Let’s not waste another crisis

As Covid-19 creates panic across the globe and leads to calls for fiscal stimulus, I would like to suggest something outrageous: Let’s not waste this crisis like we did the last one.

The Global Financial Crisis of 2008 and 2009 provided so many opportunities to rectify the mistakes of the past. And no, I am not talking about regulating the financial industry, but spending some money on the horrible infrastructure in industrialised countries. As I have said here and here, I think monetary policy will not be sufficient to fight the next recession and so fiscal policy has to come to the rescue. And when it comes to fiscal stimulus, infrastructure investments are amongst the best thing you can spend money on. Moody’s Analytics calculated in 2010 how much US GDP would rise for every Dollar spent in different forms of fiscal stimulus. As the table below, taken from their publication, shows, infrastructure spending is far more effective than any form of tax cuts. The only fiscal measures more effective than infrastructure spending would be to go full-on socialist and finance work-share programmes or extend unemployment benefits.

Fiscal multipliers for different forms of fiscal stimulus

Source: Moody’s Analytics.

It is no surprise that politicians on the left and the right of the political spectrum are in favour of increased infrastructure spending. But it still doesn’t happen because no politician wants to give the other party a win. Thus, when the Republicans were in the opposition in 2009 and 2010, they blocked any proposal by the Obama administration for increased infrastructure spending. And if the Trump administration would propose increased infrastructure spending today, I’d bet a lot of money, the Democrats would shoot it down immediately. After all, there are elections coming up and they need to be won…

The end result is that infrastructure spending has dramatically declined in the 1970s in the US and in the 1980s in many European countries and never recovered, as Ray Fair from Yale has shown. The chart below shows the annual infrastructure investments of six countries. As a share of GDP, most countries spend about 0.6% of GDP on infrastructure each year. The only country in our sample that actually managed to increase infrastructure spending after the last crisis was Canada. 

Infrastructure investments

Source: OECD.

But infrastructure costs money and either you do it like the Swiss and systematically outspend other countries on infrastructure with the nice side benefit that trains are running on time, streets don’t have potholes and things work. Or you use a crisis and reach across the aisle for the good of the country to start large scale investment programs to soften the blow of a recession. Yesterday, the British government announced a massive infrastructure stimulus to fight the slowing economy. This is a great step in the right direction, but I doubt, the United States will follow suit. After all, there is an election in November…