The proposal obviously counters the austerity mantras going around in British politics (not to mention most other places), though Corbyn himself has paid lip service to balancing the budget, as well. The controversy, beyond the typical concerns with greater government spending of austerians, are fairly predictable for anyone who has taken a standard macroeconomics course (usually with a textbook written by someone who didn’t see the financial crisis coming)—Leave it to Scott to tie things together in a neat bundle showing the accounting. Everything anyone wanted to know about PGE and a lot more. Hope the Corbyn people pick up on it and run with it.
- first, the often heard QE = “printing money” = massive inflation argument is pervasive here with regard to PQE, as well;
- second, there are substantial concerns being voiced that “forcing” the BoE to finance the NIB will undermine the “independence” of the central bank and monetary policy;
So, here I want to look at the accounting and some basic operational realities of this proposal in order to understand how PQE does or does not do what the naysayers say it will.….
- third, PQE gives the government free reign to spend by eliminating the need to fund its deficits in the financial markets.
New Economics Perspectives
Corbynomics 101—It’s the Deficit, Stupid!
Scott T. Fullwiler | James A. Leach Chair in Banking and Monetary Economics and is an Associate Professor of Economics at Wartburg College
Scott now has the Dealers included in his T-accounts...
ReplyDeleteOnce again, everybody seems to be losing sight of the difference between spending and lending. For example, the Guardian article Scott links to explicitly compares the proposed National Investment Bank to the Nordic Investment Bank, and institution that already exists. The Nordic Investment Bank is owned by the governments of Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden. The Bank exists to make loans to projects that "improve competitiveness and the environment of the Nordic and Baltic countries." It acquires the funds for its lending by "borrowing on the international capital markets."
ReplyDeleteNow how does combining such an investment bank with "People's QE" change things? The difference is this. After the UK's new National Investment Bank raises funds in private capital markets by selling bonds, the Bank of England will then be required to buy some or all of these bonds. So the private bond-holders make some nice and quick, but presumably fairly small, profit. They are operating only as dealer/middle men to get around the EU proscription on direct BOE lending to government departments. At that point, it is the Bank of England that owns the NIB bonds.
So, suppose you are a the developer of some new infrastructure project and the NIB decides that you have a good project, and one that accords with its mission. It decides to loan you, let's say, 50 million pounds. You borrow it, and then in accordance with the loan agreement begin paying back the 50 million pounds. As you pay off your loan to the NIB, and as other borrowers pay off their similar loans, the NIB is paying back the BOE which holds its bonds. Again, this is not much different in ultimate effect than if the BOE had loaned the money for the infrastructure project directly. However, with the NIB, you will presumably have an institution run by specialists in the art of identifying and evaluating infrastructure projects, something central banks themselves have no experience with.
How do the end borrowers get the funds to pay back their loans? If the borrower is a local government, then same way they always do: taxes and/or user fees. If the borrower is a for profit enterprise, then in whatever way that enterprise pulls in its revenue - again probably user fees if we are talking about a piece of infrastructure.
Is this a good program? Sure. By making the Bank of England the ultimate source of financing, you keep financing costs to a bare minimum and also eliminate all of the problems of business confidence, liquidity crunches, hoarding etc. that afflict private sector financing during down times. The private sector dealers never have to worry about recovering their investment, since they can always sell the bonds they purchase to the Bank of England.
But what this is not is just some kind of spending program. We are still in the realm of banking here, which is all about lending. And just as in the US, the Bank of England has to maintain positive net income over the long haul, or else Her Majesty's Government gets stiffed out of central bank disbursements.
Yest Scott makes the same mistake that came up when we discussed this before:
For PQE, consider a NIB that is essentially an arm of the government carrying out its spending, so we can include it as part of the government simply spending from the government’s account at the central bank, while its purchases of infrastructure show up as government assets.
That is not the case. The NIB is not an agency that simply disburses government funds. It loans funds. And only in some cases will the borrower be a national government agency or public-private partnership. In many cases, the infrastructure assets that are created will not be owned by the British public.
I would advise Corbyn to distance himself from Murphy, MMTers, and other confused monetary cranks who will turn his program - a sensible program for targeted, strategically coordinated and reduced cost public financing something that people will actually vote - into a muddled mashup of crackpot monetary schemes that people will not, and should not vote for.
ReplyDelete"That is not the case. The NIB is not an agency that simply disburses government funds"
ReplyDeleteIt is the case. But it is disguised to work around EU issues.
"How do the end borrowers get the funds to pay back their loans? If the borrower is a local government, then same way they always do: taxes and/or user fees"
Interest is paid via the block grant. Since all dividend from the bank and the central bank go to HM Treasury who then hands it back to the local councils in the block grant to pay the interest again. Round and round it goes.
Repayment is via refinancing - just like any other QE. You repay loan 1 by borrowing loan 2 from the same place.
If you're going to comment on UK affairs, then learn how our affairs differ from your experience. I have explained this several times now
"In many cases, the infrastructure assets that are created will not be owned by the British public."
They will until the loan is repaid - since it would be the collateral on which the loan is based. The NIB handing out loans to private businesses in no way affects the way it funds public infrastructure. Again the NIB private facility is there solely to get around silly EU legislation.
Scott now has the Dealers included in his T-accounts...
ReplyDeleteI recently read a letter from a Fed official in answer to a query in which he stated that the primary dealers do not have reserve accounts at the Fed and do not have direct access to the payments system. Rather they use correspondent bank for settlement. So that introduces another set of books
GS and Citi are listed as primary dealers. So, apparently GS and Citi operate as a primary dealer through separate GS and Citi entities that then settle through GS and Citi as their correspondent bank.
"something that people will actually vote"
ReplyDeleteRandom I think Dan is correct in this regard... its too hard a sell right now... its pragmatic...
If you want to win the next election on it, its too hard/technocratic...
rsp,
Trump is running on increased public initiative via increased taxes on Wall Street and increased tariffs on the USD zombies...
ReplyDeleteThis will bring the deficit DOWN...
He is soaring in the polls...
Running on "we need higher deficits!" is a loser.... and imo not even correct...
Repayment is via refinancing - just like any other QE. You repay loan 1 by borrowing loan 2 from the same place.
ReplyDeleteWoo, hoo. That's easy! Is there anything in Corbyn's actual representations to the public that suggests that the NIB, in addition to the ongoing financing of new projects, will also be involved in the perpetual rollover of loans to earlier borrowers? Does the public know that HMG indemnifies the BoE against Central bank losses?
Dan, you've never much cared what "the public" knows about anything. Certainly you considered the public's knowledge irrelevant, even unhelpful, when you were defending financial crimes from prosecution on the grounds it would be "divisive". Nope, right down the memory hole with the public, I tell ya.
DeleteSuddenly it's your own version of the LeBron James defense: "What do they know! Do they know!" Which is of course a non-response to the comment. When did you fall in with Zarlenga's crowd? This "where does the interest come from" stuff is right out of the mouths of his acolytes who freak when someone informs them of the existence of turnover.
Ben I think Dans point is that Neil is arguing that they can be rolled over but Dan is pointing out that Corbyn hasnt actually said that was part of the plan....
ReplyDeleteiow it may be Neil's plan but not Corbyns... rsp.
Let's not pile on Dan. He is making some points that hold or not. This is a key issue for the UK and we need to discuss it intelligently instead of arguing about it.
ReplyDeleteI think that PQE proposal is ill-advised as being too clever. It smacks off being a work-around instead of addressing the issue head on instead of trying to sidestep it, or at least giving that appearance.
Overt money financing through the central bank or through direct issuance by the Treasury is either inflationary or it isn't. It either impacts the exchange rate or it doesn't. Those are the issues that the scolds and nay-sayers are concerned about — other than the "moral" issue, which is neither economic nor financial and can therefore be disregarded in debate about economics and finance as they affect policy choices. Let's get the econ and finance straight first and then argue about moral implications based on a solid foundation in operational realities.
Whatever is proposed is going to be a hard sell politically given the powerful opposition. So why diddle around at the edges instead of getting right to the point, as President Lincoln did with greenbacks, which got the job done without excessive inflation even in wartime. The US financed WWII similarly although using debt, according to Ruml. In fact, there is only superficial difference is using direct financing and indirect through issuing T-bills.
Politicians need to sit down with the public and have a heart-to-heart talk about how they are being duped. The government is the currency issue that supplies currency users, not a big firm or household or even a US state, province or municipality, all of which are currency users.
The quantity theory of money is just wrong. It is based on the accounting identity MV= PQ, which all people in finance and economics accept as an accounting identity. But when is is interpreted causally, the it becomes theory. That theory has been disproven since it only holds in special cases or using restrictive assumptions like cet. par.
If we don't have the debate and win it decisively, the progressive agenda will never be enacted, or if it is, it will be reversed subsequently.
The seven deadly innocent frauds need to be exposed for what they are.
I am not claiming either than the MMT view is definitive. There are qualified people that make objections that need to be met. But at least the debate is on solid ground rather than foundationally wrong based on misunderstanding accounting and operational realities.
Let me just say this. I've read several things both here and on other sites where people claim to explain what People's QE is. Sometimes these pieces link to various interviews, news reports or Corbyn campaign statements. But often the descriptions in the pieces don't match what the Corbyn campaign is really saying, and the latter is the much more restrained. So I think a lot of this stuff I'm reading on the blogs is some blogger's wishful thinking or reconstruction of what they want Corbyn's People's QE program to be.
ReplyDeleteIt seems to me that the program, as Corbyn envisions it, is pretty much what it sounds like: a QE program. In the US, for example, there was a QE program to buy up mortgage backed securities originated and sold by other financial institutions. And Corbyn wants to do the same thing with infrastructure bonds. He wants to create a special bank to finance infrastructure projects via lending, and he wants to add a QE component to this project to keep the lending rates low and make sure the financing is there as a matter of public policy. It is "people's" QE in the sense that the projects being financed are projects in the broad public interest.
We should celebrate this as it is one way of turning the central bank into a public bank, via another public sector intermediary. But it is still going to be a bank. It's going to make loans, and the borrowers are going to pay the loans back. They will be super cheap loans, which is great, and they will be based on assessments of the public good and not assessments of conventional profitability, which is also great. And because many of the recipients will be local governments or agencies of the national government, those governments will have the option to pay for the projects for the many by taxing the rich few. And they won't have to pay interest through the nose to private finance, because the Bank of England can make sure the interests rates remain very low.
I suppose Neil's idea of a perpetual loan rollover to turn what looks like a loan into a de facto grant that is never repaid is possible in principle. But it seems implausible. I assume that the NIB will be set up with a fairly strict charter and with a mission to make loans to worthwhile projects with well-defined payment terms; not a mission to make loans to all previous loan recipients ad infinitum, and to maintain an indefinitely ballooning balance sheet.
Maybe I'm being too fussy. I've gone around in circles on other sites where people are still confused about the difference between QE and helicopter money. They can't seem to get it through their heads that there is a big difference between the central bank giving people money and instead using the money to buy existing assets. They think that because the central bank is "printing" the money it spends, QE is some big monetary injection. I hate to see what is already a progressively redistributive public financing plan swallowed up and muddled in the public mind by another exercise in monetary creativity from monetary cranks.
Also, 9 our of 10 voters will regard the thing Neil described as a Ponzi scheme. (It's not, but it is potentially inflationary.) If he runs on that kind of idea he'll be ripped to shreds.
Overt money financing through the central bank or through direct issuance by the Treasury is either inflationary or it isn't. It either impacts the exchange rate or it doesn't.
ReplyDeleteTom, I think the answer to both questions is probably, "It would be in some circumstances, but it wouldn't be in other circumstances."
The issue is what kinds of institutional mechanisms would be put in place to manage overt money financing, and who gets to make the monetary policy call on when to turn off the helicopter dollars and compel the government to employ more conventional taxing and borrowing.
Some people (Wren-Lewis, e.g.) are so fixated on the idea of central bank independence and management of monetary policy that, while they are perfectly willing to countenance print-to-spend helicopter money programs, they want to create entirely new and redundant fiscal departments inside the central bank, and have the legislature pre-delegate spending authority to the bank. This is because they completely distrust the ability of the political branches to issue currency for print-to-spend on an as needed and politically determined basis without turning their countries into inflation-ridden banana republics.
There seem to be three different and interesting accounting issues here.
ReplyDelete1. If the NIB starts by raising funds on the capital markets, then it will never have a deposit at the BoE. Its starting balance sheet is - in that case - a commercial bank deposit on the asset side (previously owned by the private sector entity that lent it the funds) and the NIB bonds it has issued on the liability side.
2. Does the NIB
a) lend funds or
b) does it spend the deposit it has acquired by issuing its bonds?
If b), then Scott Fullwiler nailed it - this is deficit spending by an autonomous body controlled by the government.
But what if hypothesis a) is correct? In that case,
3. The NIB doesn't spend its deposits - but rather lends funds as Dan Kervick maintains. At this point, however, a new question must be answered: does the NIB lend its own deposits (bank as an intermediary theory) or does it simply expand its balance sheet like any real-life commercial bank, by creating "ex novo" both an asset (the loan) and a liability (the deposit of the borrower)?
Of course, if case 3 holds, the tables of Scott Fullwiler's article would have to be expanded accordingly.
Jose,
ReplyDeleteIf the NIB does end up being structured like the Nordic Investment Bank, then there would be a statutory limit on the amount of lending (some multiple of subscribed capital), and profits would be distributed back to the shareholders (which in the UK case I assume would consist of the UK government alone - but perhaps there would be other regional or local governments with shares.)
http://www.nib.int/filebank/2032-Constituent_Documents.pdf
http://www.newstatesman.com/economy/2011/10/investment-bank-capital
But to Neil's credit he is the only one making this type of statement from his post above:
ReplyDelete"you can build universities and hospitals, but you can't staff them."
You can look at all the dilapidated sports facilities in Greece leftover from the Athens Olympics as an example.. now trash...
You have to question these Corbyn people to see if they think "Infrastructure" is a source or a sink within the context of source/sink dynamics
https://en.wikipedia.org/wiki/Current_sources_and_sinks
Infrastructure is manifestly a sink.
Infrastructure requires constant continual maintenance... believe me it is a SINK.
If the greater systemic problem is an insufficient source flow, and then the solution implemented is to increase the sink flow, then it just makes the problem worse...
If local govts become responsible to pay the loans back, then you get local govts installing red-light cameras, increasing fines, fees, etc , perhaps even eventually selling the infrastructure to private investors to get out of it, and generally pissing off the locals who are recipients of insufficient source flow....
My belief is that these UK left-wing people probably think "Infrastructure" is some sort of source of "money" for "the people"... its not a source.
Then in the article Scott writes this:
ReplyDelete"since government deficits raise the net worth of the non-government sector. "
Would be better stated:
"Since government deficits are the ex post financial record of an increase in the net worth of the non-government sector in a previous period..."
He is talking about something that only can exist ex post (the deficit) and then using present tense verb "raise" as the action word... this is like "history teaches us..." rather than "we can learn from history"... "
Matt, what are you talking about? Infrastructure is roads, rails & rail stations, subway lines, highway interchanges, drinking water conduits, dams, electricity generation systems, electric power grids, airports runways, sewer systems, bridges, tunnels, urban walkways, ferry launches etc. When people in the UK say they want more infrastructure spending what they mean is they want more spending on roads, rails and rail stations, subway lines, highway interchanges, drinking water conduits, dams, electricity generation systems, electric power grids, airports runways, sewer systems, bridges, tunnels, urban walkways, ferry launches etc.
ReplyDeleteDoes infrastructure have to be maintained? Of course. Just like your car and teeth need to be maintained. But obviously some things that have to be maintained deliver sufficient value over the long run to justify both the initial purchase cost (your car) and the subsequent maintenance cost (both your teeth and your car).
"Since government deficits are the ex post financial record of an increase in the net worth of the non-government sector in a previous period..."
ReplyDeleteYou can't draw any such direct inference Matt. For one thing, an increase in the net nominal holdings of financial assets by the non-government sector will not in general represent the same level of real increase. Also, the net worth of the non-government sector is the real value of all assets held by the non-government sector minus the real value of all liabilities held by that sector. Most of the relevant assets are non-financial.
Dan one of the projects was mentioned as street lighting...
ReplyDeleteOK, they issue a loan and give a contractor the job so he goes out and buys components from Siemens or whoever and completes the construction and installation .... now there is a power bill to the municipality, the poles oxidize to you have to paint them, someone hits it with their car and it has to be replaced, vandalism, etc..
What are you saying that the NIB is going to loan to pay power bills? replace lamps? paint?
The system was in equilibrium before, now you are introducing additional continuing liabilities due to the additional infrastructure ... where does that flow of funds come from for the additional maintenance and operations? who is looking at that? nobody (except maybe Neil...) .. Around my area they are putting in traffic cameras EVERYWHERE, they are proposing sales of public lands, etc.. ....
There was an incident where this cop pulled over this black lady for some BS ticket and she freaked and he beat the crap out of her, etc.. chaos...
Why are the Olympic swimming pools in Greece all full of weeds? Greeks dont like to swim and dive?
And yes I know a sector has to be fully consolidated/reconciled... but a deficit is on the + side in a non-govt consolidation.. see here:
https://en.wikipedia.org/wiki/Consolidation_(business)
Standard accounting stuff.... BFD.
Dan we have management systems already designed for this process of financial aspects of life cycle management see here for eg.
ReplyDeletehttp://www.lce.com/financial_management_services_178.html
System doesnt work when morons are in top control who think "we're out of money!"....
Here from Luke 3:
" Now tribute collectors also came to be baptized, and they said to him, "Teacher, what should we be doing?"
13 Now he said to them, "Impose nothing more than has been prescribed to you."
How did our ancestors derive the appropriate rate of prescription? Pull it out of their ass? I dont think so.... this would not even be hard to do...
Matt, I guess I can't understand your reasoning. Are you saying that street lighting is always a waste of money?
ReplyDeleteAnyway, I assume the idea is that the initial installation might be financed by a loan from the infrastructure bank that is paid back over time, and most subsequent maintenance would be financed through tax revenues of some kind.
This is no different than what goes on now, right? If my town wants to do a big project, like a high school, they borrow the money by issuing bonds, and then we pay off the bonds over time via our taxes. Then we somehow have to pay for the upkeep. But, you know, a high school is worth it.
The National Investment Bank + QE wrinkle just means that the interest rates will be very low, and the availability of financing and rates charged won't oscillate up and down with market conditions.
Matt, I don't understand what point you are making with the bible quote and link to life cycle management. Have you gone whole-hog libertarian on us? Do you think municipalities should no longer build transportation systems, lighting systems, water systems, dams, etc.?
ReplyDeleteYou dont have to insult me with the libertarian jab....
ReplyDeleteDan yes those are good public things but without including the revenue sources for operations and maintenance in the model it is incomplete. .. you cant just say "we will get it from somewhere!" That doesn't work .. next thing you know the cops are on commission. ...
The scripture is evidence that our ancestors knew they had to account for both 'sources and sinks' in the system. ... and did...
Infrastructure functions both as source and a sink. It is obviously a sink since it depreciates and it is a source in the same way that all investment is source directly or indirectly in income generation and increase in wealth, as well as productivity, hopefully at least.
ReplyDeleteThe spending that gets sunk is also a source of income for all the people involved in the project and through the multiplier effect gets passed through the economy on its way to getting taxed back.
The import thing is the flow increase that would not happen in the absence of the program, since the private sector is either unwilling or unable to undertake the investment and the political football of increased deficits is avoided.
next thing you know the cops are on commission
ReplyDeleteCops in many areas have been "on commission" for a long time. It's called quotas and performance records.
Dan yes those are good public things but without including the revenue sources for operations and maintenance in the model it is incomplete. .. you cant just say "we will get it from somewhere!" That doesn't work .. next thing you know the cops are on commission. ...
ReplyDeleteMatt we'll generally get it from the same place governments usually get things: taxes! In the 50's and 60's the US government played a much larger role in the US economy. Our investment to consumption ratios were higher, jobs and retirements more secure, growth rates higher, public investment and R&D more aggressive, income and wealth more equally distributed, marginal income tax rates much higher. Deficits were usually pretty low. There is no reason to think economic dynamism or progress correlates with the size of the deficit. We also don't need any MMT money magic to re-make public finance. We just need more public finance. It's time to get back to the managed, mixed economy postwar model that served us so well in the past. How and whether an economy grows, develops and progresses depends on how it allocates its exiting people and resources. Money mechanics are a secondary issue.
Dan: We need to get across the river!
ReplyDeleteMatt: We should look at building a bridge...
Dan: How is that going to help?!
Dan how do you know that those macro accounting results back then were not largely due to dis-savings of the bonds that were issued during the war?
ReplyDeletedo we have domestic savings that high now? so we could pursue the same path today? I wouldnt just assume so... foreigners have been allowed to accrue much more of it today...
Picture a big infrastructure project in the poorest parts of appalachia.... the bank turns it over to the locals for O&M the community might not have the income to support it...
But, in the end, it seems we have not yet found a definitive answer to the question - will the NIB spend or will it lend?
ReplyDeleteJose that will be up to the policymakers...
ReplyDeleteI have to side with Dan's observations to this point...
do we have domestic savings that high now? so we could pursue the same path today? I wouldnt just assume so... foreigners have been allowed to accrue much more of it today...
ReplyDeleteMatt, you can get national savings up via direct government action. For one thing, you can tax dollars away from the wealthy to bring down big ticket consumption and pour the dollars into public investments. That's one way of re-directing income from consumption to savings. You can also impose Pigouvian taxes on various kinds of consumption expenditures and put incentives on capital expenditures. Any time the government taxes away income and then spends it on public investment it is automatically increasing the rate of national savings because the tax revenues would otherwise be spent about 70/30 on consumption, on average.
The macro accounting results I'm talking about are the proportions of national expenditures that went into consumption spending and the proportion that went into investment spending. It has nothing to do with the purchase of financial assets.
I don't understand your metaphor about the bridge. But if what you are talking about is the best way to get politically from here to there, then I think the best approach is embrace more or less conventional fiscal principles to build a more equal, secure and prosperous society based on tried and true approaches that have worked in the past, before our mixed economy social democratic model was replaced by neoliberalism.
Dan,
ReplyDeleteCALTRANS arranged for a new Bay Bridge. Paid USD 6B to Chinese firm to supply steel AND labor in the SF community.
Chinese firm takes the 6B USDs, goes to the PBC and exchanges out the 6B USDs for Yuan and the PBC puts the USD 6B in UST bonds at the Fed....
Now the bridge is going to need painting and other maintenance (O&M), where does CALTRANS get the USDs to pay the maintenance people? Taxes? The f-ing 6B USDs are with the f-ing Chinese....
So tax the local SF community for the $6B they dont even have?
ReplyDeleteWhen the revenues arent there, instead of doing the math, maybe send out some jar head cops to bust people and run up the fines? Maybe kick their ass while they are at it?
Well, then - if the NIB is going to raise funds in the private markets and will lend, not spend, then I guess Scott Fullwiler's tables will have to be reformulated accordingly.
ReplyDeleteRight?
Matt, what is the economic impact of the bridge? Money was paid out, but they got a whole freaking bridge in exchange. I assume that bridge is worth something. It contributes to the economic growth of the Bay Area, and as the region grows businesses are created, that new business results in the extension of credit by banks and the money is re-created. In the end, you pay for real assets with other real assets. The money is just a mechanism.
ReplyDeleteBridge was already there... this one was a 'repair by replacement'... infrastructure is a SINK...
ReplyDeletehttp://www.sfgate.com/bayarea/article/Bay-Bridge-s-troubles-How-a-landmark-became-a-6021955.php
OK, lets look at Buffalo County, ND. Poorest county in USA
Pop. 2,032 and per capita income $5200... so lets say $10m income...
Lets say federal govt comes in and installs infrastructure project that requires $10M in O&M and then leaves and says "ok, you county guys have got it now! go ahead and run it!"... just tax the county residents $10m and you'll be good to go!"
How does that work?
Matt, your thinking boggles my mind. You are arguing against infrastructure projects? Or no? You are arguing that all infrastructure projects cost more than they are worth?
ReplyDeleteThe biggest problem with your argument that infrastructure is a sink is that you are completely ignoring the positive positive economic value that is flowing from the infrastructure every day. A bridge or a sewer system is obviously something that both delivers ongoing benefits and incurs ongoing costs to keep the benefits flowing. I'm sure there are many white elephants out there where the benefits do not add enough to justify the costs.
Yeah, if you take the poorest place in America, then they might be too poor to support even the maintenance on the finished project without additional support from external government, even though that project has substantial benefits. This would be the case if the benefits don't come in a form that delivers a cash flow, but come in some other form. I guess that's similar to the idea that if a poor person wins a really fancy car in a contest, they might be too poor even to maintain the car, and will have to sell it despite the fact that having the car is a benefit. But most cases aren't like this. People build things, and incur the ongoing costs of maintaining them, because the overall cost is worth the benefits.
"the money is just a mechanism"
ReplyDeleteWell its just as important to get right as the steel work...
I'm not arguing against infrastructure, I'm trying to point out that competent people not only plan for the construction of the infrastructure, competent people also plan for the O&M of the infrastructure...
This is why Neil says "you can build a hospital but that doesnt get you the doctors and nurses"...
You are discounting, inappropriately, the technocracy required to competently manage the monetary system component of our economic system....
That whole Bay Bridge fiasco revealed in the SF Gate story above was caused by the "we're out of money!" falsehood so they went with the Chinese firm who came in $billions below domestic firms...
Do you think Trump just builds one of his buildings and then one day he walks outside and some guy comes up to him and says "Hey! Nice building there Trump! Hey! Do you think I could lease some of it for my firm?"
And Trump says "Hey! I never thought of that! Yes!... Boy! I'm really glad you came along as I borrowed some money to build it and now I have a loan payment due I didnt know how I was going to make the payments! Wow! what luck that you walked by!"
I dont think so....
In Canada, infrastructure is funded by three levels of government: federal, provincial and municipal. Local roads are usually a municipal responsibility. Major highways and bridges are provincial and federal projects. There is no issue with the mechanics of funding, other than bureaucratic waste.
ReplyDeleteAn unwillingness to invest in the future beyond the next election cycle is what we get from our politicians. We can do better than spending money on bailing wire and duct tape.
Technocrats are not infallible:
ReplyDeletehttp://montreal.ctvnews.ca/order-of-engineers-won-t-lay-blame-in-de-la-concorde-overpass-collapse-1.1928719
Money is just a mechanism, but right now is the mechanism getting in the way of improving common welfare.
ReplyDeleteThe problem with increasing liabilities is that eventually you need to fund them. This works both for initial investment ('the loan') plus the operating costs they generate (this is the sink Matt is talking about). Independently if the initial investment loans are rolled over, they will generate maintenance costs that will have to be paid (with higher budget allocations) in the future.
The typical argument is those investments will generate new economic activity and increase the revenue base, in the case of the infrastructure. A lot of those loans are meant to be for the private sector and supposedly would go towards sound investment that will improve efficiency and lower costs in the long run.
As always this all is theoretical, but it can't be worse than financing housing bubbles through the banking system.
In the end it's all based on the assumption than inflation will raise as will do the GDP, and incomes will also raise and broaden the tax base. Is all based on a wonderful story of an economy always growing exponentially. There hasn't been a decoupling of resource consumption and growth yet (no matter how much economists keep talking that it will happen), developed nations have decreasing populations and deflationary environments, etc.
At the end of the day we will have to come to terms with the idea that money can be created to create the funding for those liabilities, or the sad story of decaying infrastructure will increase, because neither high inflation or growth is ever coming back, and 95% of the population had stagnant incomes for more than two decades now.
Even tapping the wealthy incomes wouldn't probably cut the funding of increasing liabilities (probably Matt's point).
Bob,
ReplyDelete"including the heads of the company that built the overpass in 1970, be held responsible,"
The bridge was 36 years old.... probably needed to be replaced.... but for "out of money!"
rsp,
Matt,
ReplyDeleteIt was an engineering or lack of inspection problem. If you know an overpass is unsafe, you close it or repair it pronto. "Out of money" is no defense in a courtroom.
Hence the 'cover our asses' outcome.
According to Richard Murphy I have it right, and he's the one that's been pushing it on behalf of Corbyn. But, yes, if it's a loan, which it may very well be, then it's obviously different (though I doubt the economics profession and financial press would care so much about a loan to the pvt sector as they have been about PQE). Not a big deal. Certainly didn't need the level of vitriol seen here. Not surprising given who started it, though.
ReplyDeleteIt's great that Scott Fullwiler has taken care to intervene in this debate to make clear that if the NIB lent instead of spending - as the originators of the proposal want it to do - then the accounting would have to be different.
ReplyDeleteI think the matter is now settled.