Mar 10 Sub-national Keynes

In this article on job growth and the bonding bill I expressed some serious skepticism over the job creation claims of its DFL and union supporters. (Discussed earlier.) Two thoughts I hoped to make clear there may be a bit buried and so I will restate. First, it is highly unusual to me to emphasize the job creation story over the public value of some investment. I said in the article, "The question is more what it's worth to us once it's built, than what it's worth to us while it's being built." If all we cared about were jobs, why stop with bonding for public works? Why not issue a bond to build a new WalMart in some outstate Minnesota area, or thousands of new playgrounds? Where is the logical stopping point? Of course, the critic will answer, we have to borrow only so much because of our borrowing limits, but that makes my point. We borrow to invest in things of value to us. We must choose, and if jobs are the only rationale you should choose from all projects that provide jobs, public or private. But that of course is not how politicians choose.

Second and relatedly, it seems many proponents of bonding-in-recession are relying on John Maynard Keynes, who famously said:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again . . . there need be no more unemployment. . . . It would indeed be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing. (p. 129)

The key difference here is that Keynes spoke of a government without a budget constraint who had access to the printing press. The banknotes are free to the sovereign. But a sub-national government has no access to free money. It must first borrow from others the banknotes it puts in the ground to let others dig up. Money borrowed by the state cannot be put into private projects. You must either assume the borrowed money would have been idle (which Keynes himself thought) or that it was invested in something that had more value than what the private sector would have done. I see no evidence that dollars are lying idle out of fear of investment; most money people are saving is for repair of portfolios. And the return on investing in a sculpture garden or more money for our Twin Cities arts district is poor relative to the return in investing in the private sector where real jobs last longer.

Cross-posted at SCSU Scholars. Comments welcome.