I read an article in the Financial Times earlier this week (September 23, 2023) -…
On Monday (December 19, 2016), my blog – US central bank decision to raise interest rates doesn’t make much sense – examined the recent interest rate hike in the US and made a case that it didn’t appear, on the basis of the evidence at hand, to be a well-reasoned policy decision. In researching the case I was struck by how far public gross capital formation has fallen in the US, particularly at the State/Local level as mindless austerity takes its toll. Governments find it easier to cut capital spending than recurrent spending because the ‘costs’ of the those spending cuts are not immediately obvious to the population and, typically, do not manifest until after the political cycle exhausts. Cutting pensions, school outlays, and other recurrent targets usually brings an immediate political outcry because the impacts are immediate. But it takes time for public infrastructure to degrade from lack of maintenance and replacement. Eventually it does degrade and in some cases becomes unusable. Then the costs of repair/replacement are usually higher than if the resource had have been maintained and replaced according to reasonable engineering schedules. The US Bureau of Economic Analysis (BEA) publishes a very interesting data series that allows us to examine the ageing of the capital assets (public and private) on an annual basis back to 1925. I thought I would explore that dataset to inform the proposition that neo-liberalism has been associated with degraded public infrastructure and the loss of service (to the non-government sector) that accompanies such degradation. The results of my enquiry are fairly stark.
I wrote about that sort of policy mypopia last week in this blog – Austerity is the enemy of our grandchildren as public infrastructure degrades.
Average age of public infrastructure assets in the US
The BEA Table 7.7A Current-Cost Average Age at Year end of Government Fixed Assets, 1925-2015 provides annual estimates of the vintage of public infrastructure. The data is quite detailed.
Clearly, the older the asset the more likely it will fail or deliver degraded services. Everytime I visit the US (about annually at least) I notice that the inner cities are increasingly more rundown – drains, paths, roads, public transport facilities etc.
The data confirms what one sees informally.
The following graph shows the estimates of average age from 1925 to the end of 2015 for the Government as a whole broken down by total, equipment and structures; the Federal government similarly broken down but also divided in defense and non-defense, and the State/Local government sector.
It appears that policy towards equipment has been fairly constant throughout the last 90 years (with an interruption during World War 2 (predictably).
Governments at all levels in the US turnover their equipment (on average) after 10 years or so.
What is striking, however, is the steady increase in the average age (in years) of the public structures (bridges, roads, transport infrastructure, hospitals, schools etc).
And more striking is that the average age while trending up since the 1940s accelerateg in more recent years, indicating a lack of new investment.
I am not an engineer but I would be more inclined to conclude that these trends are more associated with fiscal stringency than any notion that the structures are designed to last longer.
Movements in Gross public investment
The BEA Table 3.9.3. Real Government Consumption Expenditures and Gross Investment, Quantity Indexes combined with the NBER Recession Dating information allows us to examine the behaviour of US government gross capital expenditure (investment) over past cycles.
The assertion is that the current cycle is quite distinct from the previous cycles as the neo-liberal spin doctors went crazy in the recovery period and the austerity mindset enveloped government policy makers at the Federal and State/Local levels.
The widespread promotion of the myth that the US government would soon run out of money and the unwillingness of the US Federal government to use its currency-issuing capacity (once the elites in Wall Street were saved) to help State and Local governments struggling with revenue in the recession, saw gross investment spending cut severely in the so-called recovery period following the peak in the December-quarter 2007.
The following series of graphs tell their own story. They present gross investment indexes from the March-quarter 1947 to the September-quarter 2016 indexed to 100 at the pre-GFC peak (December-quarter 2007).
The first graph shows gross investment in the US for total government, Federal and State/Local. The patterns are quite interesting.
I will provide some more ‘political’ information below, but what stands out to me are the Clinton cuts in the late 1990s, which helped him achieve fiscal surpluses but contributed to the ageing public infrastructure, and, ended in recession anyway.
The other (diabolical) feature is the response during the GFC at all levels of government. The dramatic decline over the Obama period in gross investment and the starvation of investment at the State/Local level is beyond belief really given the state of the economy.
It is clear that these ‘political’ choices contributed to the accelerated ageing of the US public infrastructure.
This effect is when we can really say the choices made by the current generation undermine the prosperity of the next generations. By allowing public infrastructure to age as a result of cuts in public investment, the different levels of government are guaranteeing a reduction in the well-being (other things equal) of our children and their children.
That intergenerational impact has nothing to do with running deficits, other than the deficits are too small relative to non-government spending.
The next graph shows the breakdown of structures investment by level of government. We see that there has been a steady decline in gross investment in structures by the Federal government which accelerated under Clinton and was pro-cyclical under Obama.
The final graph shows the breakdown of equipment investment. Clinton and Obama stand out again.
The following Table computes the percentage growth in gross government investment (broken down into total, structures and equipment) for Total government, Federal and State/Local corresponding to the different presidencies since 1953.
One might conclude that it was the Republican presidents who were the Keynesians and better looked after the health of the public infrastructure (at the federal level).
Bill Clinton came to office on January 20, 1993 and vacated 8 years later in 2001. Over his period in office, federal public investment in structures fell by 40.9 per cent. Only the Obama regime has been able to top that.
Clinton’s surpluses were driven by these huge cuts in federal investment and the massive buildup of private credit that kept growth in revenue positive.
Of course, this ended in grief with recession and, ultimately, the GFC (as the credit chickens came hometo roost).
Cyclical response of public investment
The final thing I was interested in looking at was the cyclical response of public investment over history. That is, how has it behaved from the peak to trough and recovery period of the successive cycles as dated by the NBER (link above).
I produced two graphs.
1. Gross public investment by level of government (Total, Federal, and State/Local) charted for each cycle from the Peak quarter, through the trough up until the quarter before the next peak.
2. The same analysis for structures (second graph).
While there are some variations over time, the Obama GFC and aftermath stands out as an indictment against neo-liberal fiscal hysteria.
The GFC has been the worst recession in this series of recessions (starting at December 1948 peak) yet the pro-cyclical nature of the Obama regime’s investment spending is evident.
The US Federal government could have supported the State and Local governments more to prevent what is a very pro-cyclical slump in gross investment at that level.
Pennies cut now will surely require many dollars later as the public infrastructure that has been starved of funds degrades and stops working.
The message from the graph below on structures is the same. US public infrastructure structures are getting older very quickly and yet at a time that unemployment was very high and wages growth flat, the US government (at all levels) decided to allow those structures to get even older on average because fiscal austerity was more important than responsible government.
So that ends my little trek down the assets and investment data for now.
As I have said on many occasions, even if one is besotted with minimising public spending, cutting investment in basic public infrastructure and allowing it to deteriorate to the point that it stops servicing the public is myopic.
It ends up costing more to replace and fix up that it does to continue regular maintainence/upgrade cycles.
And in the meanwhile, the service quality coming from the assets degrades.
It is just ridiculous really.
Updates – MMT Macroeconomic Textbook
We signed a contract last week with Macmillan Palgrave for the next version of our MMT macroeconomics textbook. We will deliver the final manuscript by the end of February (we are working hard on it at present) and it will be published in the second half of 2017 (in time for the North American academic start).
This version will cover the introductory year and the second year of a university-level macroeconomics
We published the first version of our MMT textbook – Modern Monetary Theory and Practice: an Introductory Text earlier this year. It is an introductory text only. It is intended as an introductory course in macroeconomics and the narrative is accessible to students of all backgrounds. All mathematical and advanced material appears in separate Appendices.
The next version will contain an additional 10 Chapters and include a lot more advanced material to supplement the material presented in the introductory text.
The current book covers a very detailed introductory macroeconomics course based on Modern Monetary Theory (MMT) and provides a very thorough grounding for anyone who desires a comprehensive introduction to the field of study.
The next expanded edition which Macmillan Palgrave will publish will introduce advanced topics and more detailed analysis of the topics already presented in the introductory book.
Updates – Our latest book on Reclaiming the State
Regular readers will have been aware that we (Italian journalist Thomas Fazi and myself) are close to completing our manuscript for my next book, which traces the way the Left fell prey to what we call the globalisation myth and formed the view that the state has become powerless (or severely constrained) in the face of the transnational movements of goods and services and capital flows.
Social democratic politicians frequently opine that national economic policy must be acceptable to the global financial markets and, as a result, champion right-wing policies that compromise the well-being of their citizens.
In Part 3 of the book, which we are now completing, we aim to present a ‘Progressive Manifesto’ to guide policy design and policy choices for progressive governments.
We also hope that the ‘Manifesto’ will empower community groups by demonstrating that the TINA mantra, where these alleged goals of the amorphous global financial markets are prioritised over real goals like full employment, renewable energy and revitalised manufacturing sectors is bereft and a range of policy options, now taboo in this neo-liberal world are available.
Anyway, we now have negotiated a publishing contract with Pluto Books and it is expected the book will be available for sale worldwide around July/August 2017 (hopefully).
We have to deliver the final manuscript by February 2017. I will provide updates when publication dates are available. We have been negotiating to keep the price down as low as possible.
Updates – Blog Ranking
I was informed last week that based on:
- Google reputation and Google search ranking
- Influence and popularity on Facebook, twitter and other social media sites
- Quality and consistency of posts
- Feedspot’s editorial team and expert review
My blog has been ranked 40th in the top 100 Economics Blogs.
You can see the rankings HERE.
New Economic Perspectives (UMKC) was ranked 36th, which means two MMT blogs are in the top 40.
I don’t promote much through social media and do not have a Facebook account (why anyone would when they sell your private information for profit is beyond me) so perhaps it is “consistency of posts” that has earned the ranking :-)
Anyway, there is a lot of misinformation being spread by those blogs above us and hopefully our spread increases in the coming year.
Another company (FocusEconomics) which ranks blogs etc has told me recently that they will be featuring my blog as one of the Top Economics and Finance Blogs of 2016/2017.
Who knows what any of these rankings actually mean. But it is probably better to be highly ranked than not mentioned at all!
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.