Larry Summers Discovers The Free Lunch

Give the Man a Nobel Prize Already!

There’s always something funny to report from the wacky world of our central planning bien pensants, (a.k.a. “high IQ morons” – h/t Bill Bonner), especially when one of them has a sudden personal epiphany he feels he must immediately impart so that we can go about rescuing the world by implementing his plan and no other.

One of the biggest problems central planners of all stripes face is that even the otherwise lethargic couch potatoes realize deep down that there is no such thing as a free lunch. So what could be better then discovering one? Larry Summers has apparently just succeeded in this task, as he reports in a Financial Times editorial entitled “Why Public Investment Really Is a Free Lunch”.

So which economic laws are going to be magically suspended by this wizardry? Summers indicates in the sub-title of his editorial that he has got it on extremely good authority that public spending is where its at after all: “The IMF finds that a dollar of spending increases output by nearly $3”, we are informed.

Well, if the IMF “finds” so, who are we to disagree? Everybody knows the IMF is full of businessmen speculatively appraising the future for its profit-making possibilities, right? It’s not as if it were just an ivory tower full of academic economists of the Keynesian persuasion who haven’t the foggiest idea about business and are busy constructing “garbage-in, garbage-out” economic models all day long. A few excerpts from Summers’ editorial:

“It has been joked that the letters IMF stand for “it’s mostly fiscal”. The International Monetary Fund has long been a stalwart advocate of austerity as the route out of financial crisis, and every year it chastises dozens of countries for their fiscal indiscipline. Fiscal consolidation – a euphemism for cuts to government spending – is a staple of the fund’s rescue programs. A year ago the IMF was suggesting that the US had a fiscal gap of as much as 10 per cent of gross domestic product.

All of this makes the IMF’s recently published World Economic Outlook a remarkable and important document. In its flagship publication, the IMF advocates substantially increased public infrastructure investment, and not just in the US but much of the world. It asserts that when unemployment is high, as it is in much of the industrialized world, the stimulative impact will be greater if investment is paid for by borrowing, rather than cutting other spending or raising taxes. Most notably, the IMF asserts that properly designed infrastructure investment will reduce rather than increase government debt burdens. Public infrastructure investments can pay for themselves.

Why does the IMF reach these conclusions? Consider a hypothetical investment in a new highway financed entirely with debt. Assume – counter-factually and conservatively – that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 per cent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 per cent of the amount invested, since the government claims about 25 cents out of every additional dollar of income.Real interest costs, that is interest costs less inflation, are below 1 per cent in the US and much of the industrialized world over horizons of up to 30 years. So infrastructure investment actually makes it possible to reduce burdens on future generations.”