Investment Chart Kondratiev Wave

Investment Chart Kondratiev Wave

Friday, 15 June 2012

How good is austerity: good and bad deficits (Woody Brock (2))

Tuesday Woody Brock was at our office and also this time he suggested the US and UK should have more good deficits (deficits because of more government investment in infrastructure (or education, research).

China and India demonstrated after 2008 how well you can boost economic growth with infrastructure spending to get only small decelerations of growth. They have big good deficits.

In the West all deficits are bad.

This distinction between good and bad deficits (in the past the golden rule for government deficits) doesn’t get enough attention in the drive to push austerity. It is seen, but it is not leading to action.

In Europe Hollande wants a growth pact, but he is not pushing infrastructure funds for France/ PIGS etc.

Somewhat new (but not to the readers of his new book American Gridlock: Why the Right and Left Are Both Wrong -- and What Can Be Done About It , discussed by is his scheme when a goverment needs big or small deficits, bad and good deficits.

Animal spirits are low now and the relative yield of infrastructure investments is in the UK and US high because of the extremely low bond yields.

That means you should get very high government deficits in the US/UK, as well good as bad deficits.

In the Clinton years the animal spirits were abundant and the bond yields were high for infrastructure investments (private investments yielded more). And indeed in the Clinton years you had surplus on the government budgets.

Woody had no opinion about changing multipliers of government spending when the output gap is high (more and more studies are pointing to a bigger multiplier when the output gap is big, so that means you should not do austerity, especially not when bond yields are low).

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