Kenneth Rogoff advocates infrastructure spending as a cure for recessions.

Every time there is a recession, a crowd of well meaning folk pipe up and suggest that infrastructure spending is a cure.

The first problem there is that it just ain’t possible to implement BIG INCREASES infrastructure spending at the drop of a hat: the skilled labour and machinery are unlikely to be there. Some infrastructure projects are “shovel ready”, but most are not.

But Rogoff manages to make an entirely new mistake in connection with the “infrastructure cures recessions” myth: in a recent Financial Times article  he claimed that it’s a good idea for government to incur debt in a recession so as to fund what he calls “high return projects”. Well that sounds good, doesn’t it? Unfortunately, there are problems there, as follows.

“High return projects” should go ahead REGARDLESS of whether there’s a recession or not. Indeed, same goes for a project which produces a standard return!!! “Doh” (as Homer Simpson would say).

But Rogoff has a habit of putting his foot in it, as this recent Naked Capitalism article points out.

Another argument put by Rogoff is that during recessions “resources are cheaper”. Well that’s no more an argument for INVESTMENT projects than any other form of spending – “current” spending, in particular. That is, if the cost of all “resources” drop by X%, that does not of itself make a capital intensive way of doing something viable relative to labour intensive ways of doing the same thing.

But even that doesn’t do justice to the fallacious nature of Rogoff’s ideas: in particular, what does it mean to say that “resources are cheaper”? It’s actually meaningless.

To illustrate, if the cost of absolutely everything (in terms of dollars or Euros) drops by X%, then we’re all back where we started: except that the real value of money will have risen.

Interest rates.

One particular “resource” is capital, and the cost of capital does drop a bit in recessions in that interest rates drop.

The first problem with that argument, is that central banks normally aim to cut just SHORT TERM borrowing rates in recessions. After all, the average recession lasts very roughly three years, so rates do not want to be cut for MORE THAN about three years. (Plus even without central bank intervention, rates would probably rise come the end of a recession.)

But infrastructure projects last DECADES!!!  That is, anyone looking to fund an infrastructure project will have to borrow LONG TERM, and long term rates normally do not drop much in a recession.


The “infrastructure spending cures recessions” idea is as defective as it ever was. It’s the sort of idea that attracts those with little understanding of economics. And given Rogoff’s – er – bright new ideas on the subject, it seems that Rogoff himself comes into the category of people who do not understand economics.


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