Democrats often mock Republicans for having a one-track mind when its comes to economic policy. Here is a famous example, President Obama at the 2012 Democratic National Convention: “And that’s because all [Republicans had to offer is the same prescription they’ve had for the last thirty years: Have a surplus? Try a tax cut. Deficit too high? Try another. Feel a cold coming on? Take two tax cuts, roll back some regulations, and call us in the morning.” I was there when Obama said that. It got a pretty big laugh.
Anyway, Republicans could make a similar charge about Democrats, substituting “infrastructure spending” for “tax cuts.” Among center-left economists, Larry Summer has perhaps most most outspoken about how we should take advantage of low interest rates for needed public investment: “The single most important step the US government can take to reverse these discouraging trends is to mount a concerted, large-scale program directed at renewing our national infrastructure. At a time of unprecedented low interest rates and long-term unemployment, such a program is good economics but, more fundamentally, it is common sense.”
This very issue was recently discussed on the EconTalk podcast. Host Russ Roberts was interviewing Bent Flyvbjerg of Oxford University, who researches the economics of “megaprojects.” Here is a brief summary of his work:
Megaprojects, sometimes called “major programs”, are large-scale, complex ventures that typically cost more than 1 billion US Dollars, take many years to build, involve multiple public and private stakeholders, are transformational, and impact millions of people. … Examples of megaprojects are high-speed rail lines, airports, seaports, the Olympics, high-energy particle accelerators, logistics for large supply chains, etc. Not only are megaprojects large, they also are constantly growing ever larger in a long historical trend. … Projects of this size compare with GDPs of the world’s top 20 nations, and the scale seems to be accelerating. Evidence shows that megaprojects are highly risky endeavors. Cost overruns, time delays, and benefit shortfalls have remained high and constant for the 70-year period for which comparable data exist. Nine out of ten megaprojects have cost overruns. Overruns up to 50% in real terms are common, and over 50% overruns are not uncommon.
So here are Roberts and Flyvbjerg addressing, more or less, was Summers has been proposing:
Roberts: So, a lot of people right now are arguing that because interest rates are low in the United States, this is a good time for megaprojects. Let me ask this question in maybe a little bit of a strange way. So, if you ask those people, ‘What should we be doing?’ So it’s true that the finance charges are low; that doesn’t mean that the benefits outweigh the costs on any particular project. So just because the interest rate is low doesn’t mean we should put a human being on Mars. It doesn’t mean we should try to, say, build a superfast rail system in California. It’s true that for any cost, the borrowing part of it will be lower than it otherwise would be.
But it doesn’t make the projects valuable in and of themselves. And I think the response would be, to that point, is: ‘Yeah, that’s true; so you should only do projects that are good. So let’s make a list. We’ll make a list of the top 10 projects that the United States should be doing right now.’ What you are suggesting in a way is that at least 9 of those 10 will turn out to be not good. Aren’t there surely some megaprojects that are out there that–how could it be? Surely there are some big things that could be done publicly–again, I’m talking about public projects here–that would be good. And they are not being done for political reasons or because people have been afraid of the interest costs. Now that interest rates are low, it’s inexpensive to borrow, shouldn’t we be doing these now?
Flyvbjerg: Well, the question about borrowing is, like you said, only if you are financing the megaprojects by borrowed money and therefore incur debts then obviously you will save money by doing it when the interest rate is low. So, yes, that would be an argument for doing projects like that when interest rates are low or other things being equal. And actually the benefit-cost ratio would be better for projects like that. If you are not using borrowed money, it doesn’t matter what the interest rate is, in terms of financing costs. So that’s a different question.
If you are the public sector and you are taking money out of the public budget, then it’s not borrowed money. If you are the public sector and you borrow the money then again it would be an argument for doing it when interest rates are low. Your second question whether there are projects that are worth doing–certainly there are projects that are worth doing. And it would only be if the business case is for the 10 projects you are talking about were made in the conventional manner, then 9 out of 10 would be problematic, and 1 out of 10 would be okay in terms of cost over-run, for instance.
But some politicians might not really care about the costs, which may not be fully apparent until they’re out of office. The megaproject may just be about creating jobs right now or rewarding cronies right now. Roberts and Flyvbjerg discuss that issue, too. Here’s the transcript if you are not a listener.
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