Wednesday, yesterday, we went over the varieties of possible stimulus and how efficient they were likely to be. These included Fed rate cuts – parenthetically, cuts by the Fed to this point in 2007 have been widely reported as a response to the flagging economy. In fact they were explicitly intended to remedy “turbulence” and the threat to the economy from credit markets, not from falling demand; that is bail out the bankers. Not stimulate the economy.
Okay – no more detours – Stimulus options we mentioned included those Fed rate cuts, more tax cuts for the rich, across-the-board tax cuts, tax incentives for business investment, and government spending on public works. Oh yes, when we found none of these particularly inviting, we proposed direct support to state and local governments to stabilize them in a period of falling revenues. Without such support, federal expansion will be more than offset by state and local contraction. Further, spending on consumer discretionaries will substitute for spending on schools, police and other state and municipal services.
We have a problem. The federal government under George W. Bush has been running deficits and big ones ever since the tax cuts for the rich. They are rising again. If we borrow further to stimulate the economy, there will be additional upward pressure on interest rates. Higher interest rates could undo any stimulus with increased credit costs.
That’s a bit more than I said yesterday. A week ago Wednesday Senator and chair of the Joint Economic Committee Charles Schumer said this in response to a question following a talk at the Brookings Institute.
We have huge infrastructure needs over the next twenty-five to thirty years. Most of our fundamental infrastructure – roads, sewer, water – was done fifty to a hundred years ago and has to be redone.
When I go around New York State, the number one – in suburban, smaller cities and rural areas – number one, two or three on the list of the local governments is, “How are you going to help us with our need, not for roads, which is more federally oriented and state oriented, but for water and sewer.
So this is a serious problem. School buildings. I greatly worry that overall since 1980 that the federal government has a much more restricted role and the next twenty-five years we’re going to pay a price. We’d better figure out a way to adapt to that in terms of infrastructure and in terms of education.
We have a great system. And we energize people, no matter what their background and what their economic level, the way China doesn’t, Europe doesn’t, Europe doesn’t. Its great. So we have all of this going for us. And the anxiety I have is, as somebody who loves this country, I think we have let things lag, rather significantly, over the last twenty-five years, but particularly over the last six or seven. And we better figure out ways to deal with it.
The substance of the Senator’s talk – as I’ve mentioned before – was the housing and credit market mess and it will be up on the podcast this Saturday. Schumer knows the way out of this mess. He can explain it. And we should be following him, not the scarecrows at the Fed or the ostriches in the White House.
So, the set-up is nearly complete. One more piece. Public Goods v. Private Goods.
Demand Side makes a special point of Public Goods. Public Goods account for an immense portion of the well-being of our citizenry, and at the same time generate immense wealth to private economic actors.
A brief definition: Private goods – those which our society creates and consumes in such abundance – are marked by two primary characteristics. They are excludable and they are depletable.
Excludable means that to a greater or lesser degree the use or enjoyment can be limited to a person, household, or group. This is important. My use excludes your use of the item. Autos, houses, durable goods, food, electronics, air travel, and on and on.Public Goods, by contrast, are to a greater or lesser degree not depletable and not excludable. For example, a road is not depletable: No matter how many cars use a road today (and recognizing that there are limits to everything) cars will be using it tomorrow as well. It is not excludable. Who will be able to collect a toll for every road, or collect the cost of the service if the road is plowed free of snow?
Depletable means the benefit of the product can be limited, focused, monopolized. The entire economic benefit is consumed, or can be consumed by the buyer, wearer, user, and so on.
Not being depletable means in their own way Public Goods are the goose that lays the golden egg. Not being excludable means the private market is unable to isolate the benefit sufficiently to be an efficient producer of Public Goods. The private market requires payment in an amount approximating value. Such a payment will not be forthcoming if one party does not monopolize the benefit and enjoy the predominant value of the good.
When one party does not monopolize the benefit, it is difficult for the private market to exist. Remember, the market itself consists of nothing more or less than the moment of purchase and sale. This leads into the cul-de-sac for the market known by the technical term “the free rider problem.” The classic example is national defense. If the nation is defended from attack, I am defended, even if I do not choose to pay for the service. I am defended because my neighbor is defended. This is the downside of not being excludable, and it is the major reason that we have a universal coercive means of financing – taxation. There ought to be no free riders on Public Goods. The cost of the road, national defense and education ought to be shared by all, since their benefits are shared by all.
Public Goods as exemplified by roads are obviously a good deal for private actors. MacDonald’s founder Ray Kroc once asked his protégé, “What business am I in?” The unsurprising answer was, “The restaurant business.” “No. The Real estate business.” The success of his fast-food outlets depended on their locations. The value of a location depended on the access from streets and roads. A new highway or bridge may increase property values immensely. In rare instances part of the gain may be captured for public use. Most often it becomes wealth to private landowners.
The same sort of benefit attends all public goods, education, national defense, etc., etc. The total return is far greater than the cost or than the benefit returned to the individual, but it is impossible to isolate and capture that larger return in a transaction. The market requires a relatively simple transaction to operate efficiently. It cannot deal well with multiple beneficiaries or variable benefits or extended or uncertain periods of time. A good which returns enormous benefits over costs will not be produced by the market unless the purchaser commands enough of the benefit to match the seller’s price.
Taxes are simply the means of purchasing or financing Public Goods, in the same way mortgages finance houses. The great success of the anti-government Right Wing in the United States has arisen from their ability to separate taxes from the goods they purchase in the minds of the electorate. In fact, taxes are the source of funding for Public Goods. Public Goods which have a high multiplier at the front end, being expenditures of government, and so stimulate economic activity. They often produce immense value over their cost. And they create wealth for many private economic actors.
Now, for those of you – approximately three of the faithful thirty-nine – who like sports metaphors – we’ve driven the ball down the field. Time is running out. We can’t afford to risk another run, so we’re going to pass for the score.
Wednesday we established that Public Works would be by fr the best stimulus if it could only be implemented more quickly. Here we establish that public works create growth in and of themselves over time.
Let’s just admit that the Bush tax cuts for the rich have been a bust, recapture that money for the operating budget, and use the debt space for bonds for the public works this country needs. This is a sustainable growth path.
Again, thank you E.B. for this transcript of the podcast for Thursday, December 27