Public investment again.


OMG. Another economist, Ashoka Mody, calls for more public investment as a way out of the recession. See his last paragraph.

The flaw in that argument is that investments should take place if they are VIABLE, not just because extra aggregate demand is needed. And if you don’t understand that, I’ll illustrate with some examples. Here goes.

If all worthwhile public investments that could be made have already been made, and given a need for more extra demand, the extra demand should come in the form of extra consumer spending and extra CURRENT public spending (as opposed to extra CAPITAL public spending). The extra spending should not come in the form of non-viable public sector investments.

Conversely, if there are worthwhile public investments that can be made, and NO EXTRA DEMAND is needed, then those investments SHOULD BE MADE. As to how to make them without causing excessive demand, the answer is to damp down consumer and public current spending. I.e. raise taxes on the private sector (or damp down private sector spending by having government borrow from the private sector).

As for the claim by Ashoka Mody that more public investment might “shake the world out of its stupor”, that’s a great new bit of economics. Where pray do we find learned papers by leading economists in “stupor” and “shaking the world out of it”? I long to know.

If, as Ashoka Mody claims, the central problem is an excess desire to save (i.e. Keynes’s paradox of thrift) then that problem won’t be ameliorated one iota by more public sector investment. Or if there is any “amelioration” likely to take place, then Ashoka Mody really needs to explain how and why.



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