OECD Advocates Investment in Infrastructure

It’s a point we’ve been peddling for years now, but it looks like the OECD have at long last come to the conclusion that investment in infrastructure is in fact an excellent idea. By way of some proof that we haven’t been in a minority of one up to now, here’s The Economist from October 2014, underneath a picture of a parrot pushing up the daisies:

Germany’s chancellor, Angela Merkel, should allow France and Italy to slow the pace of their fiscal cuts; in return, those countries should accelerate structural reforms. Germany, which can borrow money at negative real interest rates, could spend more building infrastructure at home.

That would help, but not be enough. It is a bit like the early years of the euro debacle, before Mr Draghi’s whatever-it-takes pledge, when half-solutions only fed the crisis. Something radical is needed. The hitch is that European law bans many textbook solutions, such as ECB purchases of newly issued government bonds. The best legal option is to couple a dramatic increase in infrastructure spending with bond-buying by the ECB. Thus the European Investment Bank could launch a big (say €300 billion, or $383 billion) expansion in investments such as faster cross-border rail links or more integrated electricity grids — and raise the money by issuing bonds, which the ECB could buy in the secondary market.

Obviously here at V2G UK we were particularly keen on the bit about “more integrated electricity grids”. More recently the United Kingdom’s House of Commons Energy & Climate Change Select Committee put much the same message this way:

This promising new demand-side response technology has been disadvantaged in the auctions under the Government’s Capacity Market – meaning costs and emissions could be higher than necessary. Only a fraction of the £1 billion pounds that will be spent keeping the lights on through the Capacity Market will actually provide new capacity and just 0.4% will go on demand-side response – with most of the rest going to existing fossil fuel power stations, paying some of them to stand idle for much of the year.

Today the OECD announced its latest “Interim Economic Outlook” in a blaze of publicity under the headline “Stronger growth remains elusive: Urgent policy response is needed”:

Global GDP growth in 2016 is projected to be no higher than in 2015, itself the slowest pace in the past five years. Forecasts have again been revised down in light of disappointing recent data. Growth is slowing in many emerging economies with a very modest recovery in advanced economies and low prices depressing commodity exporters. Trade and investment remain weak. Sluggish demand is leading to low inflation and inadequate wage and employment growth.

Financial instability risks are substantial. Financial markets globally have been reassessing growth prospects, leading to falls in equity prices and higher market volatility. Some emerging markets are particularly vulnerable to sharp exchange rate movements and the effects of high domestic debt.

A stronger collective policy response is needed to strengthen demand. Monetary policy cannot work alone. Fiscal policy is now contractionary in many major economies. Structural reform momentum has slowed. All three levers of policy must be deployed more actively to create stronger and sustained growth. The recipe varies by country, especially with regard to needed structural reforms.

Diving into the depths of the OECD report itself, the bit that caught my attention runs as follows:

A stronger collective fiscal policy response is needed to support growth and provide a more favourable environment for productivity-enhancing structural policies. Governments in many countries are currently able to borrow for long periods at very low interest rates, which in effect increases fiscal space. Many countries have room for fiscal expansion to strengthen demand. This should focus on policies with strong short-run benefits and that also contribute to long-term growth.

A commitment to raising public investment collectively would boost demand while remaining on a fiscally sustainable path. Investment spending has a high-multiplier, while quality infrastructure projects would help to support future growth, making up for the shortfall in investment following the cuts imposed across advanced countries in recent years. These effects would be enhanced by, indeed need to be undertaken in conjunction with, structural reforms that would allow the private sector to benefit from the additional infrastructure; notably in the Europe Union, cross-border regulatory barriers are a significant obstacle.

Here’s a video of the proceedings in Paris earlier today:

The presentation was given by Catherine Mann, the OECD’s chief Economist, and the bit where she mentions the OECD’s concerns about the need for fiscal stimulus and investment in infrastructure is is around half an hour into the video:

Implementation of the “Juncker” investment plan has yet to deliver the targeted boost to investment. The further harmonisation in regulation needed to make the plan work also lags.

Note also Ms. Mann’s remark during the Q&A session, at around 48 minutes:

Fiscal spending on just any old thing, to the same white elephants, that is not the type of collective action that is going to generate the improvement in growth and the improvement in debt to GDP fiscal sustainability that we can see as possible. So our recipe is very much one that we started talking about more than a year ago. The recipe is we deploy the full set of tools that we have at our disposal as policymakers. Fiscal and monetary policy under the demand side, and a range of structural reforms that are unique to each country, depending on what it is they need to do.

One thought on “OECD Advocates Investment in Infrastructure

  1. This weekend’s edition of The Economist landed on my doormat this morning. In it I discover that they are suggesting the same sort of concerted action as the OECD, albeit without actually mentioning them. A brief extract from “Out of Ammo?“:

    Governments can make use of a less risky tool: fiscal policy. Too many countries with room to borrow more, notably Germany, have held back. Such Swabian frugality is deeply harmful. Borrowing has never been cheaper. Yields on more than $7 trillion of government bonds worldwide are now negative. Bond markets and ratings agencies will look more kindly on the increase in public debt if there are fresh and productive assets on the other side of the balance-sheet. Above all, such assets should involve infrastructure. The case for locking in long-term funding to finance a multi-year programme to rebuild and improve tatty public roads and buildings has never been more powerful.

    and another one from “Unfamiliar ways forward: Fighting the next recession“:

    The most effective fiscal boost comes from capital spending on new infrastructure or on the upkeep of that which is already there. Unlike tax cuts, which may be saved or spent on imports and thus have less effect on GDP, money sunk into roads, schools, hospitals and the like stays put. And capital spending induces complementary spending elsewhere in the economy more than any other intervention.

    However:

    Governments find it notoriously hard to deploy as an effective stimulus. For one thing, when public finances are under pressure during a recession the reflex response is to cut capital spending. For another, such cuts are sometimes quite good ideas: a lot of infrastructure spending is indeed wasteful. China has pristine highways that few wish to drive on. Alaska has bridges to nowhere. Governments tend to choose projects that make a political splash but have little underlying logic.

    Do you suppose they had the “Juncker Plan” in mind when they wrote those words?

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