The Fatal Misdiagnosis of the U.S. Economy

Main conclusions

1. The fatal Misdiagnosis of the U.S. Economy

Some economists claimed that the level of U.S. debt has reached a point (90%) at which economic growth traditionally begins to slow. Economists and Rating institutes have misdiagnosed the problem with the US economy. The following paper shows that there is no association between the level of public debt and slow economic growth. Given this, there is no justification for rapid, deep cuts to federal spending based on fears of exceeding this threshold.

2. Investment Level not Debt Level is the Main Problem in the US Economy

The problem is not one of government debt. Rather the problem is a low investment rate and a long history of underinvestment in economic growth. The rest of this paper shows in more detail that the best way to reduce the deficit over the long-term is by increasing federal investments in economic growth. President Obama's call to focus on making investments for the future in infrastructure, innovation, and education could therefore not come at a more critical time.

3. A New Investment Strategy

United States needs a new investment strategy. The main principals are:

3.1 Military and Civilian Economy Integration.

The importance of military spending as a tool of macroeconomic management and economic growth should be used as a platform for the budget discussion. The potential effects of defense expenditures on economic growth need to be studied extensively. The circumstances in which defense spending might generate economic gains should be reflected in defense budgets.

3.2 Investing in Economic Growth and Civilian Security Instead of in Wars

The benefits of avoiding war can be used as a new investment principle. Military spending by its self has no negative impact on investment. The greatest fall of investment in the US economy has been occurred during the Iraq war in 1990-191 and during the Iraq war 2003-2010. This situation is not without historical analog. The Vietnam War cost between 1.5% and 2% of GDP each year during the eight years of war. Between 1965 and 1980 US gross fixed investment varied between 17 percent and 19 percent of GNP. That for Japan varied between 27,8 percent and 35 percent. The OECD average varied between 21,6 percent and 26 per cent. The same thing occurred between 2001 and 2010.

3. 3 To Grow out the Debt through Investment

Paying off the debt is largely a political choice. But one way to trim debt and deficit is to invest in economic growth. Historical data shows that best way to reduce the deficit over the long-term is by increasing federal investments. The long history of American innovation shows that such investments have been critical to U.S. prosperity. Increased federal investment in infrastructure, science, technology, and education is one of the best ways to promote growth and a primary strategy to reduce the budget deficit.

4. Strategic Proposals

The federal government should issue long-term bonds and invest the proceeds in projects that will have the immediate effect of creating jobs and producing long-term growth. The federal government can currently borrow funds at 2 percent for 10 years and 3.25 percent for 30 years. Economic reasoning tells us that, at the margin, borrowing makes sense if the marginal cost of funds is less than the marginal benefits we receive by investing these funds.

Five strategic proposals are submitted in the end of this paper.

Einstein's Logic Problem

Einstein is often quoted as having said that if he had one hour to save the world he would spend fifty-five minutes defining the problem and only five minutes finding the solution.

This quote does illustrate an important point: before jumping right into solving a problem, we should step back and invest time and effort to improve our understanding of it. What usually happens is that as soon as we have a problem to work on we're so eager to get to solutions that we neglect spending any time refining it. The most important step in problem solving is to clearly define the problem in the first place. The quality of the solutions we come up with will be in direct proportion to the quality of the description of the problem we're trying to solve. The Problem Is To Know What the Problem Is.

1. The Fatal Misdiagnosis of the U.S. Economy

Economists and Rating institutes have misdiagnosed the problem with the US economy. The problem is not one of government debt. Rather the problem is a low investment rate and a long history of underinvestment in economic growth.

1.1 There Is no a Well-defined Threshold of Government Debt Relative to Gross Domestic Product

Many economists talk in policymaking circles regarding the dangers to the economy's future health posed by crossing a specific threshold in the ratio between government debt and gross domestic product. These fears have been fueled by a recent report by researchers Carmen Reinhart and Kenneth Rogoff. In the report "Growth in a Time of Debt" Carmen Reinhart and Kenneth Rogoff claim that there exists a well-defined threshold (90%, in their estimation) of government debt relative to gross domestic product (GDP) above which economic growth is hindered. Given that some projections of U.S. national debt over the coming decade show that this 90% threshold maybe well be exceeded, the authors argue for rapid, deep cuts in federal spending in order to keep the debt-to-GDP ratio from approaching this supposed benchmark.

However we can find several empirical lacks in this approach and findings, especially as they relate to the U.S. economy. The "90% threshold" for gross government debt should not be used as a guide for U.S. fiscal policy, as both conclusion and the data in the paper rest on exceptionally weak foundations.

The report "Growth in a Time of Debt" examines yearly growth and debt levels, with no allowance for an impact over time, or a more complicated dynamic relation between growth and debt. The data usage is very sporadic and fails to provide good prediction. The United States has very limited experience with debt levels over 90%. In particular, the United States economy has only exceeded the 90% threshold in six of the 218 years examined in this report, and these six years are constituted by a single consecutive time-span in the 1940s dominated by the defense buildup and subsequent demobilization around World War II. The results for the United States are thus very sensitive to just a couple of years in the 1940s, and simply removing the influence of defense spending contributions to growth in this high-debt period actually results in GDP growth that is nearly double that of the lower-debt years. This means that there is very little actual evidence to suggest that a 90% debt ratio by itself has had any measurable effect on U.S. growth (See John Irons and Josh Bivens 2010).

The 90% threshold rests on a very speculative theory. Data in chart concerning government debt level and its impact over time shows clearly that there is no evidence on causality between economic growth and debt level.

Chart 1 Source: OECD and IMF

A list of countries by growth of real gross domestic product at purchasing power parity over time shows also that there is no association between high public debt level and lower economic growth.

Chart 2. Source: OECD and U.S. Bureau of Labor Statistics

Macroeconomic data shows clearly that there is no a well-defined threshold of government debt relative to gross domestic product per capita. Given this, there is no justification for rapid, deep cuts to federal spending based on fears of exceeding this threshold. The rest of this paper demonstrates in more detail how the US should grow out of its debt through investment.

1.2 Government Debt Levels Alone is Misleading

Many Economists use GDP and Debt to GDP to evaluate the health of the US Economy, its ability to handle the increasing debt load, and to predict the future economic environment. Since the ratings agency Standard & Poor's has reduced the United States' long-term debt rating from AAA to AA+, government debt is at the top of the agenda in the American budget debate. There is a risk that government can no longer borrow money or do so only at relatively high interest rates. Reducing budget deficits has become a prime goal of the government.

In the end of 1986 Standard & Poor's estimates that: "Ireland's general government surplus, at about 2.3% of GDP in 2006 and 1.0% of GDP in the medium term on average (...) Ireland has the lowest debt to- GDP ratio in its peer group, and the second-lowest in the Eurozone, behind the Grand Duchy of Luxembourg" (Standard and poor´s. Rating Report 22-Dec-2006, Sovereign Credit Rating AAA/Stable/A-1+)

But looking only at government debt totals can provide a misleading picture of a country's fiscal situation. In 2007, before the credit crisis hit, Ireland appeared to be one of the least indebted countries in the euro zone, and Germany was among the most indebted.

Yet Ireland was slated to become one of the first casualties of the credit crisis, and is now among the most heavily indebted. Its net government debt - a figure that deducts government financial assets like gold and foreign exchange reserves from the money owed by the government - stood at just 11 percent of G.D.P.

Chart 3. Private and public debt expressed as a percentage of gross domestic product. Sources: International Monetary Fund and European Central Bank.

One reason for the financial crisis is that Ireland's private sector was heavily indebted in 2007, and many of those debts turned out to be bad ones. As the charts show, debts of households and nonfinancial corporations then amounted to 241 percent of G.D.P. the highest of any country in the group. By contrast, Germany was among the most indebted of the group but its private debt was much lower than Ireland´s.

1.3. The Interest Cost is More Important than the Debt Level

S&P predicts that the U.S.'s debt-to-GDP ratio will climb from the current level of 74 percent, to 79 percent in 2015 and 85 percent by 2021. But looking only at government debt totals can provide a misleading picture of US fiscal situation. In 2007, before the credit crisis hit, Ireland appeared to be one of the least indebted countries in the euro zone. Ireland´ government net debt was 11% in 2007. Yet Ireland was slated to become one of the first casualties of the credit crisis, and is now among the most heavily indebted.

One reason is that Ireland's private sector was heavily indebted in 2007, and many of those debts turned out to be bad ones. Debts of households and nonfinancial corporations then amounted to 241 percent of G.D.P., the highest of any country in Europe.

Looking only at government debt totals can also provide a misleading picture of US fiscal situation if we don't know the share of external public debt of total public debt. Japan and Italy have high debt levels, although Japan's is higher. But the interest rates on Italian and Japanese debt are very different. As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.

Chart 4. Source: IMF

The interest cost of covering the debt is an important variable affecting the economy. Japan's low interest rates have been able to sustain rising debt. If the Interest Coverage rises above 5%, this can spark a financial crisis if it appears the level will remain above that level and will continue to rise.

The difference on interests levels is du the share of external public debt of total public debt. Only 7% of Japan's public debt is held outside its borders. Furthermore, near all of it is denominated in yen, a fiat currency that is funded by the Japanese government itself. On the other hand, Italy has quite a large share of external gross public debt, 43% of total public sector debt, and the sovereign has conceded monetary policy to the currency union. Simply put: Italy's constrained, Japan is not - and interest rates reflect this.

This is why it is wrong to compare the US debt to for example Germany, France and Italy. Only 344% of the US public debt is held outside its borders compared with 72% in France and 77% in Germany.

Chart 5. Source: IMF

1.4 Private Debt Levels More Dangerous than Government Debt Levels

Standards and Poor are focusing on government debt levels. In reality the far greater danger to financial stability is the level of the private sector debt, particularly household and corporate debt.

Chart 6. Source:: Government and private debt level before the crisis. Source: Eurostat and national central banks.

Chart 6 shows all crises are the same: US 1929 and 2007, Sweden, Finland and Japan 1990 , Iceland and Ireland 2007. This crises occur in different periods, but its contours are familiar to anyone who was watched such crises over the past several decades or to anyone who has studied the history of earlier crises. The point is that while the government debt is low, the private sector debt is elevated.

The case of Greece is very special. Greece is the only country at least in the Eurozone, whose financial crisis is not caused by private debt and the collapse of the banking system, but because of the corrupt political system. The point is that while the private sector debt is low, the government debt is elevated. Greece has a government debt problem and a budget deficit problem, but not a private debt problem. In contrast, Ireland, Portugal, and Spain have huge amounts of private debt relative to the size of their economies.

1.5 The US Private Debt Lower than Many Advanced Economies

The indebtedness of the private sector is relevant in assessing the prospects for the growth of private demand. High debt level in private sector will continue to slow economic growth in the future as households and corporate focus on saving more, rather than on spending and investing more. Since the great recession, there has been significant adjustment in private sector debt levels, driven initially and substantially by the corporate sector but followed of the household sector as well. The level of the private sector debt have declined in the developed markets from peak levels debt in 2009. Part of the private sector deleveraging has occurred through an implicit transfer of debt to the public sector as governments stepped in to support growth through the crisis.

Chart 7. The private debt sector to GDP. Source: OECD and IM

In many cases there has been a significant adjustment in private sector levels, but the private sector debt is still higher than the pre-crisis level. In the US, non financial sector debt as percent of GDP was relatively low to start with. In 2011 Q 1 it was 10 ppt lower than the pre-crisis level. The US private debt is lower than many advanced economies and this is very favorable for private demand.

2. Investment Level is the Main Problem in the US Economy

Standards and Poor estimated that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021. Standards and Poor was focusing on government debt levels. I think the far greater danger to the American economy now is the level of investment, particularly the total gross fixed investment to GDP.

If economists agree on anything, it's that investment is the key to long-run economic growth and prosperity. Investment is the cornerstone of job creation, economic growth, and long-run prosperity. Both the private sector and the government have critical roles to play in the investment process. Business investment drives the economy, but public investment paves the path on which business investment depends. That's why countries with the highest levels of combined public and private investment are leading the world economy in recovering from the great recession.

2.1 The US Investment as a Percentage of GDP Remains Low

The missing ingredient in the US recovery is investment. Investment is Central to continued growth and competitiveness. Investment in the US economy was already too low even before the Great Recession. The present US recession is dominated by the fall in fixed investment. As may be seen, until the mid-1980s, with relatively short term fluctuations, US fixed investment remained relatively stable as a percentage of GDP - essentially centered on a level of 20% of GDP. This was, however, from the mid-1980s followed by a decline, with the percentage of fixed investment in GDP falling to 17.0% of GDP by 1991, recovery and then a lesser fall to 18.4% of GDP in 2002, and a precipitate drop to 14,7f GDP in 2009.

Chart 8 Investment (gross fixed) as % of GDP. Source: IMF

The chart 5 shows gross fixed capital formation, as a percentage of gross domestic product (GDP), for USA and for Japan, Australia and Canada. The message from this data is crystal clear: The US need to invest more to compete and lead economically. Japan, Canada, Australia China, India and South Korea and others are making strong investments and enjoying high growth that propels the global economy. The United States are making relatively low investments. As may be seen, until the mid-1980s, with relatively short term fluctuations, US fixed investment remained relatively stable as a percentage of GDP - essentially centered on a level of 20% of GDP. This was, however, from the mid-1980s followed by a decline, with the percentage of fixed investment in GDP falling to 17.0% of GDP by 1991, recovery and then a lesser fall to 18.4% of GDP in 2002, and a precipitate drop to 14,7 per cent of GDP in 2009.

Between 1965 and 1980 US gross fixed capital formation varied between 17 percent and 19 percent of GNP. That for Japan varied between 27,8 percent and 35 percent. The OECD average varied between 21,6 and 26 per cent. Between 1965 and 1980 the United States ranked 15th out of 19 industrialized nations in terms of economic growth. Despite the success of many Kennedy and Johnson economic policies, the decline of investment was a important factor in bringing down the American economy from the growth and affluence of the early 1960s to the economic crises of the 1970s.

President Obama's call to focus on making investments for the future in infrastructure, innovation, and education could not come at a more critical time.

2.2 Pay Off Government Debt or Invest?

There are historically two distinct strategies to reduce the national debt: repayments and investment. Amortization strategy using budget surpluses during the good years of growth to repay the national debt, the investment strategy uses surpluses to invest off the national debt. Ireland and Australia are examples of countries that have tried these strategies.

2.2.2 Lessons from the Cases of Ireland and Iceland

The good growth years of the 90th century in the Irish case meant that the public finances strengthened markedly. Finances have gone from a deficit of 8.2% of GDP in 1987 to surpluses of 2,3% of GDP in 2006. The surplus has mainly been used to reduce taxes and paying off the national debt. Government debt has fallen from 94% in 1994 to 25% of GDP in 2007.

Chart 9. Source: IMF, Eurostat and national Central Banks

In Ireland and Iceland the government paid down debt while private sector debt grew. The debt came back to the same level before paying as quickly as it was paid . The Government paid down the debt but did not invest in infrastructure, energy, knowledge and innovation system. By the end of 1980s, Ireland debt had increased to over 100% of GDP, but through paying down the debt, Ireland was able to get its debt down to 11% of GDP by 2007. The Debt/GDP ratio rose back to 100% 1986, back to 11% in 2007 and is now reapproaching 100% of GDP.

2.2.3 Australia Grew Out Its Debt Through Investment

In 1972, Ireland and Australia had a net deficit of 32 percent of GDP (Ireland) and 35.9% of GDP Australia). Between 1972 and 1986 increased Ireland's national debt to 100 percent of GDP.

Ireland has used the good years of growth in the 90's to recoup much of the national debt.

Australia has grown out of its Debt, which now represents less than 10% of GDP placing it in one of the most fiscally sound positions of any developed country. Australia was able to increase its Debt/GDP ratio through 1900 because it was a growing colony. It could borrow money in London with little problem. As it grew, Australia moved its debt burden from international to domestic borrowers and has now almost completely eliminated the foreign debt portion of its government debt. Australia borrowed as it developed its economy, and has grown out of its debt successfully with few periods of high inflation. Returns to fixed income investors in Australia have been high as a result.

Chart 10. Source: IMF and World Bank and IMF

Australia is the Western country that invested the most in terms of GDP, almost 30% of GDP in 2009 were for investment, compared with 14,8%% in the US. Between 2006 and 2010 Australia invested annually corresponding 28.3 percent of GDP compared to 18 percent in the US. Taking advantage of a low level of public debt to borrow for investment has proven to be a successful model of growth in both the short and long term. Unemployment in Australia is currently 5% and is about 4.5% in 2012. In Sweden, unemployment will increase to 7.8 according to the latest forecast. Even when the crisis was at its worst in 2009, unemployment in Australia, never exceeded more than 6% compared to 9 percent in the US. Thanks to huge investments have been to Australia during the financial crisis to keep growth going, low unemployment and bank profits stable. This occurred as a result of a government investment of $ 70 billion, including a focus on infrastructure. The effect was such a boost in the economy in 2009 that the Australian central bank in a more or less unique action raised the policy rate in several steps to prevent economic overheating. Western countries still had the fall of 2010 interest rates below 1%. Australia had long more normal interest rate around 4.5%. The lowest rate was in Australia 3%.

3. To Invest or to Reduce Debt, That's The Question

This paper shows that U.S. debt has not reached a level at which economic growth begins to slow. Knowing whether to pay down debt or invest depends not only on the level of debt, but also the interest cost. The relationship between government debt and economic growth is a complex one, involving interest rates, tax rates, and the level of inflation, among other factors.

It follows then that the best way to reduce public debt-to-GDP ratios is through economic growth, as happened during the two most recent periods in which the U.S. ran sustained budget surpluses-basically the 10 or so years following World War II and the late 1990s. Indeed, toward the end of the 1990s, government deficits switched to surpluses with essentially no change in tax rates or spending cuts.

3.1 Proposal 1: Borrow to Invest in Growth (A Ten Years Investment Program)

Paying off the debt is largely a political choice. But history shows that the best way to reduce the deficit over the long-term is by increasing federal investments. The long history of American innovation shows that such investments have been critical to U.S. prosperity. Increased federal investment in infrastructure, science, technology, and education as one of "the best ways to promote growth" and a primary strategy to reduce the budget deficit, One way to trim debt and deficit is to invest in economic growth. How to decide whether to invest or pay off debt? Compare the annual return on investments to the interest rates on public debt. When examining an investment opportunity, compare its rate of return to the interest rates on your debts. Invest only when you can reasonably expect returns that significantly exceed the interest on your debts.

Cutting spending is the wrong thing to just now. Instead the best way to reduce government debt is to invest now on improvements in infrastructure, education and other major priorities vital to maintaining U.S. competitiveness in the global market. The federal government should issue long-term bonds and invest the proceeds in projects that will have the immediate effect of creating jobs and producing long-term growth. The federal government can currently borrow funds at 2 percent for 10 years and 3.25 percent for 30 years. Economic reasoning tells us that, at the margin, borrowing makes sense if the marginal cost of funds is less than the marginal benefits we receive by investing these funds.

3.2 Proposal 2: Bipartisan National Commission on Military and Civilian Economy Integration

President Obama should send to Congress a bill to establish a bipartisan National Commission on Military and Civilian Economy Integration. The Commission should focus on the importance of military spending as a tool of macroeconomic management and economic growth. The potential effects of defense expenditures on economic growth need to be studied extensively. The circumstances in which defense spending might generate economic gains should be reflected in defense budgets.

The neo-classical approach argues that defense expenditures deter economic growth. This is true concerning Europe. Europe pays a high price for the artificial separation of civil and military research. In the contrary the example of the United States shows us that synergy between the two can be very profitable. Military priorities have a qualitative impact on civilian innovation. Military spending represents a direct demand by the government for products and services. An increase in military spending brings forward an increase in production and employment, and as military-industry workers spend their higher income, it generates further increases in investment, jobs and income.

The history of military budget and innovation in the US economy are closely related. In 1984 and 1985 US military expenditure was 7 per cent of GDP. Between1980 and 1986 US military expenditure was 6% per cent of GDP. GDP share of gross fixed capital formation averaged 20.1 percent 1980-1986. Between 1980 and 1986 the United states ranked third of 19 industrialized nations in terms of economic growth.

Military priorities also have a qualitative impact on civilian innovation. The civilian economy benefits from the spinoff from military research and development (R&D). Military investment probably had more impact on civilian products in the years after World War II than recently. Innovations in aircraft design and computer technology received a push from the military and space programs in the 1940s and 1950s. A new defense research policy is thus necessary to bring the two sectors closer together and remove barriers between the U.S. civilian and military sectors.

3.3 Proposal 3: Strategy for a Greater and Wider NASA-Pentagon Collaboration

President Obama has already publicly pledged to revive the National Aeronautics and Space Council, a White House office which coordinated military and space policy. President Obama is considering a collaboration between the Defense Department and the National Aeronautics and Space Administration because military rockets may be cheaper and ready sooner.

It's surprising to learn that NASA and the Pentagon don't share developments when it comes to space. It seems to be common sense to allow the two groups to work together. There's no doubt that the collaboration could lead to some savings and synergies in government spending and quicker development of technology.

An expert group should be formed in order to get a strategy for tighter NASA-Pentagon integration and the long-term implications of this collaboration. Several questions need to be considered:

• A potential lunar race with China is described as one reason for haste. If it must be a race, then let it be pursued more widely in the field of collaboration between civilian and military economy.

• At what extent, to tear down the barriers between the US civil and military space programs? These barriers have made it possible for the US to publicly showcase NASA's manned space program accomplishments while maintaining secrecy about military space efforts.

• Will the removal of these barriers make it easier or more difficult for cooperative efforts between NASA and the national space agencies of Europe, Japan, India, Russia, and other nations?

• NASA can buy launches from the United Launch Alliance, and probably from Orbital Sciences Corp. (OSC) and Space Exploration Technologies (SpaceX). Does NASA acting as a customer require tearing down the civil-military barriers?

• NASA and Pentagon development and operations cultures are very different. How should their different needs be managed, and who will make the decisions?

3.4 Proposal 4: Investing in Economy Instead of in Wars

President Obama Says US Troops Will Leave Iraq by the End of the Year. President Obama's new national security strategy stresses the importance of a cooperative international response to global conflicts and moves away from the Bush administration doctrine of striking preemptively and acting alone if deemed necessary to protect the country. Defense, diplomacy and development is not separate entities and they had to be viewed as part of an integrated whole.

The United States paid a high price for artificial separation of civil and military security strategy. President Obama s new Strategy Based in Diplomacy can bring the two sectors closer together. President Obama previewed a new national security strategy rooted in diplomatic engagement and international alliances.

Avoiding the war can became a new investment strategy: Investing in Economy instead of in wars. One of the major causes of the underinvestment in economy could be traced to an excessive spending on Iraq and Afghanistan war. When President Obama recently announced a drawdown of U.S. troops from Afghanistan, he said America's wars have cost the country $1 trillion dollars. But a report by Brown University's Watson Institute for International Studies estimates the total cost at $3.7 trillion. The study includes spending on wars in Iraq and Afghanistan, as well as operations in Pakistan. The report's total is more than three times higher than U.S. President Barack Obama's estimate in a recent speech.

The Benefits of avoiding war can be used as a New Investment strategy. Military spending by its self has no negative impact on investment. The greatest fall of investment has been occurred during the Iraq war in 1990-191 and during the Iraq war 2003-2010. This situation is not without historical analog. The impact of war on investment can also illustrated by the Vietnam War. The Vietnam War cost between 1.5% and 2% of GDP each year during the eight years of war. Between 1965 and 1980 US gross fixed capital formation varied between 17 percent and 19 percent of GNP. That for Japan varied between 27,8 percent and 35 percent. The OECD average varied between 21,6 and 26 per cent. Between 1965 and 1980 the United States ranked 15th out of 19 industrialized nations in terms of economic growth. Despite the success of many Kennedy and Johnson economic policies, the Vietnam War was a important factor in bringing down the American economy from the growth and affluence of the early 1960s to the economic crises of the 1970s.

President Obama should recommend that Congress request the Congressional Budget Office produce its own projections of the investment impact of the new security strategy and the effects on investment flows of avoiding war strategy.

3.5 Proposal 5: Infrastructure Strategy Investment: Transport Vision and Objectives to 2050

America has long suffered from an under-investment in economy. The United States has a rich history of underinvestment especially in infrastructure. While already established in Australia and Canada, the United Kingdom and Continental Europe, infrastructure as an asset class is still a relatively new investment strategy in the United States.

According to a World Economic Forum study America's infrastructure has got worse, by comparison with other countries, over the past decade. In the WEF 2010 league table, America now ranks 23rd for overall infrastructure quality, between Spain and Chile. Its roads, railways, ports and air-transport infrastructure are all judged mediocre against networks in northern Europe.

Physical infrastructure has a direct impact on the growth and overall development of an economy. China spends 11% of GDP on infrastructure. Of course, the U.S. need not spend like the Chinese since a solid infrastructure needed for economic growth already exists here. But much of the U.S. infrastructure like airports, highways, bridges, ports, etc. are old and crumbling and have to be upgraded to be equal to other developed countries.

GDP per capita is commonly taken as an indication of the overall economic strength of a country. When compared with the recent rankings by the World Economic Forum (WEF) Competitiveness Report on the quality of overall infrastructure, the relationship between GDP and competitiveness can be clearly seen, particularly for countries with less developed infrastructure (figure 1).

Even as constraints on spending and borrowing have grown, governments have been emphasising the importance of infrastructure in assisting economic growth. A number of countries have explicitly recognized this as part of their stimulus packages.

According to the OECD, the average fiscal package across its member countries over the period 2008-2010 is forecast to be 1.4% of GDP, with around 25%-30% of this package being spent on investment. Australia has taken the lead in this regard, investing about 2.6% of GDP. It has put aside A$5bn towards social housing and A$2.3bn on road and rail alone. Infrastructure projects are useful economic stimuli, but the time taken to approve, procure, design and raise finance for them can mean that the stimulus effect is delayed. To overcome this, some governments have emphasised the need for projects to be "shovel ready".

Figure 1: OECD countries in-group infrastructure ranking, and GDP per capita based on purchasing power parity exchange rates. Luxembourg and Norway have been excluded as being outliers on GDP per capita. WEF infrastructure ranking is based on in-group comparison.

With interest rates at record-lows, the U.S. government should borrow more to invest in infrastructure. A vision on infrastructure that focuses on systems and networks including aerospace , water, land and information can be found in a report on a project started late in the year 2000, a report issued as the new Bush administration came into power in January-February 2001. This was a project of the US Department of Transportation, entitled Vision 2050: An Integration National Transportation System. For several years the report was available on various Federal Government websites, but access has gradually disappeared. Returning to that now ten-year old Vision, you are struck by several things. First, the vision is from 2001, but still relevant today.

Vision 2050:

• An integrated national transportation system that can economically move anyone and anything, anywhere, anytime, on time;
• A transportation system without fatalities and injuries;
• A transportation system that is not dependent on foreign energy and is compatible with the environment

Hedi Bel Habib (85 artiklar)

Anmäl

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8 kommentarer Logga in för att kommentera
I kommentarsfältet har kommentatorn juridiskt ansvar för sina inlägg.

Nu är jag jätteintrsserad av ekonomi men denna artikel blev lite väl lång och oklar när det gäller att leverera poängen men:
Ett fundamentalt problem här är väl att USA:s produktionsapparat helt enkelt inte är konkurrenskraftig. USA har världens framgångsrikaste företag men pengarna tillfaller inte amerikanerna då företagen undviker skatt och produktionen (lönerna) betalas utomlands.
Lägre skuldbörda kanske inte är direkt kopplat till tillväxt men tillväxt skapas inte heller automatiskt genom högre belåning, det har man ju redan provat. Tillväxt kan bara skapas genom konkurrenskraftig produktion där vinsterna investeras inom landet för mer tillväxt och inte i andra länder. Eller?

Permalänk | Anmäl #1 Johan Delorean, 2011-11-22, 20:08

Jag kan hålla med om att den finansiella delen av USAs kris inte är värre än andras.

Problemet är amerikanska politikers arrogans gentemot dom som vill hantera problemet, antingen med utgiftsnerdragningar eller med skattehöjningar.

Bekymret är alltså ett förtroendehål , jag tror att det här klippet kan förklara min ståndpunkt.

http://www.youtube.com/watch?v=zEAAdkrh0OM

Permalänk | Anmäl #2 Anders Olsson, 2011-11-22, 20:19

Именно так! Вы действительно все понял. Спасибо.

Permalänk | Anmäl #3 Jan Wiklund, 2011-11-22, 21:18

Privat skuldsättning är inte nödvändigtvis dålig eftersom den ofta är en förutsättning för, privat, investering.

Permalänk | Anmäl #5 Johan Arve, 2011-11-23, 07:20

"It follows then that the best way to reduce public debt-to-GDP ratios is through economic growth..."

Ja, Hedi Bel Habib, det är bra att du förstår att finanser inte är samma sak som real ekonomi. De flesta ekonomer gör inte det.

Men om det inte finns några realekonomiska förutsättningar för tillväxt, vad ska man göra då? Det svarar inte du på.

Den kris som pågår idag beror på peak-oil. Det går inte att bara expandera sig ut ur den för all tillväxt kräver energi.

För att få utrymme att investera och få de delar av ekonomin som kan växa att växa måste konsumtionen dras ned på alla andra områden.

När ska ni ekonomister inse det?

Permalänk | Anmäl #6 Bo T, 2011-11-23, 09:43

USA har handelbalansunderskott- men får inte exportera ris till Kina.
USA har en stor statsskuld som växer-men kan fortfarande låna till låga räntor.
Jag tror politikerna inte tvingas komma överens pga dess storlek.
På samma sätt som Japan kan USA leva med låga räntor och stor stadsskuld. Tillväxt får inte förväxlas med real ekonomi. Tillväxt underlättar ekonomin men är inte en förutsättning för Västvärldens utvecklade ekonomier.

Permalänk | Anmäl #7 Lars Kronqvist, 2011-11-23, 09:56

"USA har en stor statsskuld som växer-men kan fortfarande låna till låga räntor."

Det hänger ihop med att oljan handlas i dollar och att det globala banksystemet är uppbyggt kring dollarn, #7 Lars Kronqvist. Därför ses dollarn som en säkrare tillgång än andra valutor trots alla underskotten.

Idag ligger den amerikanska CPI-inflationen på 3,5% medan 10-årsräntan ligger på 1,9%. Realräntan är alltså -1,6%.

Den differensen förlorar en ägare av en obligation varje år. Det visar man hur negativ marknaden är. Man tar hellre en förlust på 1,6% än investerar.

Och om staten ökar sina underskott för att göra investeringar så kommer inflationen att öka utan att det blir tillväxt.

Den amerikanska ekonomin är precis så kalibrerad att en jämvikt uppstår mellan underskott, inflation och tillväxt.

Så Hedi Bel Habib har rätt i att det inte är underskottens storlek som begränsar tillväxten men han har fel när han påstår att ökade investeringar skulle skapa tillväxt.

Det finns inte förutsättningar för tillväxt.

Permalänk | Anmäl #8 Bo T, 2011-11-23, 10:42

Min något vassare kommentar #4 blev struken, men varför ska vi behöva läsa slutsatser av förmodligen refuserade alster...

Permalänk | Anmäl #9 Sten Figaro, 2011-11-24, 18:33