A public works program that digs holes and fills them in again has exactly the same impact on current economic growth ($-for-$) as a private investment plan which constructs a new factory.
Answer: True
The answer is True.
This question allows us to go back into J.M. Keynes' The General Theory of Employment, Interest, and Money. Many mainstream economics characterise the Keynesian position on the use of public works as an expansionary employment measure as advocating useless work - digging holes and filling them up again. The critics focus on the seeming futility of that work to denigrate it and rarely examine the flow of funds and impacts on aggregate demand. They know that people will instinctively recoil from the idea if the nonsensical nature of the work is emphasised.
The critics actually fail in their stylisations of what Keynes actually said. They also fail to understand the nature of the policy recommendations that Keynes was advocating.
What Keynes demonstrated was that when private demand fails during a recession and the private sector will not buy any more goods and services, then government spending interventions were necessary. He said that while hiring people to dig holes only to fill them up again would work to stimulate demand, there were much more creative and useful things that the government could do.
Keynes maintained that in a crisis caused by inadequate private willingness or ability to buy goods and services, it was the role of government to generate demand. But, he argued, merely hiring people to dig holes, while better than nothing, is not a reasonable way to do it.
In Chapter 16 of The General Theory of Employment, Interest, and Money, Keynes wrote, in the book's typically impenetrable style:
If - for whatever reason - the rate of interest cannot fall as fast as the marginal efficiency of capital would fall with a rate of accumulation corresponding to what the community would choose to save at a rate of interest equal to the marginal efficiency of capital in conditions of full employment, then even a diversion of the desire to hold wealth towards assets, which will in fact yield no economic fruits whatever, will increase economic well-being. In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. "To dig holes in the ground," paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.
So while the narrative style is typical Keynes (I actually think the General Theory is a poorly written book) the message is clear. Keynes clearly understands that digging holes will stimulate aggregate demand when private investment has fallen but not increase "the real national dividend of useful goods and services".
He also notes that once the public realise how employment is determined and the role that government can play in times of crisis they would expect government to use their net spending wisely to create useful outcomes.
Earlier, in Chapter 10 of the General Theory you read the following:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
Again a similar theme. The government can stimulate demand in a number of ways when private spending collapses. But they should choose ways that will yield more "sensible" products such as housing. He notes too that politics might intervene in doing what is best. When that happens the sub-optimal but effective outcome would be suitable.
But the answer is true because as long as the hole-digging operation is paying on-going wages to the workers who spend them then this will add to aggregate demand and hence income (economic) growth in the current period. The workers employed will spend a proportion of their weekly incomes on other goods and services which, in turn, provides wages to workers providing those outputs. They spend a proportion of this income and the "induced consumption" (induced from the initial spending on the road) multiplies throughout the economy.
This is the idea behind the expenditure multiplier. A private investment in the construction of a factory will have an identical effect. Over time, clearly building productive capacity is an important determinant of future economic growth. But if private spending is lagging then a public works scheme like that proposed is better than nothing.
The economy may not get much useful output from such a policy but aggregate demand would be stronger and employment higher as a consequence.
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