Should Infrastructure Spending Be a National Priority?

Forex markets are driven by the strength of national economies. Monetary policy may modify the course of Forex prices but in the end a weak economy means a weak currency and vice versa. The world economy is not doing especially well and one school of though is that the Central Banks alone are not going to be able to dig us out of the rut we are in. This school of thought promotes infrastructure spending on a massive scale as a stimulus measure. Bloomberg Business just published an article, how to pull the world economy out of its rut, in which they quote Lawrence Summers who is the stimulus guy.

In Europe and Japan, interest rates have turned negative, something long thought impossible. In the U.S., workers’ productivity is improving at the feeblest five-year rate since 1982. China is a confusing welter of slumping growth and asset bubbles.

Federal Reserve Chair Janet Yellen practices the central banker’s art of draining the drama from any situation. She insists that conditions are returning to normal, albeit slowly.

Lawrence Summers, the Harvard economist who almost got Yellen’s job, has no patience for such patience. Since losing out to Yellen in 2013, he’s been jetting around the world-from Santiago to St. Louis to Florence, Italy-to argue that the world economy is in much worse shape than central bankers understand. Focusing on monetary policy alone, he says, they’re doomed to fall short of reviving growth. They need to reach out to the governments they work for, he argues, and insist on strong fiscal stimulus in the form of infrastructure spending and the like.

As the article notes, the jury is still out on this. Nevertheless let’s take a look. Should infrastructure spending be a national priority and if the US and other large economies do this how will it affect the Forex markets?

How to Fight Secular Stagnation

Secular stagnation is a situation of little or no economic growth on a prolonged basis in a market driven economy. This was the case during the Great Depression and the answer was to create public works programs. People went back to work, got paychecks and paid taxes on their earnings. Money started moving through the economy again. The short version of today’s debate is that the U.S. should invest in fixing its aging infrastructure and this would help the economy and coincidentally the US dollar. Opponents such as the Cato Institute argue that all of this about U.S. Secular Stagnation is simply an excuse for more big government. The link is to their long article.

When Does Fiscal Stimulus Work?

The Economist addresses this question in their article, When Does Fiscal Stimulus Work? They wrote this in 2010 before much of the current recovery had happened but the arguments apply today.

A country committed to stimulus will take care to prepare to use stimulus. It will construct a system of automatic stabilizers that provide immediate countercyclical aid as an economy deteriorates. It may have a backlog of needed infrastructure projects at the ready, which can be rushed into action as conditions warrant. A country generally skeptical of stimulus, on the other hand, will reach for it in an emergency and find that it is unprepared. Automatic stabilizers will be too small and will require constant Congressional maintenance. Too few projects will be shovel-ready. The need to legislate will lead to inclusion of pork items that aren’t particularly simulative. Stimulus will be less targeted, timely, and effective as a result.

The point in the USA is that we have a national highway system including bridges in need of repair and upgrades. Infrastructure spending is useful on two fronts. It puts people to work and if the infrastructure in question is needed, the repairs are good for the economy by making the whole system more efficient again. If infrastructure = pork barrel projects, infrastructure spending should not be a national priority.