There is an interesting reply by Megan McArdle to Mark Thoma's suggestion that infrastructure spending can provide an effective fiscal stimulus to an American economy struggling with recession. Prof. Thoma had argued that "a one dollar increase in government spending has a bigger impact on GDP than a one dollar tax cut". Since it involves creation of permanent capital assets and is capital intensive, infrastructure is thought of as one the most effective means of capital infusion and Keynesian demand management.
McArdle differs and argues that infrastructure spending has a long time lag and therefore may be less effective than other fiscal and monetary policy measures. She claims that the time taken to conceive, design, source finances and tender out major infrastructure works typically takes many years. She writes, "Between the environmental impact statements, public review periods, and byzantine bidding process, the development cycle for anything more complicated than painting a bus station is now measured in decades, not years."
She pumps for monetary and fiscal policy, "The reason we rely mostly on monetary policy and tax cuts for stimulus is that it is possible to rapidly implement whatever stimulus you decide on. With the exception of a few transfer programs such as food stamps and unemployment insurance, which are hard to funnel very large sums of money through, there is nothing on the spending side that matches tax cuts for speed. You could allocate the money, to be sure, but by the time it actually hit an agency and went through the bureaucratic procedures necessary to actually spend it, the window for effective stimulus would have passed."
Given the enormous supply side constraints and the legacy of delays associated with tendering our works in government, infrastructure projects in India too suffer from similar problems. Does this mean that infrastructure spending has even less utility as a demand management tool in developing economies like in India? Does it also mean that if have to spend money on infrastructure projects as a demand management policy instrument, we should rely only on smaller infrastructure projects which are easier to contract out? It also means that the first step in such times should be to ensure the immediate release of the full amounts for all those projects which have been already tendered out, but are progressing slowly for lack of adequate funds.
2 comments:
What are the best ways to stimulate an economy? This is a difficult question to answer even in the best of circumstances. In india it might be even more difficult given the absence of information on the effectiveness of such steps in the past. The steps mentioned in your statement are fiscal and monetary policies and infrastructure spending. Are there any other stimuli that are possible? How effective is each of the step? Is the measure only going to put some spending money in the pockets of the poor? Do we have a mechanism of tracing the link between public spending and the impact on the incomes of different classes of society? Have we made an attempt to put i place such systems? I think this calls for a wider discussion before we can arrive at an effective solution. You are well aware of the impact of infrastructure spending on the Real estate market. Do we desire such responses?
I have dealt with in some detail about the utility of different fiscal options available as demand management tools in an earlier post here
http://gulzar05.blogspot.com/2008/01/structuring-fiscal-stimulus.html
Any fiscal stimulus is likely to be most effective when it leaves money in the hands of people who are most likely to spend it fully. This naturally means that fiscal stimulus should be aimed at those agents most pressed during recessions - the poor and the local governments. In addition, such stimulus should be timely, well-targetted and temporary.
Further, the composition of any stimulus would be dictatated by the extent and depth of the recession. It is very easy to get confused between effective and well targetted demand management policies and those that seek to effect blanket pump priming of the economy by way of government spending. Both does the demand management function, but the critical point is to deliver the maximum bang for the scarce buck, and at the earliest.
Yes, it is true that there is limited data available to draw firm conclusions about the respective efficacies of all the fiscal measures available. But the aforementioned logic would appear to hold for any economy, all the more so for developing countries like India where many of the factors mentioned are ripe.
Yes, there is ample scope for clarity in determining the nature and extent of link between demand management policies and outcomes like incomes of people etc.
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