Austerity Won’t Work if the Roof Is Leaking

July 8, 2013 | | New York Times |

I recently spent a week in Berlin, where the entire city seemed under construction. In every direction, cranes and other heavy equipment dominated the landscape. Although many projects are in the private sector, innumerable others — including bridge and highway repairs, new subway stations and other infrastructure work — are financed by taxpayers.

But wait. Hasn’t Germany been one of the most outspoken advocates of fiscal austerity after the financial crisis? Yes, and that’s not a contradiction. Fiscally responsible businesses routinely borrow to invest, and so, until recently, did most governments.

Lately, however, fears about growing public debt have caused wholesale cuts in American public investment. The Germans, of course, yield to no one in their distaste for indebtedness. But they also understand the distinction between consumption and investment. By borrowing, they’ve made investments whose future benefits will far outweigh repayment costs. There’s nothing foolhardy about that.

The German experience suggests how we might move past our own stalled debate about economic stimulus policy. In the aftermath of the economic crisis, the policy discussion began with economists in broad agreement that unemployment remained high because total spending was too low. Keynesian stimulus proponents argued that temporary tax cuts and additional government spending would bolster hiring. Austerity advocates countered that additional government spending would merely displace private spending and that we already had too much debt in any event. And the debate has languished there.

A preponderance of evidence suggests that Keynes was right. But as the German experience illustrates, progress is possible without settling that question. The Germans are investing in infrastructure not to provide short-term economic stimulus, but because those investments promise high returns. Yet their undeniable side effect has been to bolster employment substantially in the short run.