I had a very nice man recently tell me that he is a life long ultra-liberal (his description) and has always loved Paul Krugman (of course) but that our work at Strong Towns has helped him see some of Krugman's blind spots and now he is less enthusiastic in his support. It made my day. For years here I've been inundated with audience members being helpful and forwarding me links to Krugman's work. And, of course, there is always the angry chorus any time I dare question, even in the smallest way, the religious belief that borrowing more money to build more infrastructure is not only righteous but a moral imperative. I love Strong Towns but you just don't get economic theory, Chuck.
Well, the last seventy years have been a test of those theories and it appears that we're about to expand that test even further. I'm almost certainly going to be an active opponent of the Trump administration's approach to infrastructure (let's get the details first before I commit). Either way, I'm really looking forward to seeing how the proposal forces Krugman -- who keeps the Bat Signal out for more infrastructure spending during good times and bad -- into a struggle between head and heart. Maybe we'll actually get to determine which belief originates where (I cynically think I already know, but I'm open to being wrong).
This article was part of a series examining the notion that America has an infrastructure crisis (it does), one that is best solved with massive federal spending (it isn't). As Ray LaHood would tell us: We need a great big pot of money. What I like most about this piece is the opportunity to use Krugman's numbers -- he rarely shares real math -- and show what they actually mean. And what they mean is not what most people think they mean. I'll leave it up to you to decide whether Krugman intends it that way or not.
When the math had to make sense, when we actually had constraints, the painful feedback within the complex systems that are cities resulted in a compact development pattern. The unreality of our modern economic system -- the absence of regular, painful feedback or any substantive constraints -- has distorted our development pattern. Can we have cities that work with economics that don't?
I laughed more than a little when I started Paul Krugman's August 8 column "Time to Borrow." It's time to borrow in Krugman's world, or as others would say, it's Monday. In a worn out and very predictable way, America's foremost Keynesian advocate argues that now is (still) the right time to borrow money to build more infrastructure. In his words, we have pressing needs and very low interest rates. Come on, people....it's too obvious to even debate.
Here's where he gets interesting:
So investing more in infrastructure would clearly make us richer. Meanwhile, the federal government can borrow at incredibly low interest rates: 10-year, inflation-protected bonds yielded just 0.09 percent on Friday.
Put these two facts together — big needs for public investment, and very low interest rates — and it suggests not just that we should be borrowing to invest, but that this investment might well pay for itself even in purely fiscal terms.
Krugman then goes on to prop up a bunch of straw men to slay -- potential (weak) arguments against borrowing to build infrastructure -- and proceeds to do so in a manner befitting the social media age.
As with my writings on Richard Duncan last week, I find the contention by Krugman that more borrowed money to pay for infrastructure spending "might well pay for itself" fascinating for its honesty. It might pay for itself, but it might not. His caveat "in purely fiscal terms" buttresses a point I've made for years: Our infrastructure investments are not paying for themselves in fiscal terms -- they are not making us wealthier, especially at the local level -- unless you use economist math and equate things like saved travel time and reduced wear-and-tear with cash. It's great in theory but try making a pension payment with ninety seconds of saved travel time.
If you follow the link Krugman inserted for "might well pay for itself" you get an article from the like-minded Larry Summers. In the article, Summers complains about a Congressional Budget Office report ("The Macroeconomc and Budgetary Effects of Federal Investment") that suggests the opposite: federal infrastructure investments are not paying for themselves. We're going to get into this report in the near future, but today I want to highlight an example Summers provides so everyone understands what these Deacons of the Infrastructure Cult are actually saying.
Here's his example from the article:
Imagine an infrastructure project that costs $1 and yields a modest 5 cents a year in real return forever, in terms of higher GDP. The project thus has a 5 percent social rate of return. Tax collections will rise by about 1.5 cents a year. With the indexed bond market suggesting federal real borrowing costs that are negative for 10 years and 50 basis points for 30 years, the government will come out ahead on the investment.
Let's use his numbers, which I think are bizarrely optimistic for reasons I'll elaborate on in a future article. He claims that for every dollar we borrow and spend on infrastructure, we'll have five cents of social return. Great, but we don't pay the bills with social return. For that we need money. Summers suggests we will get 1.5 cents each year. That's 30% of the "social rate of return" which also seems bizarre to me since the federal government collects about 20% of GDP; it's ludicrous to suggest that the government would collect a more actual currency from a fictional statistic that they are currently collecting from GDP. Nonetheless, let's go with it.
Here's how the Summers/Krugman numbers work out over thirty years (ignore your inner Nassim Taleb on projections and play along for this exercise):
For those of you that don't like spreadsheets, I'll summarize: After thirty years of what would be an historically unprecedented low level of interest combined with an unrealistically high level of return for decades-old infrastructure, we will only manage to repay a third of the money we have borrowed to actually build the infrastructure. That's how you bankrupt a country. We've been doing it for decades, at all levels of government.
Note: This isn't investing in infrastructure to -- as Krugman said -- "clearly make us richer." We don't recoup our money on the investment, let alone have extra money for education, defense, medical spending, etc... We're not richer, we're poorer, and now we have the added burden of all this unproductive infrastructure to maintain as well.
Let me channel my inner Krugman. Pretend for a moment that I have a Nobel prize and so I'll erect a couple of straw man counter arguments I can slay. The first one is that there are all these other benefits -- the whole "social rate of return" -- that I'm ignoring. At Strong Towns, we're all for a high social rate of return, but let me reference one of our core principles: Financial solvency is a prerequisite for long term prosperity.
For those of you that like the word, we should strive for a sustainable social rate of return, one that we can maintain and incrementally build generation after generation. However Krugman is pretending to measure a social rate of return -- and I'm more than dubious to have an economist make policy on such a measurement -- it's clear that it can be jacked up for short term benefit, just like GDP, quarterly profits and any other macroeconomic metric. In the words of Detroit reporter Charlie LeDuff, "Get the money together or the kids don't have a future."
Here's the second straw man: Chuck, you're a fool....don't you understand that we don't plan to pay back this debt. That's a fascinating assertion based on this new theory of credit economics that Richard Duncan outlined for us last week. If that's the case, than Krugman/Summers/Duncan can argue that -- and have argued that -- it's truly time to borrow, we cannot lose anything and all we can do is win by borrowing. My only response is that, if this is the world we live in, a world where we believe we have no constraints, then why bother with infrastructure? What is magic about pipes, steel and asphalt? If we can borrow trillions, never pay it back, have no intention of ever paying it back, and suffer no consequences for that action, why not just give Americans money? Why don't we all live like kings? Why bother with the charade of building a road? Let's just cut out the middleman.
Starting next week, we're going to delve into the dangerous waters of the upcoming election. Specifically, our bipartisan consensus on the need to blow trillions on infrastructure. In a follow-up to this essay, I'm going to examine the reasons why infrastructure does not provide -- as Larry Summers suggested -- a real return forever and I'm also going to explain why these macroeconomic theories, even if they work well at the national level (which is highly questionable), wreak havoc on local government balance sheets.
We don't see any national politician or party who truly understands how to build Strong Towns or grasps why an America made of strong cities, towns and neighborhoods is essential to our prosperity. Let's change the conversation.