07 September 2011

Martin Wolf: Listen to the Markets

As President Obama prepares for his big jobs speech, Martin Wolf, an economist and columnist for the Financial Times, cogently makes the case for government investment based not on political ideology but the empirical evidence of what the markets are saying.  He writes:
What is to be done? To find an answer, listen to the markets. They are saying: borrow and spend, please. Yet those who profess faith in the magic of the markets are most determined to ignore the cry. The fiscal skies are falling, they insist.
The markets are saying "borrow" in the form of extremely low interest rates.  Of course, borrowing for borrowing sake makes no sense, but borrowing for investment makes a lot of sense, especially when the rate of return exceeds the interest on debt.  Wolf explains:
[U]se cheap funds to raise future wealth and so improve the fiscal position in the long run. It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets, on their own or together with the private sector. Equally, it is inconceivable that government borrowings designed to accelerate a reduction in the overhang of private debt, recapitalise banks and forestall an immediate collapse in spending cannot earn a return far above costs.
From this perspective, the focus on austerity and short-term fiscal contraction among many governments is misplaced. It reflects more than just political ideology against government, but a complete lack of faith in society to create returns on investment justified by negligible costs of borrowing. Where might society invest to generate returns above the cost of borrowing?  I can think of a few areas in addition to those mentioned by Wolf -- infrastructure, energy, skills and education.

An economic policy based on short-term investment when money is cheap coupled with a long-term plan for reigning in debt makes the most policy sense, as enhancing today's growth makes reining in tomorrow's debt that much easier.  However, political realities may simply make such a policy impossible, meaning that we will get neither a boost to short-term growth nor the benefits of investment, which means a less wealthy society in years to come, reducing political prospects for getting a handle on long-term debt.

The great irony here is that those who profess the most allegiance to market fundamentalism abandon that view when the markets are saying to governments that it is time to borrow and spend.


  1. Wow. Money fleeing the economic disaster area that is Europe means that the market is saying it wants the US government to get bigger?! Amazing that the crisis-driven interest rate says all that.

    And how many hundreds more training programs should we create? Or on education, given that there has been zero return in performance on the extraordinary investment in education over my lifetime, how much more do we want to get a zero return on? Sounds like another 'shovel-ready' project. Bury it.

    Roger, your faith is strong. Your facts, however, are weak.

  2. -1-Stan

    Thanks for helping make my point ;-)

  3. Roger,

    If the market is saying to borrow more, how much more is it saying to borrow?

  4. The Market says... (The Science says...)

    Neither do.

    You've set up a market fundamentalist straw man. The market fundamentalists don't criticize government borrowing and spending because of the poor return. They tend to criticize the misalignment of incentives that will cause malinvestment. The critical issue is who does the spending and borrowing, not how much the loan costs. The market fundamentalist doesn't make a pragmatic argument at all (i.e. just decide based on some risk/reward calculus). They make an argument from principle (the fundamentals if you will).

  5. The point is that I, as a voter, simply don't believe that the US Government can reign in its debt. What do you do with someone who can't control their spending? You cut up the credit cards. And sure, having credit available so that you can obtain things faster than otherwise is a good thing. However, our politicians simply cannot be trusted to spend responsibly. I have the example of, oh, the spending over my entire life (I'm 42) to show this.

    Would it be nice to be able to deficit-spend with a clean conscience and a clear plan to pay it off in a few years? Yes. We're about 50 years of austerity (or, say, a decade of really high inflation) away from having that option though, and every year we spend like drunken sailors now pushes that off, or brings the inevitable collapse that much closer.

  6. -4-jstults

    Yes, of course ... but to think that government investment cannot earn a positive return in any area seems fairly dogmatic to me. What about tax cuts? (Which is where Obama is reportedly heading.)

  7. -3-Stan

    Depends on your view of the returns on investment at the cost of borrowing and the effects of borrowing on subsequent interest rates, no?

  8. Oh jeez, now I have to stop coming here each day because Roger is a true Keynesian:) Roger (or should I call you Krugman?) here's a fact, spending drives debt.

    The USA has been deficit spending since 2002! We had a Republican congress through the 2nd half of the 1990's and the spending increases were small while revenue increases were strong so Clinton got to end his term with a surplus.

    Then Bush was elected and he mostly enjoyed a democratic congress where year on year spending increases were much too big, AND while revenue actually dropped post 9/11. Then the spending increases for the wars and every other darned thing were ludicrous.

    Spending more won't stimulate the economy because we spend it in the wrong place already. If you want infrastructure and jobs programs ok, but cut spending elsewhere to finance it because, wait for it, spending drives debt.

    Keynes and Krugman and now Pielke are dead wrong when they say that $1 in US government spending will result in more than $1 circulating in the economy. It is a dangerous and silly fallacy. Every $1 the government spends is $1 less that citizens spend, net effect on the economy zippo. Actually worse than that because chances are the $1 you spend is less likely to get consumed by corruption or inefficiency.

    10 years of deficit spending and the economy is in the tank and you pronounce that we should spend more? Crazy. Get me FA Hayak stat!

  9. -5-Skip

    Hey, I'm 42 also ;-)

    You write, "The point is that I, as a voter, simply don't believe that the US Government can reign in its debt."

    Reply: Maybe you are correct.

    Question that follows: Is reigning in debt made easier or harder with higher GDP growth?

  10. -8-D. Robinson

    "Spending more won't stimulate the economy because we spend it in the wrong place already."

    I'll accept this claim (and also what you say about the wars and "stimulus" spending. But what you have argued is not that spending is a bad idea, but that spending "in the wrong place already" is a bad idea.

    What about spending in the "right place already"? ;-)

    Debates over Keynesian economic policies become reduced to ideological witnessing if they are conducted absent policy context, IMO.

  11. "Depends on your view of the returns on investment at the cost of borrowing and the effects of borrowing on subsequent interest rates, no?"

    And we have a substantial base of empirical evidence that the spending you advocate has a zero or negative return. The rational decision is thus to say no to more borrowing. How is this a rejection of the market?

  12. Roger,

    Relative to 2008 spending levels, Federal government spending during the period of 2009-2011 is expected to be more than $1.8 TRILLION higher.

    What ROI would you expect from this investment?

    It may theoretically be possible for a government to invest taxpayer money inefficiently. But we don't have a theoretical government, we live in the United States of America. Our government has a well established track record, and its marginal ROI is STRONGLY NEGATIVE.

    Expecting this to suddenly change is every bit as fantastic as the spontaneous decarbonization scenarios you are so fond of criticizing.

  13. Roger, do very low interest rates mean the market is saying 'borrow'?

    The markets are saying it's very cheap to borrow in terms of nominal interest rates, but that's a different thing surely?

  14. -6- Roger,

    "...to think that government investment cannot earn a positive return in any area seems fairly dogmatic to me."

    I would agree. However, those places most likely to have a positive return are probably things like roads and bridges, and really, we're pretty good there. It's not like we're not already spending a lot there.

    Focusing on fiscal policy (not that we shouldn't be paying attention to it) misses the huge role played by other regulations. Health care, Frank-Dodd, SARBOX, light bulbs, fish hooks, ad nauseum have a role in depressing growth, too.

    You're absolutely right that a bigger economy can handle more debt. But even if someone knows what the silver spending bullet really is, would you trust the federal government to execute? If so, where have you been the last 100 years? :-)

  15. a complete lack of faith in society to create returns on investment justified by negligible costs of borrowing

    Yes...I have a complete lack of faith that Government can spend money in a manner that creates long term returns.

    All I have to do is visit beautiful Washtucna, Washington. It's a pleasant little town of 205. An unfortunate victim of the urbanization of America. If one were to eat lunch in the sole eatery in Washtushna and watch the traffic go by on Main street one might count 4 or 5 cars in the space of an hour.

    Washtucna has a very nice paved bicycle path, undoubtedly paid for with Government funds, approved by someone too ill informed to realize that Washtucna has no need for a bicycle path as the traffic on Mainstreet is almost non-existant. Obviously, someone in Washtucna was in need of employment and building that bicycle path provided 'short term' employment.

    Oh look, here's an application for Washtucna to add a $90,000 walking path.


    Don't get me wrong, the people of Washtucna are fine people, as are the people in thousands of rural towns in America that are suffering from the effects of depopulation. The General Store and Auto Repair shop in Washtucna went out of business but the 'Government' continues to invest in projects for Washtucna that are more appropriate for an urban environment.

  16. -11-Stan

    I'd welcome pointers to literature that shows that government spending on infrastructure, energy and skills/education has a negative return.

    Please no cherry picking. Thanks!


    You'll have to be more specific. A claim that aggregate US government spending has a negative ROI is nonsense (or please show me the study) ... but I guess if you are of the view that the world would be better off had the US government never been formed, you'd at least be consistent ;-)


    Of course, you are being too literal ;-)


    Thanks ... I am not convinced that infrastructure spending is where it needs to be at all. Consider this POV from Reason (hardly a Keynesian outpost):

    On light bulbs, etc, I disagree, it is more complicated ... see:


    You can make a case that one project is not a good investment, but isn't it then a logical fallacy to go from that to conclude that all such projects are poor investments?

    Remind me where your electricity comes from? ;-)

    Thanks all, a good discussion

  17. Roger said: What about tax cuts?

    Well, that's certainly one response to criticisms of misaligned incentives: avoid the problem by not creating the moral hazard in the first place. It would be interesting to hear about policy designs that tackle the problem in a positive way though.

  18. -16- Roger,

    I remember the light bulb discussion well. You're still wrong. :-)

    You're right that it's a logical fallacy to make the leap that all such projects are poor investments, but I don't think that's what Harrywr2 was doing. In any case, how do you get a positive ROI from a bicycle or walking path? And if this is the extent to which the excess of borrowing is going, what's the likelihood of finding something good on which to spend that money? Now, if we could, say, zero out the budget for the Education department, I'd trade half of the savings for walking path projects.

    Large mutual funds eventually close off to new money, since they reach a point where there just aren't enough investments opportunities to make a good return on all of that money.

    So, what sort of "investments" should we be pursuing with all of this opportunistic borrowing?

  19. The phrase is "rein in", not "reign in".

    With all this loose private cash around - and there is a lot of it -- I'm wondering, if there is a fortune to be made in investments in education, how come U. Phoenix isn't constructing campuses all over the country. How come utilities aren't themselves constructing power plants? Granted, the gummint has a de facto monopoly in many areas of infrastructure; still, you'd think toll roads or railways would be an avenue for private investment, and it doesn't seem to be happening.

    I conclude that you are mis-using 'investment' in the sense that politicians of the leftist stripe generally mis-use it. You mean social spending.

    Of interest might be a piece in Chronicle of Higher Education yesterday, in which Richard Vedder estimates that only 40% of US Pell grant recipients graduate in 6 years. No private investment firm could sustain a 60% outright failure rate on their investments.

  20. -19-Gerard Harbison

    Thanks for the eagle eyes, now fixed ...

    No, I actually mean investment. A position that says that all government spending is bad is not one based on evidence but ideology, sorry.

    Your Pell Grant example makes the case well -- "No private investment firm could sustain a 60% outright failure rate on their investments" -- which is why the government takes on that risk.

    Surely you have some data/analysis to support your claim that the Pell Grant program is a poor investment? (It may be, I don't know.)

    The debate here should not be is gov't spending good or bad, that is simply an ink blot, but rather, what sort of criteria would you like to see passed for gov't spending to occur, if the point is to invest in activities that have a positive economic return.

    And I'll even reveal the trickiness to this question -- such "criteria" (e.g., a cost-benefit test) are exactly the sort of nefarious regulations that many seem to want to get rid of ... I suspect I'd be more risk taking than many on this thread (at ~0% interest rates!?),but maybe not ;-)

    FYI, I'm offline for a while, back later. Thx.

  21. By email from mark Bahner who Blogger apparently does not like anymore:

    "In comment #6 you wrote, "Yes, of course ... but to think that government investment cannot earn a positive return in any area seems fairly dogmatic to me. What about tax cuts? (Which is where Obama is reportedly heading.)"

    I don't follow. Are you saying that tax cuts are the same as "government investment"?

    Best wishes,


    PIELKE REPLY: No, but this would seem to satisfy the "let the private sector invest" crowd and "the government can take on more short term debt" crowd/small gathering, while offering the possibility of stimulating growth at a faster rate than present interest rates.

  22. Roger:

    You really should read the Vedder piece. The government doesn't even know the 'risk'. It doesn't tabulate statistics on the outcomes of Pell Grant recipients. Vedder had to extract that by a regression analysis of Pell grant funding vs. graduation rate, by college.

    What sort of 'investor' fails to try to figure out the outcome of the investment, let alone calculate the return on that investment?

    In other words, 'education' is an investment if the government's can anticipate increased income -- say in tax revenues -- upon shelling out more for it. It is incumbent on you to show it is indeed an investment, not on me to prove it isn't. You are the one making the positive claim.

  23. per the FED's website each 7 dollars of debt results in less than 1 dollar in GDP growth.......

    we are in a liquidity trap coupled with a huge capacity overhang in the ability to produce goods while everyone is desperately trying to get out of debt

    so just cause the interest rates are low doesn't mean it is a good time to borrow, what do you plan on producing? have customers lining up to buy product?no? then there is no reason for growth

    when you pull a bonehead maneuver and pull 20-30 years worth or real estate demand forward and squeeze it into 10 years it doesn't just unwind instantly when the bubble pops......world record sized malinvestment leaving us with insolvent banks and a govt helpless to do much about it without someone taking some massive pain

    might want to look at ALL the economic signals before advocating a course of action

  24. Roger,

    For reference on revenue vs. outlay:


    The 1990's were stimulated by the internet / dot com boon and by Clinton's capital gains tax cuts. The US still had a technological advantage + spending increases were small + investment taxes were cut = revenue growth was strong. So how do you re-create that magic?

    Compare revenue growth since 2000 with the previous decades and see that our economy no longer has the growth rate to support our growth in spending, and we probably don't have the technology advantage anymore either.

    I can't see how government spending can fix this because unlike private investment government spending doesn't create wealth, it redistributes it.

    Clearly some spending policies have to be more beneficial to the economy than others, but the word stimulus in DC seems to mean "spend more" and that is not working.

  25. Roger @9, you ask, "Is reining in debt made easier or harder with higher GDP growth?"

    And the answer is that, given politicians who will feel no need to do so without a crisis forcing their hand, it's absolutely harder to accomplish this with higher GDP growth. Politicians only care about being reelected, and the electorate only cares about things like this when times are really, really bad.

  26. There is a simple question of who do you want to invest your (taxpayer) money?

    Barney Frank


    Warren Buffet?

    Certainly there are things that only govt can invest in, public infrastructure, etc. So it is not that cut and dried, but to ignore that the govt has a credibility problem with wise spending ignore the reality, and this debate becomes only theoretical in nature.

    Try investing in a whole bunch of nuclear power plants, you might get some welcome support from the right.

  27. Being admittedly a bit dogmatic on this subject, I would be a bit more sympathetic if I wasn't harboring absolutely zero faith that Keynesians would actually pay that debt back when the "good times" came back around.

    As it sits now, it is spend now, and spend even more later. A budget surplus is like a gigantic mountain of crack cocaine to a liberal junkie. It's going to get spent. Convince me otherwise, anybody. Snort Snort.

  28. It seems that "blogger" limits the length of a comment. So, it will be necessary to divide my comment.

    Concluding Notes on the Social Philosophy Towards which the General Theory Might Lead -
    Thus, apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before.
    It is in determining the volume, not the direction, of actual employment that the existing system has broken down.
    The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state.
    The authoritarian state systems of to-day seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated — and, in my opinion, inevitably associated — with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.
    But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.

    The General Theory of Employment, Interest, and Money - John Maynard Keynes

  29. This discussion should begin with the principal principle, "individual dignity." It should continue with a review of the measures by which totalitarian policies have been substituted for the conveyance and acceptance of moral knowledge. It is acknowledge that compromise of individual dignity is inevitable and necessary for the establishment and development of society. Any compromises induced by a government with a granted authority cannot be taken lightly and without an informed consensus of the people it serves.

    A nation, at minimum, is an administrative district, and, if it is to be successful and provided for its citizens, must convert on the natural and human resources which populate its land. At the most, it is an encapsulation of a new race, defined by "any people united by common history, language, cultural traits, etc.".

    It is desirable to acknowledge that legal immigration, when nearly 10% of the population is unemployed, an additional 20% is long-term unemployed or underemployed, and nearly 50% are subsidized through taxpayer subsidies, is unreasonable. It must be acknowledged that illegal immigration, that is, unmeasured immigration, under the same circumstances is unconscionable. Not only do immigrants displace American men, women, and children; but, they also necessarily increase the incidence of involuntary exploitation (including murder, rape, etc.). A selective rule of law undermines the perception of the legitimacy of a governing body or ruling authority.

    On a related note, we should acknowledge the conditions which would drive a million aliens to leave their homes and risk their lives to reach another nation. This is indicative and, in fact, confirms that the corruption of societies in Hispanic, African, Asian, etc. nations is progressive and intolerable. It does not help anyone to merely shift the problem from one district to another, whereby the underlying causal factors are ignored, or worse, are exploited by foreign and domestic competing interests, including those with a granted authority (principally government).

  30. The government should act to enable the conditions where entrepreneurs thrive, whereby they establish and develop businesses, which will provide for the employment of managers and workers, and the wealth from which government derives funding for its activities, compensation for its civil servants, and financing of its "expenses".

    We should help individuals who falter, with limited, targeted, and accountable assistance, where the individual is engaged in their own recovery. As a society, we must decide how to cope with individuals who choose to fail (e.g., criminals).

    We need to review policies (e.g., welfare), which are causal factors in corruption of individuals and society, and sabotage character development of individuals. The current system contributes to corruption of both the beneficiary and the provider.

    We must end institutionally honored denigration of individual dignity (e.g., discrimination by incidental features), progressive involuntary exploitation (i.e., redistributive change), and devaluation of human life (e.g., abortion). We must avoid condemning people merely based on the color of their skin, gender, etc.

    For example, it is utterly insane to teach young boys that males are predisposed to the involuntary exploitation of females. The evidence does not support that conclusion, and their dignity cannot be preserved with that deceptive message. The same is true when whole classes of people (typically identified by their "skin color") are condemned as prejudiced, bigoted, etc.). The only minority of consequence is the individual. Anything else is, by definition, prejudiced and demonstrably false.

    We must stop manufacturing obstacles for entrepreneurs and punishing responsible individuals. We should be good stewards of our society, the environment, etc.; but, we cannot submit to extreme or fanatical interests that sabotage our development.

    It is imperative that the government act responsibly and facilitate domestic resource recovery and energy production. This is the foundation of an economy, and it will precede the reduced cost of capital investments across the board while increasing efficiency of converting on both natural and human capital.

  31. As for the marginal value of debt accumulation:

    Labor Day Musings

    Review the "Debt and GDP Change" graph. If it is correct, then there has been no material return on the accumulation of debt (since the 1950s) by the federal government. If anything, the expansion of the virtual economy precedes a decline in the real economy. This would suggest that Keynes's criteria of "it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom" has not been met by our overseers.

    The reason, I believe, that centralization is failing in America, as it has and will fail everywhere else, is that is is predicated on a competing interests (e.g., individuals, cooperatives) moderating their interests. This cannot be achieved in a society which promotes totalitarian principles above moral knowledge. The latter of which is a prerequisite for self-moderating behavior, which is impossible with the normalization of denigrating individual dignity and devaluation of human life.

    As Keyne's observed, the market (i.e., individual competing interests) is the superior economic (i.e., capitalism) and political system (i.e., Democracy), for the simple reason that through adaptation, and evolution, it optimizes the preservation of individual dignity. However, as he noted, it requires oversight in order to accomodate individuals who are corrupt and neligent. Still, who can be trusted with that oversight, and who provides oversight of the overseers? All people are vulnerable to the causal factors which lead to their corruption.

  32. From Mark Bahner by email:

    ""By email from mark Bahner who Blogger apparently does not like anymore:"

    Yes, it's weird. I was able to comment three times, a day or two ago. Now it's back to problems.

    Regarding your "tax cut" thought, you wrote, "... but this would seem to satisfy the "let the private sector invest" crowd and "the government can take on more short term debt" crowd/small gathering, while offering the possibility of stimulating growth at a faster rate than present interest rates."

    That sounds like a plan to me. I personally wouldn't mind cutting military spending in half also...but that's just me.

    Regarding what "the market" is saying about additional federal government debt, it would be interesting to me to hear what Don Boudreaux (or similarly-minded economists) say about that. It occurs to me that "the market" might have said Greek debt was OK...until it wasn't OK.

    Best wishes,


  33. Roger,

    I agree that spending/investment would be good if it is spent in areas that improve our competitive advantage in the world.

    In the short term, one key area is shale oil, shale gas, coal to gas/oil etc to reduce oil imports. For the long term, advanced nuclear, solar, wind, bio, .... R&D (not production subsidies) to get the cost below the cost of coal.

    We should not borrow to support consumer spending (much which is spent on imports).

  34. RP, you are right of course. A simple thing would be to borrow money, purchase a broad array of U.S. stocks and bonds based on a common index, and use the returns to pay future social security obligations. The return of that type of portfolio would almost have to outpace the cost of the borrowing and this would distribute capital to the private sector.

    We are already doing this type of thing poorly by effectively borrowing money to invest in selected energy start ups. Investing across and index would avoid some of the issues with that.

  35. Roger,

    Yes, of course ... but to think that government investment cannot earn a positive return in any area seems fairly dogmatic to me. What about tax cuts? (Which is where Obama is reportedly heading.)

    Yes it is dogmatic. It is also dogmatic to believe that government "investment" inevitably earns a positive return.

    My issue is not with the theory. I have no doubt that a properly sized, well-timed stimulus which focused on worthy projects could produce an ROI greater than one. My skepticism comes from the fact that any stimulus is subject to the political process and if history is any indication then we are likely to get a politically effective stimulus and not an economically effective one. And effectiveness must be measured using actual outputs, not by inputs to someone's economic model.

    Furthermore, all this talk of "infrastructure" spending is mired (IMO) in 1930's thinking. First, the ROI on roads and bridges is, IMO, likely to be a lot less than ROI on electrical, internet and other 21st century infrastructure (such as a modern air-traffic control system). Secondly, as we have seen from the last stimulus, road and bridge-building don't generate a lot of new employment. Those types of construction projects are primarily performed by medium-sized companies (who are often politically well-connected to local government via existing contracts) using specialized heavy equipment and specially trained workers. There are no more gangs of men with shovels digging road-beds. The last stimulus brought these firms a lot of business and their employees a lot of overtime. To expand capacity they would have to not only hire more people, but also invest in new and additional equipment at great expense. Are these companies going to make such investments knowing that a stimulus is, by definition, short term? In other words, would the stimulus be big enough and long enough to make such investments profitable for them?


  36. part 2:

    Secondly, infrastructure projects typically take minimum of 3-5 years to get off the ground unless its something simple like repaving. We need to be cognizant of the fact that the "shovel ready" projects have already been done (or are not worth doing) and understand that this kind infrastructure investment isn't going to provide returns for quite some time. As a result, it's not going to affect our immediate employment problems.

    Third, yes it does make sense to borrow at what are real negative interest rates in some circumstances. Like a teaser-rate credit card, though, if that debt just ends up getting rolled-over at a higher interest rate then it's no longer "free" money. So, can the borrowed money be paid back before interest rates rise? The answer to that is no considering we are looking at significant federal deficit spending for at least the next decade even under rosy assumptions.

    Finally, it does make sense to borrow for investment. It's completely crazy to borrow for operating expenses. Guess which one we are doing to the tune of over a trillion a year? That is simply unsustainable and what can't be sustained, won't be sustained, one way or another.

  37. Actually there are plenty of examples of government investment which results in negative ROI even in entire fields.

    I'd point out wind and solar subsidies as falling in this category.

    The present state of technology yields cost/benefit ratios which are negative in every way...except for manufacturer profits.

    While I absolutely agree that investment in alternative energy is a good idea, on the other hand the method by which money has been invested in the present solar and wind industries in the United States is criminally bad.

    The part which Krugman lacks is very simple: dogmatically spending more simply invites special interests to feed at the trough.

    While I completely disagree with the 'Starve the Beast' demagogues for much the same reason you do - i.e. austerity has no historical basis for success - at the same time profligate spending without a coherent plan or measurable waypoints toward success is equally ridiculous.

    It is the latter in which the 'anti spending' view has a cogent point.

  38. Roger,

    Seems like you are making some progress. We've already walked back the idea that low nominal rates are the market telling govt to expand. Nice to see that little caveat now recognized that we also have to have projects with a positive rate of return.

    [someone above made a point I was going to make about a teaser rate on a credit card.] Just because some bank is willing to lend you lots of cash right now at a low rate doesn't mean it is smart to borrow it. Since government programs are never phased out, any programs begun now will still be in existence and still need to be funded decades from now when the teaser rate has expired.

    re: no return on education spending
    Don't have a cite handy, but I believe that inflation adjusted spending has quadrupled since 1970 (?) with no improvement in outcomes.

    As for training programs -- saw an article a few years ago that mentioned that we have hundreds and hundreds of these, just at the federal level. Someone did a study which showed that they don't increase the chances of finding a job. In many cases, those in the programs and those administering them often treated them as a type of welfare program.

    But the biggest objection (besides the permanence of any new govt programs) is that government spends money for political reasons, not economic ones. All the incentives are for the cash to be used in a way that does the most to benefit the people making the political choices. See Amity Shlaes book on FDR and the depression (The Forgotten Man ?) where she describes how FDR and his political advisors made all their spending decisions with an eye on where it would do him the most good at the ballot box.

    Or as PJ O'Rourke has written -- "It is a popular delusion that the government wastes vast amounts of money through inefficiency and sloth. Enormous effort and elaborate planning are required to waste this much money."

  39. Roger,

    Oops -- should have mentioned this upfront. Interest rates are not a reflection of the "market". When the govt, through the FED, is buying up the vast majority of the debt that the govt is issuing, any claim that this reflects a genuine market is lucicrous.

  40. http://online.wsj.com/article/SB10001424053111904332804576538361788872004.html?mod=djemEditorialPage_h

    No evidence that jobs programs do any good.