STIMULUS ON THE CHEAP

by Ryan Avent

As fellow guester and Ligon Middle alum Neil Sinhababu notes, now is a good time to be borrowing if you're the American government. And while some of the forces that have reduced American debt costs (central bank demand for Treasuries and a general flight to safety) may ebb a bit in 2009, increased domestic saving will be there to help pick up the slack. (And suddenly high domestic savings rates are another reason why fiscal spending, as opposed to tax cuts alone, may be necessary; consumers are too spooked to do all that much with their windfall).

But there is another reason to want to accelerate needed infrastructure investment as much as possible. Mainly, everything is cheap right now. In recent years, the heat of the housing boom combined with rapid emerging market growth to generate upward pressure on a lot of prices. Everything from lumber, to petroleum (and petroleum derivatives, including asphalt), to metals (including steel), to shipping, to construction labor saw large increases in price. This was bad news for public infrastructure projects. Budgets burst as governments competed with private interests at home and abroad for scarce resources.

That's no longer the case. The well-documented collapse in oil prices has been mirrored across commodities markets. Raw materials for construction are now cheap, cheap, cheap. Shipping costs are near zero. And one no longer has to bid against tens of developers for the services of an engineer or architect or builder.

Infrastructure investment is something we should take seriously as a nation and devote resources to in good times and bad. But the bottom line is this: when the economy recovers, resources will again approach full utilization. And when that happens, governments will have to pay more to build needed projects, and government investment will crowd out some private investment. Fiscal stimulus skeptics focus their ire on the potential for government waste in spending, and that potential is there. A full accounting would also consider the opportunity cost of failing to invest now while costs are low and there's plenty of slack in the system. There's a very good case that the best way to save taxpayer money over the long-term is to build as much infrastructure as possible right now.

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