Saturday, December 18, 2010

The Economy Faces a Major Crowding Out Problem...

...private investment poses a serious risk of crowding out public investment.

I don't know how I missed this before, but this is interesting - Brad DeLong and Paul Krugman disucss an original post by Michael Mandel on the age of the capital stock. Residential and non-residential private capital stays about roughly the same age. Seems reasonable - it looks like market forces are maintaining an equilibrium that's probably pretty strongly dependent on productive technology.

Our public capital stock has not been at equilibrium - its been getting older and older. Its no surprise no equilibrium can be maintained. We know from the socialist calculation debate that non-market institutions don't respond to signals that would maintain equilibrium in the same way that the market would. The conclusion a lot of people take from that is "down with the public sector". Another conclusion oughta be "if we want the public sector to do certain things we need to manage it more deliberately - we can't expect natural forces to produce the ideal result."

1 comment:

  1. A solution could be that the government could be mandated to maintain GAAP-based accounting standards with

    a) a high rate of depreciation
    b) maintainance of yearly revaluation reserves for capital assets, which revalue them according to the rise in the monetary base

    And then it can be demanded to not show any bottom line in the red. Since adjusting for depreciation might show the government in the red, the government will not consume capital that it needs for future reinvestment.

    For this, it would have to set up a separate infrastructure company, with a bank account separate from the treasury. Else, it will be too easy to just draw from that common treasury and consume capital.

    PS: Krugman criticises politicians for lack of political will. Do politicians criticise economists like Krugman for lack of academic rigour or for intellectual lightweightness? If Krugman wanted to show political will, he could leave his NY Times column and run for Congress. Which would mean giving up his status, and thus showing...a lack of political will.


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