I’ve been quite hard on central bank leaders lately, and rightly so. But once in a while, a central banker says something that makes sense. When it happens, I want to be fair and highlight it.
Bank of Canada Governor Stephen Poloz gave an unusually coherent Sept. 20 speech called Living for Lower with Longer. The “lower” refers to lower interest rates. He discussed some of the broader factors contributing to the extended low-rate environment.
Poloz thinks (and I agree) that the aging Baby Boomer population is slowing down economic growth. He is less persuasive about the benefits of low interest rates for workers and savers, but his entire speech is worth reading.
Poloz gives several economic policy prescriptions. One is infrastructure spending.
"One important impediment to business growth that is widely shared globally is weak infrastructure. We know that infrastructure projects spur growth in the short term by boosting demand. More importantly, infrastructure projects can support long-term growth by raising an economy’s potential output," he said.
"Among economists, there has been some debate over the size of the impact on potential output that infrastructure projects can deliver. Deputy Governor Sylvain Leduc did some research during his time at the Federal Reserve Bank of San Francisco. The research showed that, within six to eight years, US government spending on highway projects delivered at least one dollar, possibly two to three dollars, in increased output for every dollar spent. It would be helpful to have more research on the fiscal multipliers of infrastructure spending in Canada. But it seems likely to me that well-targeted infrastructure investments will yield more economic growth than just the first infusion of cash because they enable more growth to occur in the future."
I know it’s very Keynesian to say that government spending can create growth. Of course, the other side of the equation matters, too. What kind of economic activity won’t happen because the government diverted capital to its own politically decided priorities?
It’s a fair question. I’ll gladly debate it with you while we sit in a traffic jam on our way to a dilapidated airport where our planes take off late because a vacuum tube burned out in the air traffic control system.
Does any of this enhance GDP? I think not. We can accept that the way we handle this problem is not ideal, but continuing to ignore it is not a good option, either. If we do it with capital that would otherwise sit idle, then the opportunity cost should be minimal.
Poloz adds that targeted infrastructure spending could “add another tenth or two of a percentage point to potential output over the medium term.”
That’s not much, but it’s not nothing, either. Given that nations are struggling to show even 2% GDP growth, every bit helps. It might harm the companies who make high blood pressure medicines—but it was government failure that gave them all of those customers in the first place. We need to move back toward balance.
We desperately need to repair and replace a vast part of our national infrastructure. We have legions of former manufacturing workers and young people who need work. And we need to remove as many obstacles to economic growth as possible. We can do all three with an aggressive, Federal Reserve-funded infrastructure program.
John Mauldin is the chairman of Mauldin Economics, which publishes a growing number of investing resources, including both free and paid publications aimed at helping investors do better in today's challenging economy. Mauldin uncovers the truth behind, and beyond, the financial headlines.
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