Extra infrastructure spending not an economic panacea

Increased government spending on infrastructure has been proposed yet again to revive the economy from the government-imposed recession. However, there are good reasons to be sceptical.

Spending big on infrastructure to create employment is a straight replay of Keynes’ 1930s advocacy of increased spending on ‘public works’ during the Great Depression.

Yet today’s labour force is far more specialized than the workforce of the 1930s would have been.  Back then, labour was more homogenous and hence more substitutable across industries.  It would have been easier for displaced farm or factory workers, for instance, to be re-deployed to other manual work on labour-intensive projects — and there was greater incentive to do so as there was no equivalent to today’s JobSeeker.

In contrast, the Australian economy — like all advanced economies — is now far more services-oriented; and currently-unemployed baristas or beauticians, for instance, are unlikely to be keen to switch to now more capital- intensive projects with their shovels at the ready.

It is true that interest rate payable on public debt to fund new infrastructure are at rock bottom, but given the massive surge in public and private sector borrowing globally, they must surely rise in coming years when the ballooning public debt has to be refinanced.

Instead of focusing on government spending to boost aggregate demand, structural reform measures aimed at the supply side of the economy would be more effective in hastening economic recovery. This should most notably target deregulation of business red and green tape, industrial relations reform, lower company tax and/or increased investment allowances.

Tony Makin is professor of economics at Griffith University, a former IMF economist, and an author of the Centre for Independent Studies papers Lower Company Tax to Resuscitate the Economy and A Fiscal Vaccine for COVID-19 and the book, The Limits of Fiscal Policy.