Spring Break
Creative idea for a Keynesian stimulus package
Issue date: 12/4/08 Section: Opinion
When I list my economic inspirations, John Maynard Keynes doesn't make the top five, or even the top ten. I tend to lean towards the University of Chicago school of thought so creating a fiscal stimulus package through deficit financed government spending immediately sends shivers down my spine.
Recently, Professor Greg Mankiw, a nationally renowned center-right economist, wrote about high yield public investments on his blog, gregmankiw.blogspot.com/2008/12/passing-buck.html.
One thing all economists agree on: If there are public investment projects that pay a high rate of return, those are worth paying for even if it means more borrowing. But that isn't always true. Even if we were at full employment and there were no possible employment effects of fiscal stimulus, we should undertake public investments that pass a cost-benefit test.
In this regard, two observations come to mind. First, since most infrastructure is used locally, the proper level of spending is best determined by state and local governments rather than by the federal government. Earlier, I suggested that fiscal stimulus could be decentralized. Each state governor could be allowed to determine whether to take federal money as state aid or have it paid directly to his or her state's citizens as tax relief. I still think that makes sense.
Second, more public projects would pass a cost-benefit test if we repealed the Davis-Bacon Act. This law requires contractors on these public projects to pay "prevailing wages," which are typically union wages well in excess of what would occur in a free market. If the government paid market-determined wages for infrastructure projects, we could have both more infrastructure and less government debt. Without doubt, that legacy would benefit future generations.
Earlier this year, I asked Professor Mankiw about income inequality, and he was gracious enough to respond. He told me that the problem with income inequality is the gap between skilled workers and unskilled workers. The highly skilled workers get good jobs, keep them and have high and increasing real wages. The unskilled workers don't get good jobs at the same rate as skilled workers; they have trouble keeping them and their real wages are either stagnant, barely rising with inflation or decreasing. The problem is that our educational system is not producing enough skilled workers, or to say it a different way, our education system is not properly "skilling" our workers. (And here I thought they made Kosher laws to cover that)! You might be wondering how income inequality and a government stimulus package tie together.
Recently, Professor Greg Mankiw, a nationally renowned center-right economist, wrote about high yield public investments on his blog, gregmankiw.blogspot.com/2008/12/passing-buck.html.
One thing all economists agree on: If there are public investment projects that pay a high rate of return, those are worth paying for even if it means more borrowing. But that isn't always true. Even if we were at full employment and there were no possible employment effects of fiscal stimulus, we should undertake public investments that pass a cost-benefit test.
In this regard, two observations come to mind. First, since most infrastructure is used locally, the proper level of spending is best determined by state and local governments rather than by the federal government. Earlier, I suggested that fiscal stimulus could be decentralized. Each state governor could be allowed to determine whether to take federal money as state aid or have it paid directly to his or her state's citizens as tax relief. I still think that makes sense.
Second, more public projects would pass a cost-benefit test if we repealed the Davis-Bacon Act. This law requires contractors on these public projects to pay "prevailing wages," which are typically union wages well in excess of what would occur in a free market. If the government paid market-determined wages for infrastructure projects, we could have both more infrastructure and less government debt. Without doubt, that legacy would benefit future generations.
Earlier this year, I asked Professor Mankiw about income inequality, and he was gracious enough to respond. He told me that the problem with income inequality is the gap between skilled workers and unskilled workers. The highly skilled workers get good jobs, keep them and have high and increasing real wages. The unskilled workers don't get good jobs at the same rate as skilled workers; they have trouble keeping them and their real wages are either stagnant, barely rising with inflation or decreasing. The problem is that our educational system is not producing enough skilled workers, or to say it a different way, our education system is not properly "skilling" our workers. (And here I thought they made Kosher laws to cover that)! You might be wondering how income inequality and a government stimulus package tie together.
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