I don’t agree with Paul Krugman about everything. But I do agree with him about this: It’s economically stupid and morally wrong to tolerate high unemployment for an extended period if there’s anything we could responsibly do to avoid it.
Current prospects are gloomy. Long-term unemployment is at a post-Depression high, and recovery will be painfully slow. It took a little more than two years to regain the jobs lost during the 1981-82 recession, about two and a half years after the 1990-1991 recession, and more than three and a half years after the 2001 recession. The job loss is much worse this time: six percent from the 2007 peak, versus three percent in 1981-82 and two percent in both 1990-91 and 2001. Even if job creation were to double its current pace, it would take until 2014 to regain the job total of late 2007, and longer still to attain what passes for full employment. In the interim, the economic waste and human misery will be staggering.
So what is to be done?
Setting aside the obvious political obstacles, further Keynesian stimulus would probably prove unequal to the task. Among other problems, a substantial portion of increased demand will leak out of the U.S. economy through higher imports, as it has already begun to do, and households would use some of the rest to pay down debt and increase savings.
Nor would returning to the New Deal—ie. direct job creation and hiring by the federal government—work as well as it did 75 years ago. The cost per job would be much higher, and the vastly more complex structure of regulations at every level of the federal system would bind a 21st century Harry Hopkins with myriad Lilliputian threads.
Fortunately, there is an alternative staring us in the face. Over the past generation, we have systematically underinvested in the foundation of an efficient economy and society—namely, infrastructure. Anyone who has travelled in recent years knows that our systems of transportation and information are no longer world-class. In the Washington DC area alone, the once magnificent Metro is staggering under the weight of deferred maintenance and outdated safety systems. Inadequate roads and highways yield some of the worse commutes in the nation, with negative consequences for worker productivity and economic efficiency as well as family life.
The traditional response is to use the federal government’s taxing authority to raise infrastructure funds, and appropriations to fund specific projects. This model has hit a wall: not only will it be very difficult to raise taxes in current or foreseeable circumstances, but there’s also the problem of how local and special interests influence, even determine, project selection for reasons that have nothing to do with economic efficiency.
We need a new model. Today, we have trillions of dollars of capital sitting on the sidelines earning almost no return, and millions of long-term unemployed workers who would be thrilled to receive a steady paycheck again. The task is to bring these two factors of production together around projects that make sense.
Setting aside details, the new model has three key structural features.
To attract private capital, projects must earn a reasonable return, which means increased reliance on user fees (tolls or levies per unit consumed) rather than general taxation.
Because most infrastructure projects generate public goods (such as economic growth in the areas it opens up) as well as private goods (such as easier commutes), user fees cannot capture their total worth. The market, then, will undersupply these goods unless public subsidies fill the gap. The new model requires a shift from traditional appropriations to subsidies based on the economics of individual projects.
To promote economic efficiency and growth, projects must be chosen on economic rather than political grounds. The new model requires a shift away from congressional dominance of the selection process toward an empowered board substantially insulated from day-to-day political pressures.
An infrastructure bank—versions of which have already been introduced in Congress—is one way of meeting these three criteria. No doubt there are other institutional designs that would as well.
The bottom line is this: Projects selected and funded in the manner I’ve sketched would help build the economy for the long-term at minimum cost to taxpayers while creating large numbers of new jobs that can only be performed here in the United States. Win-win-win, one would think. Isn’t this new model something that elected officials should be able to agree on, regardless of party and ideology? If they can’t, it will be yet more evidence of ideology trumping common sense ... and of a handful of veteran appropriators more interested in preserving their own power than in promoting the public good.