Monday, December 1, 2008

Public Spending will Crowd Out Private Spending

The concern right now is that the private sector is shrinking, or at least not growing like it used to. My added concern has been that the new Administration would sell a "fiscal stimulus" based on the fantasy that government spending actually stimulates private spending (perhaps along the lines that Professor Krugman is selling the fiscal stimulus), when in fact public spending crowds out private spending.

I have been relieved to see that new Keynesians like Professor Mankiw are candid about the possibility that public spending reduces private spending.

I will write more as inauguration day approaches, but to a first order approximation, I think that public infrastructure spending may be a good idea, or at least not such a bad idea, even though it wouldn't stimulate the private sector.

1 comment:

Tino said...

One problem with all these “New Deal” comparisons about infrastructure projects is that the capital-labor ratios have changed.

In the 1930:s construction was labor intensive, guys with shovels, so that public work projects created lots of jobs (may or may not have crowded out other jobs). In contrast construction projects today are very capital intensive.

There may be some slack in capital assets after the boom, but the slack people are most concerned about is labor.