An American Road to Nowhere

Many American roads are in pretty bad shape – I can attest to that after driving from New Jersey to Massachusetts and back for family business last week. When you combine that fact with the underlying macroeconomic situation (more on that in a minute), the case for spending substantial sums on repair seems obvious.

But President Obama’s recent proposal for what is actually a modest infrastructure program – $302 billion over four years for road repairs and transit upgrades – appears to be going nowhere, thanks to a fight over how to pay for it.

Which brings me back to something I started saying way back in 2008, which is still true: when you’re in a liquidity trap, virtue becomes vice and prudence becomes folly. Asking how we will pay for infrastructure may seem prudent, but it is in fact deeply foolish.

Think about it: what would the true costs be of repairing our roads? It wouldn’t divert capital from other investments – that capital has no place to go, and the markets are practically begging the federal government to borrow funds and put it to work.

It also wouldn’t divert labor from other uses: unemployment among construction workers remains high.

So it’s deeply irresponsible NOT to spend this money, and foolish to worry about financing.

Clearly, however, we’ve learned nothing from five-plus years of depression economics.

A Monetary Puzzle

O.K., color me puzzled. I’ve seen a number of people touting a recent paper from the Bank of England on how banks create money as offering some kind of radical new way of looking at the economy. And it is a good piece. But it doesn’t seem, in any important way, to be at odds with what the economist James Tobin wrote 50 years ago – indeed, the Bank of England paper cites Mr. Tobin’s work extensively.

And I have always thought of money in Tobinesque terms, even if I sometimes use shorthand descriptions that can be misread if you take them out of context; the same is true of many economists.

Furthermore, the key Tobin insight – which is fully consistent with the Bank of England’s analysis – is that while banks are indeed more complicated creatures than the mechanical lenders of deposits we like to portray in Economics 101, this doesn’t mean either that they have the unlimited ability to create money or that they are somehow outside the usual rules of economics.

Don’t let monetary realism slide into monetary mysticism!