Quality of spending always matters

We havebeen in mild recession for a year now but this is turning out to be no ordinaryrecession. The news from the leading economies is ever bleaker and politicians aroundthe world are scrambling to find ways to halt the slide in their economies.

It isstrange that the answer to our troubles seems to be the same as the cause –spend, spend, spend.   We got into this mess by spending money we hadn’t earnedand now we’re going to go into debt to try and spend our way out of the mess.Let’s not get into the economic contortions that justify this apparentlycontradictory logic.

Insteadlet’s focus on the sort of spending that is being recommended. Firstly, thegovernment is going to do most of the spending because individuals are now tooscared to spend and have started to squirrel away some savings.

So where’sthe government going to spend? Infrastructure seems to be a popular choice formany governments and that normally means roads, bridges, water and seweragenetworks, electricity generation and transmission, buildings and maybe a stadiumor two.

These are theconcrete things that are nice-to-haves, and in some cases must-haves, to helpthe economy function and ideally grow. They are attractive areas to turn thespending hose onto because they can soak up a lot of dollars, the spendingproduces a long stream of benefits and these projects retain or create lots ofjobs.

The lastpoint is particularly important because it may convince thousands ofconstruction workers and others that they have secure employment,   and ifpeople feel secure about their incomes they are more likely to spend on goodsand services that other people make or provide. Slowly but surely the stimulusfrom infrastructure spending restores confidence amongst households and theyreturn to the shops, cafes and builders’ yards. We get back to business asusual.

Physical infrastructurecertainly dominated the government’s $500m package announced a few days ago (roads,buildings and transmission upgrades). It’s important but given the substantialshift to services in most developed economies the government should look atpublic spending programmes that lay down the capital that a service-intensive economywill need if it is to grow over the medium term.

The governmentand businesses invest heavily in intangible capital to ensure all sorts ofactivities run smoothly and ideally lay the foundation for future growth. The currentcrisis has highlighted how important the banking system is to the properfunctioning of the economy. One of the biggest investments banks make is insoftware, which is critical in allowing them to operate as a bank. Sure this isprivate-sector intangible infrastructure.

Althoughnot strictly intangible investment, the government’s commitment to help fundthe roll-out of super fast broadband to schools, businesses and households isbelieved to be an important piece of infrastructure for a modernservice-intensive economy. The education sector looks likely to be one of thefirst beneficiaries of the proposed new faster network.

Thepriority given to education is interesting because the quality and extent ofour human capital is one of the most crucial elements of economicinfrastructure that determines our future growth prospects. We can have all thenew bridges and buildings we want, but if our kids aren’t being educated to thevery highest standards we surely cannot expect to enjoy first-world living standards.

Educationis a publicly-funded and vital element of the economy’s infrastructure. Andwe’re not talking simply about more schools or upgrading of school buildings. Itis about providing more resources to ensure many more of our kids attain alevel of education to equip them to contribute to a relatively sophisticated moderneconomy. Too many kids in New Zealand leave secondary school without the basicskills needed to secure the types of jobs that might one day underpin astandard of living close to that enjoyed by Australians.

The governmentcould be bold and invest heavily in lifting the educational achievement of thebottom third of kids passing through our schools. The returns on thisinvestment would not be immediate but they would be substantial over thelonger-term. There could be some immediate benefits from investing in educationor retraining of those losing their jobs over the next three years. While thistype of government spending is generally regarded as operational and thereforea long way from the infrastructure spending being used to revive sickeconomies, education is the process of creating human capital – the criticalinfrastructure of any modern economy.

It’s clearthat the government is committed to trying to spend our way out of thisrecession, and infrastructure is a popular spending option. But they need toweigh up the short-term benefits of infrastructure spending against the long-termvalue of the capital we’re now borrowing to create. The quality of governmentspending always matters.

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