Tuesday, October 7, 2014

The IMF Tells Us How Government Spending On Infrastructure Provides Us With A Free Lunch

The IMF has historically been a promoter of fiscal austerity.  It has now changed its tune.  Under current conditions of weak demand and low interest rates, the IMF shows how one dollar of infrastructure spending can yield three dollars of benefits.  Larry Summers summarizes the IMF proposal and suggests that it disproves one of the eternal bromides found in econ 101 textbooks.  He tells us that free lunches are possible.  The solution will vary across nations, since circumstances differ between nations, but the IMF has become a champion of infrastructure spending.  Politicians who have used budget deficits as a vehicle to reduce the role of government in the economy will not like the IMF's proposal.  They will stick to their conviction that free lunches are not possible.  Curiously, they are reviving their own version of a free lunch.  That is, the belief that a one dollar cut in taxes will increase tax revenues by more than one dollar.  Cutting taxes is a fiscal policy that everyone can love.  Especially when one believes that they will reduce budget deficits.

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