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Here’s the difficulty with investing our way out of debt

Summary:
The IMF tells us how to get out of this problem of there both being a massive debt mountain and also slack in the economy:The IMF tries to square the policy circle by advocating investment in infrastructure projects with a fiscal multiplier of 1.0 to 2.0, meaning that they pay for themselves through higher GDP growth, and ultimately lower the debt ratio over time.Well, yes, but does anyone know of a manner of ensuring an actually existing political system makes such investments?We have a certain logical problem which is that if past governments had been investing only in such a manner then we wouldn’t have a national debt whizzing through 100% of GDP in the first place. For the growth from those past investments would have arrived and paid off the debt. We’ve also little to suggest that

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The IMF tells us how to get out of this problem of there both being a massive debt mountain and also slack in the economy:

The IMF tries to square the policy circle by advocating investment in infrastructure projects with a fiscal multiplier of 1.0 to 2.0, meaning that they pay for themselves through higher GDP growth, and ultimately lower the debt ratio over time.

Well, yes, but does anyone know of a manner of ensuring an actually existing political system makes such investments?

We have a certain logical problem which is that if past governments had been investing only in such a manner then we wouldn’t have a national debt whizzing through 100% of GDP in the first place. For the growth from those past investments would have arrived and paid off the debt.

We’ve also little to suggest that current plans pass such a test. HS2 appears to cost £100 billion by now and that doesn’t even pass its own internal cost benefit analysis let alone anything more general. Or perhaps it should be more directly about greenery, one idea being the mass installation of heat pumps. This would seem to involve “investing” £450 billion for a £3 billion a year reduction in emissions costs. That’s not a set of numbers to pay off the national debt now, is it?

It is conceptually obvious that it is possible to spend now to reap more in the future - that’s how all investment works after all. It is conceptually possible that government can spend money that performs this trick. It is not obvious, to say the least, that politics - that thing which defines what government does - leads to this result in practice.

The answer here - such as there is one other than abandoning the whole idea as unworkable - would be to insist that any such government “investment” pass a rigorous cost benefit analysis. A proper financial one, not just vague hand waving about intangible benefits at some point. For the aim here is to pay off the national debt, something determinedly financial. The problem with this as a solution is that some to many of the things already being spent upon would fail such a test.

That is, we could only know that the government is being serious about investing to cut debt levels when they cancel HS2. Which isn’t, as we know, going to happen. Therefore the idea itself doesn’t work, does it?

In short, politics cannot invest its way out of a wet paper bag - therefore government investment isn’t going to pay off the national debt.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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