A Good Time For Federal Investment

A blog about business and economics.
May 19 2012 12:15 PM

A Good Time For Federal Investment


One high status thing to say throughout the current economic downturn is that we shouldn't be focusing on short-term stimulus. What we really need to do is focus on the long-term sources of sustainable growth and prosperity. It's all very sober-minded and sensible.

Above is a chart of three of the four elements of investment spending in the United States—all stated in real terms. You can see that private residential investment has been in a depressed state for a long time. You can also see that private non-residential investment has recovered from its low point but is still way below it's peak level even though the population is larger. And you can see that state and local government investment is just not that big a deal, hasn't surged in response to the collapse of private investment, and of course that state and local governments are fiscally constrained in their capacity to invest.


This shortfall of investment is bad news for the economy's long-term growth potential. But fortunatey there are a number of things we could do to help bolster investment and thus set the stage for long-term growth. We could implement expansionary monetary policy, for example, to encourage private investment. Or the federal government could take advantage of currently prevailing ultra-low costs of funds to make direct investment. Or the federal government could use its borrowing power on behalf of state and local governments to facilitate investment decisions made by lower-level politicians. Or the federal government could engage in loan guarantees to bolster private investment. Heck, we could even just cut taxes or increase transfer payments to put more money in peoples' hands so that businesses would invest to build the capacity to serve that increased customer demand.

Get it? This is all just demand-side stimulus policy. Because one of the things a prolonged period of depressed aggregate demand does is stifle investment. Society's per capita stock of houses and offices and factories and trucks and tractors and airplanes is decaying. So is our stock of household machinery—cars, washing machines, dishwashers, toasters.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


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