Infrastructure: tinkering with broken economic policy tools

There used to be two economic policy tools – monetary policy and fiscal policy. With monetary policy, we would raise or lower the interest rate to decrease or increase the amount borrowed and spent.  It was argued that reducing the interest rate would decrease the readiness of consumers to save and so would lead to more consumer spending and simultaneously increase the willingness of firms to borrow and invest more.  But interest rates have hovered close to zero (and in the case of Japan, below zero) for close to a decade and the expected increase in spending – either consumption or investment has not arisen.  Despite calls that suggest governments should take advantage of low interest rates to spend on infrastructure, it is noticeable that investors (playing with their own money) are not doing so.  The point is that it is only when the economy is healthy that tinkering with the interest rates is likely to work. For a long period after the end of the second world war, that was the case. We simply assumed it would always be the case, but we were wrong.

So, now we are down to one policy tool – fiscal policy.  In the recent past governments have been trying to build up their surpluses while simultaneously encouraging the population to do the reverse!  Communities have been urged to spend, while governments have struggled to save. But government savings (mostly through reductions in the public service or by outsourcing) has resulted in loss of jobs and, as this has mounted, loss of confidence. So consumers are not spending, they are saving for that inevitable ‘rainy day’.  Again, when our economy was healthy, governments used capital spending as a tap that could be readily turned on or off.  Recurrent spending was not seen to be so amenable to manipulation. This has morphed into today’s focus on infrastructure with a simultaneous reluctance to spend on the upkeep and operations that are necessary to provide service from that infrastructure. But infrastructure spending during the global financial crisis of 2008, which was seen as so successful at the time, led to severe reductions in spending subsequently in order to pay the interest bills incurred.  So a short term gain at a slightly longer term cost.

Are we now down to zero economic policy tools?  Are we clinging to the belief that infrastructure spending will save us simply because we know of nothing else?  And is infrastructure spending better than nothing?

3 Thoughts on “Infrastructure: tinkering with broken economic policy tools

  1. I think this highlights the need for spending on the right infrastructure. Any gains from a programme of spending will be offset in the longer term by negative consequences of poor infrastructure decision making. In terms of policy preparedness, a portfolio of sound, third industrial revolution, initiatives to be funded by the “spending tool” would be a great foundation.

  2. Patrick Whelan on November 30, 2016 at 1:47 pm said:

    I have to agree with you, Greg. As an example, the “Building the Education Revolution” money that was such a stimulus during the GFC has left the states and private schooling organisations with no recurrent expenditure to maintain the new facilities. Current levels of funding for maintenance (which the WA Treasury expects departments to extract from their “one line budget”, but agencies rarely do in full) are expected to be spread over more assets. This is not good management, but there isn’t any extra money for recurrent expenditure, Without an increase in revenue (a no-no for governments scrabbling to find savings with an eye on the ballot box), there never will be enough money for maintenance. The infrastructure will degrade, with lack of maintenance, and replacements are needed. It becomes a viscous circle.

    Infrastructure decision making must include adequate provision for ongoing maintenance. To me it is a no brainer, but it seems difficult for decision takers.

    • Thans Patrick and Greg. The problem is endemic. I have just spent a week in Papua New Guinea on behalf of Talking Infrastructure, helping the Auditors General in the Pacific Islands to audit the management of public assets. The islands are poor and infrastructure is generally aid funded – but, of course, only the capital. With donors using their own labour and their own materials, the locals do not only miss out on employment but they miss out on learning how to maintain the newly constructed assets. But see tomorrow’s post.

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