There is a lot of debate regarding the President's recent $50 billion plan to invest in America's infrastructure. The main question on everyone's mind is: "Will it work?" The following from The Economist summarizes the arguments in favor of the $50 billion stimulus.
"Infrastructure spending is capital-intensive, but it also has a relatively high multiplier; a dollar spent on infrastructure will be fairly successful at triggering other spending and investment. The lead-time issue is, in my view, overplayed...there are many opportunities for near-term infrastructure stimulus going unexploited. Meanwhile, the time horizon for full recovery stretches on. Full employment may be five years away, and the American economy might not return to its trend level of output...ever. The biggest economic advantage of infrastructure spending is that it represents investments that are probably needed in any case. There would be positive returns to such investments whether or not the economy was weak. That there are ample underused resources at present merely sweetens the deal. Projects can be done cheaply and effectively now, without the risk of crowding out private investment and while providing desperatly needed support for aggregate demand."
The moment you hear the term "aggregate demand" thrown around, you know you're dealing with Keynesian economics. Infrastructure spending itself does not help the economy. The only time it does help is when it ultimately makes us more productive, if it allows us to produce more consumer goods in the future. This would mean the investment in infrastructure is worth the cost, but simply making the expenditure does not help the economy.
The economy has to suffer the cost, either now or in the future. Without the proper production facilities in place, what benefit will it add? The roads may be a little less bumpy, but if no extra consumer goods are moving across them, what good does it do? The argument is that the resources are not currently being used, so this is better than nothing. Why? There is a reason these resources are being underutilized. If they were cost-effective, they would already be in use.
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