return (perhaps it reduces the cost of business or training, etc.)?

Let's take available resources as an endowment. They are sitting there, some used and some unused. Sure sure, in the long-run there are ways to increase the amount of resources that the economy goes through, or can theoretically get its hands on, in a fairly short or routine period of time. But here we are today, wondering if there is an opportunity cost to government borrowing. Forget about the bonds, treasuries and all that for a minute.

Those people, concrete, iron ore, etc., sitting there waiting to be transformed into skyscrapers, or into advanced transportation infrastructure in urban areas, which of them is better? If the transportation infrastructure, which the private sector will build for profit but not fund itself, expands the supply and demand potential of the economy by more than the skyscrapers project, then no matter that there might indeed have been crowding out, the public borrowing might remain the best investment at the economy-wide level of consideration.

No matter - if those skyscrapers were so sorely needed, rental prices downtown will just be a bit higher for a couple/few years until soon those resources can be deployed. One might say the same of an investment which is driven in part by political demands - it could be built in the near future as well - but that private sector crowded out investment, we can be pretty sure that any such profitable investment will nevertheless be made in the near future, whereas in the public sector some governments might kick the can down the road for decades or generations while things crumble.

You kind of focused the discussion on funds rather than resources. By looking at real resources, what relevance does borrowing have? Consider WWII. The gov't conscripted something like a quarter of the labor force directly (draft) and indirectly (having civilian factories retool to supply war materials). Does it matter if this was done via borrowing or a more direct method like taxation or simply command and control? I would say it probably doesn't, 1/4 of the economy has been diverted so the opportunity cost is whatever best use that 1/4 of the economy could have otherwise done with itself.

Those obsessed with debt and deficits, though, obsess over the funding and imply that somehow using debt as a mechanism matters more than if the budget was balanced instead. I'm unclear why?

Because debt allows the current politicians to spend X billions of dollars to get XY billions of dollars in value (Y<1) because politics and incentives don't align with altruism. Then, those dollars are traded to the private market for 1 to 1 value. Debt lets the politicians produce poor value/dollar spending, without raising taxes. It's a typical concentrated benefit/ diffuse cost situation. The friends of Hillary Clinton or George Bush get the billion dollar contract, and no taxes are raised, but interest rates could be a problem. Conveniently, anemic, I mean "sustainable", and planned, I mean "responsibly regulated" growth is aesthetically appealing to the philosophy of certain elites. Maybe they are banking on interest staying low unless growth somehow happens and tax receipts rising accordingly.

Anyway real rates are 0 or thereabout, but getting a loan isn't easy. When the banks fail, they are bailed out. Yes, a low, low price for money, very high standards to touch any of it, and a complete lack of responsibility for sellers. "Hey, why not charge higher interest rates in exchange for looser standards?" Nope, can't do that, why that'd be as crazy as holding a catestrophic life insurance policy from a firm that didn't hold the required amount of government debt. It would be as crazy as operating a one day lemonade stand on your residential zoned land without commercial insurance and a signed audit from PWC.

D. Trump was criticisized for suggesting the possibility of repudiating the national debt, but from what I gather, inflation is unpossible, so we could just snap our fingers and pay it off. I wonder what the effect of 18 trillion dollars being dispersed throughout the world would be?

Well, at least one economist has suggested that a government focusing on fighting a war is of great economic benefit in terms of growth, apparently regardless of whether it needs to borrow or not -

Though who knows whether that economist was concerned about real resources when he wrote that.

This is a question that bothers me a lot. In WWII the gov't suddenly found that it needed to demand all the war materials the economy could make and more. It did everything it could to get it so the economy quickly moved to full employment and beyond.

But that is not economic growth. If anything it should harm economic growth since the entire economy had to retool to make war material and then retool back again to make consumer goods. What if we didn't have a war but the gov't just did whatever was needed to boost demand by giving people money, lowering taxes etc.? There'd be no need to retool away and then back to consumer goods, factories would just make the stuff people wanted to buy straight through the period.

But the decades after WWII were not periods of slack growth. Why?

Well the war had opened up new industries like mass air travel, atomic power, medical advances, computers and probably refined older models such as improving mass production, better management, etc. Perhaps the economic growth lost by changing around our supply system was more than offset by opening up new discoveries.

So if we didn't have the war but did have good demand management would we have had 1950, 1960, 70, 80 etc. when they happened? Or would our computers today look like what was cutting edge in 1980 and would we be laughing at scientists trying to tell us we could use fission to make electricity? Perhaps an economy doesn't need so much as a war but a big relatively pointless project that gov't goes all in on (like a moon landing?!) just to open up innovative doors. Would the private sector, for example, have burned billions on refining uranium, blowing up hundreds of rockets, trying to build and fly hundreds of huge planes all at once just to get to the innovations that doing so unlocked?

I think part of the problem is that what people actually wanted was leisure and security. War wasn't a market equilibrium, but neither was command and control production of consumer goods. It occurs to me that war is a tax on bullshit. Given the nature of beaurocracy, I suspect that you alternate history may have resulted barracks style homes, a lovely cousin of the Trabant, and beautiful top down urban planning.(maybe they could have designed the streets in most major cities to look like FDR when viewed from 4000 ft. in a government plane?)

The good thing about war, with respect to centralized planning, is that failures quickly out instead of lingering for decades. No, I suspect that the people would not have chosen to live the feverish total war lifestyle. Most probably would have preferred to be left alone to their reasonable work and leisure. That being said, there is a sort of romance to top down planning and every smart young male technocratic leftist I've ever met, fancied themselves to be a planner. ;-) There's always SciFi.

I know it is too much for you fools to actually read, but read up on what is happening right now in countries and jurisdictions that where cheap money has been fully taken advantage of.

Maybe explain to me why the Chinese government is getting so little activity with their extraordinary levels of borrowing?

Maybe explain to me why the Ontario government is seeing job losses in spite of continuing borrowing and infrastructure spending, now being the most indebted non national government.

By the way, Ontario after borrowing extraordinary amounts of money still don't have the infrastructure. Golly gee. I wonder how that happened?

The budget this year is about $150 a head in deficit, from an operational point of view. But there's debt payments too. The story's more complicated than it seems, but I'd put 10-20% odds that something crazy happens in the next 10 years and Ontarians will be very happy with their energy independence. But usually you don't talk crazy shit like that, so we can bemoan the cost of renewables payments to the local economy instead of exporting the money for oil. Ontario isn't a nation, but balance of accounts is not irrelevant ...

I dunno, I've spent a lot of time in Ontario, and it doesn't make sense to me that deficits have run the way they did. Services are generally reduced (in proportion to where they could be used, so for example, obviously there is expanded services in areas where population has grown a lot) and fees are generally up. And I don't think you can pin it all on the present governing party - the previous one ran up large deficits during booms times while handing away public assets at bargain rates and massively reducing services (e.g., cutting an entire year from education).

Perhaps a fear about "real resources" is linked to an idea about really massive new borrowing and spending (something similar to or bigger than The American Recovery and Reinvestment Act of 2009)?

I don't fear that because I don't see it as politically possible with any likely Congress. Or any likely President for that matter. What I expect to happen is for the vast laundry list of "we shoulds" to be reduced to fairly boring things like incremental expansions of infrastructure spending. I see that such spending is currently below 2% of GDP, has been as high as 3%.

I don't think Hillary will get it back to 3.

So... show of hands. How many commenters are on-board with Trump's plan to massively outspend Hillary on infrastructure? Sounds like a winner, amirite?

My hand is way in the air. He just needs to scrap the tax cuts from his plan and it would start to look useful.

The deficit is north of $500 billion and increasing, six years into a recovery. But Keynesians gonna Keynesian.

Keynesians might rightly say that taxes are too low, six years into a recovery. That is, temporary stimulus should be over. Perhaps Tyler can do tax next week.

They might also wrongly say this. 35.8% of GDP, $20,000 per citizen this year in taxes in the US.

/pause to let that sink in

Anyway, this is a conversation worth having.

Sure, maybe Tyler will take this one up.

Not sure how reliable those numbers are. This says taxes as a % of GDP in 2012 was 32.3%. which case, taxes as a % of GDP have increased by 3.5%(!) since 2012. So, chew on that, Keynesians.

But why look at other countries anyway?. US has among highest GDP per capita in the world- perhaps this is part of the reason.

The higher GDP also means that the $20K we collect per capita is probably higher in absolute amounts than poorer European countries, even with their higher tax rates.

I think gubmint has PLENTY of wherewithal in these United States today. Others are free to think we are insufficiently taxed.

What would be your real purchasing power if all government activities were to close tomorrow?

Sometimes the logically extreme scenario can be instructive ...

What on Earth are you on about?

America has swallowed the full-throated welfare state. At this point, we're only talking about indigestion.

Put your fork down.

What does welfare get you? 4-600 square feet and emergency hospital access?

I think the situation is rather in the middle, despite the fact of not being to the opposite extreme across a large number of avenues of expenditures/transfers relating to welfare state programs.

Welfare, if you play it right, gets you more like 1000 sq ft, completely free health care, free food, a free cell phone, and the worst neighbors in your town or city. Also, if you can manage to get disability, then you can add a couple thousand per month to that.

It's not a life I'd be proud of or even happy with, but for some people, they are three generations in and it feels like home. Objectively, it's a reasonable welfare system. The people who have it worst are the working poor who make slightly too much for this or that.

I think the argument is flipped here. 5% hurdle rates allow for excess return due to the riskiness of the investment. Therefore some investments won't make the cut. Government investments are risky as well, to use a 1% hurdle rate seems wrong. With a hurdle rate of basically zero, essentially unlimited government spending can be justified (all projects clear the zero bar). Krugman and DeLong are searching for a philosophical framework to justify essentially unlimited spending. You might be able to argue that since the government has a large portfolio of investments the hurdle rate can be lower than an individual project owner in the private sector - OK. But should it really be the risk free-rate? If spending on infrastructure, health care, education, welfare transfers is so valuable, it shouldn't be hard to establish that they have a positive return? If it is hard to establish, why? Companies look at the IRR of internal projects all the time including ones with "soft" pay-outs. Where's the part of the progressive economics profession doing that and showing that societal spending exceeds private spending in returns to capital? That's what would really solve the crowding out argument.

FWIW, I oppose unlimited government spending.

It should only be at the risk-free rate if it's a risk-free return.

Some things, the return is basically guaranteed. Say, you're building a bridge. One scenario, you think there's a 50-50 chance that with the bridge in place, an international firm will open a facility at location convenient to some resource. But that would depend on the change in prices of some commodities in the next few years. But the bridge would take a few years to complete, etc., so certainly there is a quantifiable risk. In this case, a risk-free rate is completely wrong.

Compare this to a scenario where there is some town on the other side, it is expected to reduce transportation time for X number of people by Y hours a year, increasing the profitability of some local business, creating a dozen (expected) permanent jobs as a result of this. None of this relies on anything particularly risky, and can be prudently taken on at somewhere near the risk-free rate. Or so it may seem to the local planners - investors, not being dumb, will apply a premium for this, and as a result you have a lot of federal-level activity and funding (and perhaps thus mismanagement) of activities which really should be decided and implemented at lower level of government.

I dunno ... interesting questions.

Yikes. That bridge depends on the health of two population centers that either developed independently or through a substitute accessway. Evidently there is no through traffic that would have previously justified a bridge and there have been no private firms clamoring at the opportunity. Somehow I doubt this bridge is a risk-free natural monopoly low-hanging fruit.

People are guaranteed to take the shorter route most of the time. If there is known movement between two centres, there is not much "risk" in the calculation. Unless you tell me that the single source of employment in the further city, a lumber mill, was soon to close. But, then, if the savings were sufficient as to keep some dozens or hundreds of jobs in the area, maybe it pays off?

Should/could the forestry firm build the road/bridge? Often they do. But sometimes it makes sense for the government to do so, probably related to the issue that the government can capture the gains (including in the sense of non-pecuniary benefits such as time savings for a population), or at least more gains, more readily than the firm. Say, it will cost some millions of dollars and the firm cannot take on this debt, but the municipality is willing to do so. And anyways it will use a bunch of local labour in the meantime.

Tyler's comment about real resources is an important one. If you look at the economy from 50,000 feet you have a bunch of people who go to work every day to do something (or not) and use natural resources and physical and intellectual capital to make things and provide services (or not). The job of markets and the government is to optimize policy so the allocation of those **finite** human, natural, intellectual and physical capital resources is roughly optimal in some sense. To have roughly 1/3 -1/2 of the allocation decisions being made with a much different assumed necessary rate of return for the finite resources will lead to inefficient allocation. It will also tend to make the role of that portfolio manager (government) grow without bound versus the other portfolio manager (private economy) since the first portfolio manager can find unlimited projects that meet his rate of return requirements. It's up to the investors to evaluate the performance of the two managers. This decision is complicated by the ability of the first portfolio manager to influence the asset allocation decision by paying off some of the investors.

I was a computer programmer. For several years I helped create new medical diagnostic equipment. For several years I made websites for used car dealers. The market actually valued the second role higher.

Selling used cars is very carbon efficient so...

I was happy to take the money, but I am pretty sure the same number of cars were sold as thousands of US dealers cycled through successive (more expensive) generations of web software. They are scared to death that an extra click on the search will send you to a competitor, not that you won't buy a car.

I used to save children in Africa by installing mosquito nets in their homes. Now I make medical diagnostic software that helps a member of the 1% accurately diagnose type II diabetes among self-control challenged Americans. Can you believe that I make more at the second job?

America's priorities are really out of place. Also I'm currently collecting signatures to stop a developer from turning a really cool old house I walk by into a building 20 families could live in, do you want to sign?

Somebody did that in Portland, OR, but 54 (tiny) units, not 20.

Winner 1. Developer, who paid $400K for the land, and could sell $10M worth of crappy cramped condos.

Winner 2. Corrupt city, that violated the zoning contract(1 house per 3K or 7K square feet land), that neighbors relied on. As a result, they are collecting, or will be collecting at least $100K or more in property taxes, where they previously collected around $5K.

Losers: Neighbors that have to deal with the impossibility of their visitors in finding parking, hipsters all over.,+Portland,+OR+97210/@45.5355025,-122.6979549,3a,75y,172h,90t/data=!3m7!1e1!3m5!1s2Yl0xTU1fNV4JcEvUdKZdA!2e0!!7i13312!8i6656!4m2!3m1!1s0x549509e447e0b461:0xfce955e6056ab920!6m1!1e1

Above should be a streetview picture of the construction.

This is how it looks today:

Here is the 2011 look:,-122.6979798,3a,75y,172h,90t/data=!3m7!1e1!3m5!1ssOp0hh2Gm3opEln6chMEqg!2e0!5s20110601T000000!7i3328!8i1664!6m1!1e1

Street parking?

Ok, but resources may be finite but used more or less effectively. This is, after all, the key to long-term economic growth. Consider labour. Trump doesn't say to Walmart greeters, "actually people you will be Walmart greeters for the rest of your lives". He says the government will make things happen that give you meaningful jobs.

For the unicorn crowd here, some ways that government borrowing crowds out private investment.

First for the fools among you, this isn't a black and white issue. Borrowing for a well designed transportation system or bridge has never been the issue. Toronto after voting in a tax revolting Ford voted for a tax increase for a specific transportation project.

1. That $16 trillion that the US Treasury has borrowed is spent and is continually being refinanced. That defines the bond market. Yield, tax rates, even the whole of government and Fed fiscal policy is predicated on maintaining that debt. Even the decision whether to borrow at 1% or whatever rate is dependent on whether whoever is in government thinks they can borrow more without ill effects. The Mother of all Crowding Effects.

2. Companies who live off of government financed projects are defined by the exigencies of government projects and are typically incapable of being competitive outside of that market. So by definition, the more government borrowing and projects the less competitive your economy is.

3. Wage rates, and more importantly the professional services costs and practices are determined by government projects. That how many $billion dollars spent so far on high speed rail in California with no rail yet existing has gone where? It has built up a professional service group that exists not to build anything, but to not build anything. It sets up a pattern and practice where nothing matters except the length of the project (longer the better, delays are good) that bleeds into private sector practice. It raises the costs of commercial infrastructure. Things don't get built. Here.

4. The corollary to money being so cheap is that the project costs don't matter. The prices for all the commodities required get bid up, making all other projects more expensive.

5. Governments don't build bridges. They build bureaucracies who ostensibly build bridges, whether they do or not. Low cost government financing means more bureaucrats, more regulators, more cozy deals with narrow interests. It means that government is not accountable to those who pay for it, but to those it can borrow from. So what if your actions fuck over households by increasing their costs, or businesses by loading them with unproductive and wasteful nonsense. It doesn't matter because that isn't where the money is coming from.

6. The money spent doesn't in fact go to anything useful, but in the US will be used to top up bankrupt pension plans for States and local governments. So you have all the negatives, but no positives.

Last year the big idea of the enlightened was the 'resource curse' or the Dutch disease. The oil patch in Alberta had some of these effects, but a big difference was that it generated tax revenues for government as opposed to being a factor of government spending. In my industry, what happened is pretty dramatic. I'll list them.

1. No one, or almost no one was training. It is shocking; well established companies who have always trained stopped. Simply that they would train someone and they would leave for Alberta where they could make twice the money. So there is a serious shortage of qualified skilled trades, which seriously increase the costs for everyone else, and yes make investments not happen that otherwise would.

2. Wage rates to keep your skilled trades are higher. Great idea, but what that means is businesses outside of the money stream who depend on those services but can't afford the inflated costs cease to exist. Millian would never read about them, so they don't exist, obviously.

3. Production and technology get focussed not on what works but on what can be sold into a money stream. This is a real problem with government projects. It doesn't matter if it works, and firms that put the work into making reliable and efficient products and services lose out. This is a really bad idea.

And to finish, wasn't there a study showing the negative economic effects of having your congress representative being a committee chairman and able to bring home the bacon? That is free money, no need to borrow, but had serious negative economic effects. Everything that Tyler is referring to is exemplified in this situation.

You know, there are counterargument to your points. No one actually believes in unicorns.

Ontario manufacturing was always going to get killed by the Chinese, so why not help them to an early grave by outpricing them in trades while extracting a non-renewable output? Well, many operations have persisted, but certainly oil sands contribution to long-term potential will be positive only if the money is allocated to production potential rather than holiday homes and monster trucks were are resource-intensive to use.

Thank you for making my point so eloquently.

Free lunch economics in the Comments? Really? Shocking!

So no one's going to mention that the govt's maximization function has diff inputs than private sector's?

Project 1: Build a ninth Whole Foods in Richville. Project 2: Distribute vaccines in Poortown. Seems possible that only Project 1 clears the hurdle for private sector and only Project 2 clears the hurdle for public sector.

I would think that effective vaccination programs would show a very high rate of return!!

And yet, the private sector isn't famous for providing quality health care to the poor.

Regardless of individual examples, the larger point stands. Whatever the government seeks to maximize -- whether you believe that's votes, human lives, national greatness, whatever -- isn't identical to what private investors seek to maximize.

And the government being a monopolist isn't famous for providing quality anything to anybody at a reasonable price!

I guess the government stopped polio pretty effectively. But that's less impressive than Upworthy.

Since there are an infinite number of good things the government can do, which ones should it do? And how much of each? How should it decide? Is it better of paying the private sector to do these things or doing them itself? Why? Are there some good things that are just too expensive to do? Why and how expensive is too expensive?

I'll add another Mother of all Crowding effect. For all the talk of borrowing vast sums of money for infrastructure, that isn't what it will be used for.

It will be used to pay for health care. The inflated prices of health care that have no relation to any market influence at all will continue. That means that any business in the US will continue to face a substantial overhead that their competitors in other countries do not have, and any investment in the US won't happen if there is an alternative.

Stop borrowing money to fund government. Government is overhead, and only drives economic activity as a service to the economy. If it can do it's job for less money that means the economy will benefit, just as a business benefits when an input cost decreases. Government takes more than 1/3 of the economy, and if it can't operate and maintain what it runs with that level of resources, giving it more is not going to accomplish anything except line some pockets.

Tyler, the problem is not that these people believe in free lunches- I doubt any of them, even DeLong, really believe their own arguments. The implied claim of of a free lunch is just a political tool for reaching another goal.

And, it appears to me that DeLong's argument is actually a concession of that, though unintentionally, when he pines for that "cross-sector equalization". I mean, seriously, what does that sound like to you?

It's not a free lunch if I have to get off my ass to get it is it?

Economically speaking, there may be a trillion dollar bill on the sidewalk. But really, it's idle resources. Maybe it's too much of a pain in the butt to arrange my free lunch, so instead I'll just stick with my inferior lunch. I know that's not really a "free lunch" then, but I think this is basically the situation.

Like, if I get off my butt and go do $100k worth of activity instead of $0, then the macro planner might see a free lunch if they can induce me into activity. But the person whose blood, sweat and tears went into it might disagree about the price. Naturally, some financial transactions would have to be performed to account for this productive activity, but that's not the subject, unless getting heavy into "finance-real economy linkages" sort of stuff, which is more debatable than a long of people who are very sure of themselves (not me on this subject) seem to think.

Isn't this a case of that thing that everyone accuses economists of? Confusing price with value?

Say building a park crowds out building a luxury condo, both in terms of land and labor. The Condo builder is getting his 10% returns, say. Should our hurdle rate for the park be 10% too, since that is the opportunity cost? How do you calculate that? Building a park might raise the property values in surrounding areas. It might make the workers in the nearby offices marginally more productive. But what if those returns don't meet the 10% threshold?

Government's role is to tend to the welfare of all, and that welfare can't be measured strictly in economic returns. What is the hedonic value of that park, for generation after generation? What is the health benefit? Presumably substantial, but what if you included those factors in your calculation, and it still didn't meet the 10% threshold?

There would still be the issue of distribution. If there is ANY government interest at all in correcting the inequities that are baked into capitalism, how can it be addressed? My belief is that it would distort the free market less to have it done on the spending side, rather than the revenue side, particularly if those investments could be made in areas like education.

"Government’s role is to tend to the welfare of all, and that welfare can’t be measured strictly in economic returns."
So what limits the scope and scale of government activities? By this type of mandate, nothing.

The Democratic process! I don't think it's any kind of natural or moral law, and I regret if I might have been interpreted that way. I hope you don't think there's some kind of edict from the heavens, do you? A nation is a bunch of people that decide when and whether to act jointly... or not. (I might sound like a huge collectivist, but really I'm not. More like a pragmatic centrist.)

Argumentum ad populum is a logical fallacy, not a serious worldview. Our Constitution is very fortunately based in philosophies which assumed God-given or natural rights. I suspect you'd understand if the majority voted themselves your property. I suspect you are much less generous with 'choice' in the context of capitalism than you seem with regard to nationality. You don't even have to pay your first employer a portion of money you make at a new employer, but your first employer taught you how to be an employee, you Sir, did not build that.

This is perhaps a reply to someone else's post? Arguing that the role of government is not circumscribed by an overweening principle is quite obviously a different argument than that the people are always right. And it is a different argument than saying that people have no rights to protect them from government. And since you are a man of the constitution, I am happy to report that the "necessary and proper" clause has been interpreted to suit my preferences perfectly.

Scarcity is not a ruling economic principle in developed countries; relative scarcity is imposed by the class structure, becoming pronounced via the sales effort/marketing of upscale emulation, producing innumerable brands and product variations which engender identities based on consumption.

US corporations would spend those trillions in cash they're sitting on if only the government cut spending! That's basically the argument here.

There is no fixed pool of investment

Government spending when there are idle resources is the closest thing to a free lunch

> No one actually believes in unicorns.

I think I found one.

What do you call it when the government hires unemployed construction workers during a downturn to repair a road, and then transfers them cash which adds to their buying power but by diluting the money supply reduces the purchasing power of the trillions in corporate accounts?

Such unicorns are easier to find in some conditions than others. Their cost is not zero. Not is it infinite. In the non-dogmatic view, it is an empirical question of chance to observe (or dedicate to creating) which type of unicorn one may conjure by virtue of being more than a pants wearing monkey, and more importantly, whether such unicorns are better in price or more wanted than the unicorns promised if we just refrain from ever intervening in anything and letting the best of human instincts to have everything work out for the best, in markets...

Owners of capital haven't been investing in productive capital in the US because the rate of return has been falling for decades, opting instead for speculative investment in real estate and stocks and bonds and currencies. Of course, it's investment in productive capital that adds to productivity and rising wages and economic growth. Since owners of capital have chosen speculative investment over productive capital, why would they want public investment in public goods like infrastructure. They don't. Deteriorating productive capital, deteriorating infrastructure, it's not just a correlation. Thus, we get theorists trying to sell simple models that ignore very important distinctions between such things as investment in productive capital and speculation in assets, arguing there is no such thing as "speculation" - it's the markets method for allocating a scarce resource, capital. Not only economists of the future will look back on this era with amazement, an era when people would believe anything, an era when a presidential candidate based his entire campaign on the idea that people will believe anything.

Wow, TC was right in his previous post on crowding out. Check this out, there *is* a tradeoff, it’s quite graphic (Fig 3). So maybe there is crowding out if you talk about military vs private spending, but not government vs private. Or it could be a data mining artifact, but Fig. 3 is striking.

The Cold War Economy Opportunity Costs, Ideology, and the Politics of Crisis By Robert Higgs | Posted: Fri. July 1, 1994Also published in Explorations in Economic History

An increase of the share of G-M in GNP can occur at the expense of either the share of P or the share of G-NM or of both. For expositional convenience let us employ the usual terms, calling G-M “guns” and P “butter.” G-NM will be called “roads.” A distinction may be drawn between “butter-sacrificing” mobilizations, when the P share declines, and “roads-sacrificing” mobilizations, when the G-NM share declines. Demobilizations may be viewed in parallel terms as “butter-enhancing” or “roads-enhancing.”

The behavior of the private share was quite different. Changes in the G-M and P shares were almost exactly offsetting. A trade-off equation fitted to the annual changes during 1948-1989 has a tight fit (R2 = 0.814) and shows that the implicit cost of a one-percentage-point increase in the military share was a reduction of one percentage point in the private share: the regression slope coefficient is -1.004 with a standard error of 0.077; hence one cannot reject the hypothesis that the slope equals one at any customary level of Type I error. (Deletion of the years 1948-1950 from the data set has no effect on this conclusion.) Figure 3 plainly shows the two offsetting changes to be deviations from a horizontal line representing a zero sum of the two changes. In short, during the Cold War the private sector alone bore the full cost of annual increases in the military share of total output as conventionally defined.

I think Brad's argument has the same fallacy as the Stern Report for global warming. The Stern Report argued for a very low discount rate for evaluating global warming projects. I forget what it was exactly, but suppose it was 2% in contrast to 7% that the private sector uses. He argued for 2% on a priori grounds such as time preference--- essentially, that it was a normative decision and most people are too impatient and shouldn't use the 7% they're using. The fallacy is that most people ARE using 7%, so if 2% is correct for some philosophical reason, the government should be engaged in vast spending on private-sector kinds of projects such as building factories before it gets down to global warming projects that only yield 2.5%. Underspending on global warming, by his reasoning, is a trivial problem compared to underspending on investment generally.

Similarly, Brad says the private sector is too risk averse in choosing 7%. True, government investments are just as risky--- they create systematic risk too--- but people are just too scared of risk for their own good. Thus, the government should use a 2% hurdle rate. By his reasoning (I forget if he agrees explicitly), the government should tax us (or borrow) heavily and buy index funds so as to drive the stock market return down to 2%. That’s more important than just building more bridges and roads.

That is exactly what it sounds like DeLong is conceding with his argument.

Most people indicate that fairly low discount rates are correct for the long-run, but their short-term decisions do not match this.

This is often precisely the problem. In this case, it can be suggested as a cause of underinvestment for the fact of not exhausting all projects sufficiently likely to bring positive benefits, but in others it implies highly sub-optimal usage of natural capital (or non-renewables) by costing out a management or depletion strategy at a 7% rate whereas when asked implicitly about the value of a stock existing in 50 years time, the 2% rate may very well be preferred by many.

So, we do stuff like have national parks where you just can't mine, pave over or manicure every last bit.

What's the probability another dollar allocated to the government goes to 'investment', eg roads, as opposed to transfers, as when the last stimulus bill merely paid into unfunded retirement pensions?

The idea that another dollar given to the government would go to infrastructure is absurd.

Close to full employment! Doubt that's anytime soon.

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