Paul Krugman writes:
There’s now a lot of talk about the fact that U.S. corporations are sitting on a lot of cash, but not spending it. I don’t find that particularly puzzling: with huge excess capacity, why invest in building even more capacity. But almost everyone seems to agree that if we could somehow get businesses to spend some of that cash, it would create jobs.
Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly).
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I have never seen a coherent objection to this line of argument.
Let me take a crack at this.
The key question, in my view, concerns the reason(s) for why firms appear reluctant to undertake new capital projects. If I understand the Krugman and DeLong worldview correctly, firms are reluctant to spend because they fear that future demand for their products will fail to show up. Their collective fear somehow becomes a self-fulfilling prophesy. Because firms fail to invest, they fail to hire workers, and hence, workers fail to generate income--the income that would have been necessary to purchase the added future production. Something like this (I welcome clarifications).
There may be an element of truth to this. But there may be other reasons underlying the collapse in investment spending. And, as usual, different interpretations may lead to very different policy implications.
There is no question that firms appear "fearful" of investing. The question, I think, is whether this fear is rooted in fundamentals, or whether it is simply a byproduct of market psychology. I see several good fundamental reasons for being afraid to invest.
First, there has been a massive overinvestment in residential capital (largely a byproduct of government policy) and this needs to be worked off. The same likely holds true for other forms of business capital. In short, it is simply not a good time to invest. Additional investment may employ more people, but this is just throwing good money after bad (some people gain in the short-run, but society loses on net).
Second, in addition to being scaled back, employed resources need to be reallocated to their most productive uses. Workers may have to change locations or professions (or both), idle capital needs to be matched with new owner/operators, etc. This is a process that takes time. It is not clear why the government should have to interfere with this adjustment process (it should, if anything, encourage it).
Third, there is currently a high degree of uncertainty over the path of future government policies. I am not sure that I, as an employer, would want to make the commitment to hire a new worker not knowing what the future payroll tax will be, or what health care costs may be. The Krugman and DeLong tonic seems to be that government spending is needed because the government--unlike the business sector--is not afraid of the effect of its future policies on the business sector's income/balance sheet statements. Hmm...OK (I think).
Note that I am not necessarily against the idea of new public works in the current environment (in fact, I think one could make a very good case for it). I think that proper NPV calculations should be used to judge whether individual government projects should go forward or not (just like any other investment project). Instead of carefully worked out NPV calculations for specific projects, Krugman and DeLong want to cite studies of huge fiscal spending multipliers which assure that any government spending will have huge returns to society (not just those employed in the works). Is this simply the product of wishful (and lazy) thinking? Let's get serious, people.
Krugman and DeLong write as if they think that the goal of society is simply to create jobs. I am reminded of a news column I read from the Soviet news agency (Tass), written in 1957, which stated (in translation): "The unemployment in the USSR is currently zero percent, as it has been for the last two decades." I am not sure that shipping idle workers to Siberia and forcing them to stuff cotton balls in empty aspirin bottles was the best use of that economy's workforce, but it certainly had the effect of miminizing unemployment. Clearly, there is more to the resource allocation problem than simply creating jobs.
I have never seen a coherent objection to this line of argument.
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