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Why more highway spending won’t rev up the economy – Livemint

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Economists aren’t so sure. A wide body of research focused on the effects of highway spending suggests that major new investment in U.S. roads would generate little, if any, long-term economic gain.

While the projects would spur hiring and spending temporarily, both when they are announced and under way, they aren’t likely to raise the economy’s productivity and, in turn, its overall growth potential in a lasting way, many researchers find.

That is because the US already has an extensive system of roads, so building more wouldn’t add much to productivity, economists say.

“Highways can generate a boost for the short run, but in the long run that seems to be dubious,” said Gilles Duranton, an economist at the University of Pennsylvania.

New spending for roads accounts for the largest single share—roughly 19%—of the $579 billion in new spending that the White House and a group of lawmakers have agreed to. Both Democrats and Republicans say that money would raise the economy’s productivity, defined as the level of output per hour worked.

President Biden last week touted the agreement as delivering “higher productivity and higher growth for our economy over the long run.”

Sen. Rob Portman, an Ohio Republican who helped craft the deal, said last month that the plan would “increase our productivity as a country.”

Development of the U.S. interstate highway system between the 1950s and 1970s—currently 47,000 miles of multilane highways stretching coast to coast—did make the economy much more productive, John Fernald, an economist at the Federal Reserve Bank of San Francisco, wrote in a 1999 paper.

The system meant a cross-country trip that used to take months could be accomplished in days. Businesses gained access to new suppliers and new customers. Cities were able to specialize in certain industries. International trade opened up. By one estimate, the U.S. economy would be 3.9% smaller today without the interstate highway system.

But those gains all came about when the highways were built. By now, the gains have been reaped.

“Building the interstate highway system was enormously productive,” Mr. Fernald said. “That does not imply that building a second one would be equally productive.”

Other research has reached similar conclusions.

Charles Hulten, an economist at the University of Maryland, found that infrastructure investment in developing countries like India resulted in increased productivity and higher growth rates. In developed countries with vast road networks, such as the U.S., new investment resulted in no change in overall productivity and growth.

A group of economists in Spain studying that country’s infrastructure spending between 1964 and 1991 concluded that the investment earlier in the period produced greater economic gains than investments later, when much of the infrastructure was already in place.

Researchers have also found that in developed countries, whatever local benefits come from highway improvements come at the expense of other locations. In other words, road spending reallocates the pie but doesn’t make it bigger.

Mr. Duranton and two co-authors, Geetika Nagpal and Matthew Turner, both of Brown University, suggested in a paper last year that new investments “lead to a displacement of economic activity while net growth effects are limited.”

That’s not to say that billions of dollars in new government road spending wouldn’t boost growth in the short term. But the gains would come about as the result of the construction, and would dissipate once all the projects are completed.

In a 2012 paper, San Francisco Fed economists Sylvain Leduc and Daniel Wilson found that new spending on roads can boost an area’s economy at two specific times: immediately after the new spending has been announced, and six to eight years later, when construction is under way. Beyond 10 years, there were no economic benefits to infrastructure spending, they found.

Moreover, the immediate effect applies only during recessions, they wrote. It’s unclear whether the U.S. would see that short-term boost now that the economy is expanding rapidly.

Some of the spending lawmakers are considering could ease congestion. But those improvements would also be temporary. Adding more highway lanes to ease congestion tends to encourage more people to use those lanes, making them congested once more, a phenomenon known as “induced demand.”

A 2011 paper by Mr. Duranton and Mr. Turner found that areas that added road miles saw a proportional increase in driving, resulting in the same overall traffic levels.

Even if long-term benefits are limited, there is still a case to be made for spending money on roads, economists say. Filling potholes could provide a more comfortable driving experience, for instance.

“The more comfortable ride is getting you the improved quality of life but it’s not necessarily adding tons of private sector productivity,” Mr. Fernald said.

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Can Industrial Policy Save The American Economy? – Forbes

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As the US continues struggling with Covid-19 and economic recovery, debate is growing about the revival of “industrial policy”—government -led efforts to favor certain industries over others, in contradiction to market fundamentalist approaches.  An important new forum in the Boston Review takes on these issues and is well worth your attention.  For our future prosperity, these issues are more important than just arguing about deficits and taxes. (Disclosure:  I’ve coauthored a piece in the forum.)  

In the battle over President Biden’s economic proposals, most commentary focuses on whether the price tag of over $3.5 trillion is too large. How much should be paid for?  Which taxes should go up or down?  Senator Joe Manchin (D-WV), the key Democratic vote for Senate passage of the Biden plan recently called it “the largest single spending bill in history with no regard to rising inflation, crippling debt or the inevitability of future crises.”

But there’s a second debate hidden behind these budget numbers—how and whether government should deliberately foster some industries and withdraw support from others.  Although simple introductory economics textbooks say government intervention is always “second best” to markets, in the real world government is constantly favoring some industries over others.

So the debate is really about what type of industrial policy we are going to have, not whether it exists.  The Review’s forum centers on an excellent piece by economist Marianna Mazzucato and colleagues—“Industrial Policy’s Comeback.”  They flatly (and correctly) say “market fundamentalism has failed to improve economic and social conditions,” calling for “a mission-oriented approach to the economy that embraces an active role for government in spurring growth and innovation.” 

Mazzucato is one of our best thinkers on the complex relationships between government and the private sector.  Her 2013 landmark book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths showed how government investment undergirded the tech revolution, with Apple and other firms adapting technology developed and paid for by the government, often through military spending.

Economists have long known that industrial policy is central to modern economies.  In 2008, Harvard’s Dani Rodrik asked readers to imagine “a set of policy interventions targeted on a loosely-defined set of market imperfections…implemented by bureaucrats…and overseen by politicians” while subject to “rent-seeking by powerful groups and lobbies.”  

Yikes!  Rodrik says those sound like good reasons that “governments should stay away from industrial policy.”  But he then turns the tables, saying he’s not describing industrial policy.  Rather, those complicated conditions hold for “long-standing areas of government intervention such as education, health, social insurance, and macroeconomic stabilization.” And no one thinks we should stop those policies just because they are complicated and sometimes contentious.

So complexity, political debate, attempts to capture benefits at the costs of general prosperity, and addressing critical problems possessing lots of uncertainty characterize all modern social and economic policy.  Hence Mazzucato’s emphasis on developing clear “missions” for industrial policy, with government setting overall directions and goals while avoiding “excessively top-down planning by an overbearing state.”

There’s a lot of deep thinking and clear argument in the Boston Review forum, from a wide range of viewpoints, and I won’t try to summarize it all here.  Read the forum (and buy the new book the Review is publishing on this topic.)

My contribution to the forum, co-authored with my colleague (and spouse) Teresa Ghilarducci, emphasizes the central role workers and labor unions must play in any successful industrial policy.  We hearken back to the great economist John Kenneth Galbraith, who after World War II focused on how the large firms needed to foster innovation and growth could be kept from purely self-interested behavior.

Galbraith’s answer was in the title of his 1952 book—American Capitalism:  The Concept of Countervailing Power.  Without government and union countervailing power, “private decisions could and presumably would lead to the unhampered exploitation of the public.”

Ghilarducci and I argue that successful industrial policy “promotes unionization and shared economic returns,” not just technical innovation where the gains are captured by a narrow slice of wealthy tech and finance owners.  And the politics of industrial policy mean it won’t be enacted without union and popular support.

So as you follow the twists and turns of Biden’s economic plan, where the cable news and commentary are dominated by spending, taxes, and deficits, spare a thought for what that money will be spent on.  Senator Manchin correctly warns about “the inevitability of future crises,” but those aren’t mainly budgetary issues. They are structural problems that need industrial policy solutions.

Our economy faces a short and long-term crisis of innovation, climate change, and racial, gender, and economic inequality.  Industrial policy is critical to building a long-term, sustainable, and equitable prosperity.  I commend the Boston Review forum and book to you as a way to understand this critical issue.

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Germany's next leader could make or break the economy – CNBC

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Supporters of the German Social Democrats (SPD) party, attend at an election campaign rally on August 27, 2021 in Berlin, Germany.
Maja Hitij | Getty Images News | Getty Images

With Chancellor Angela Merkel due to leave office after Germany’s upcoming federal election on Sunday, the country’s priorities could change dramatically, particularly as power could soon be shared among newer (and more unpredictable) political forces.

It’s practically certain that the next government (like the current one) will be a coalition, but what’s far less certain is which parties will create or dominate a governing alliance.

What form the next coalition takes will undoubtedly have a big impact on Germany’s economy which is Europe’s largest and, arguably, its most important.

In 2019, almost a quarter of the EU’s gross domestic product (24.7%) was generated by Germany, according to Eurostat, and so how the country is governed — at a time of transition in terms of global trade and consumer trends — matters.

The election is still wide open with the latest voter poll on Monday showing that while the left-leaning Social Democratic Party remains in the lead and is seen with 25% of the vote, the ruling conservative alliance of the CDU-CSU (the Christian Democratic Union and Christian Social Union) has closed the gap, and currently stands to gain 22% of the vote. The Green Party, meanwhile, trails with 15% of the vote, according to the Insa poll for the Bild newspaper.

A new coalition will have to be formed after the vote and German economists say certain alliances could have “massive consequences” on the country’s economy.

‘Massive consequences’

Germany’s respected Ifo Institute and newspaper Frankfurter Allgemeine Zeitung surveyed 153 economists at German universities, asking them how different coalition formations could affect Germany’s economic growth, unemployment, public debt, and income inequality.

For each of these measures, respondents were asked under which coalition the highest and lowest levels could be expected at the end of the next legislative period.

The survey results, published Tuesday, found that 83% of the German economists polled believed that the lowest economic growth rate would be the product of a so-called “Red/Red/Green” coalition of the SPD, the Left Party (Die Linke) and the Greens.

Such a coalition of leftist parties “would represent a sea change in policy direction, which would translate into a different economic policy with higher taxes and more government transfers,” Ifo Researcher and Professor Niklas Potrafke noted of the survey results Tuesday, adding “that would also have massive consequences for the real economy.”

A total of 77% of the economists said they expected that, in addition to delivering the lowest economic growth, a “Red/Red/Green” coalition would lead to the highest unemployment rate and 86% believed they would have the highest national debt. However, 55% of the economists also believe that such a leftist alliance would achieve the greatest net reduction in income inequality.

The devil you know

Perhaps unsurprisingly, 44% of the economists believed that a coalition of the ruling CDU-CSU alliance and the pro-business FDP (a “Black/Yellow” coalition) would achieve the highest growth rate for Germany, although this grouping lacks a majority when it comes to current polls.

A “Black/Yellow” coalition would achieve the lowest unemployment rate, according to 43%, and the lowest public debt ratio, according to 73% of the economists.

This prosperity could come at a price to many with 70% of economists believing that such a coalition would lead to the highest net income inequality and 56% seeing it as leading to the highest carbon emissions of all the alliances.

The cokery plant of German industrial conglomerate ThyssenKrupp on Rhine river in Duisburg, western Germany in 2019.
INA FASSBENDER | AFP | Getty Images

In joint second place, 18% of the economists believed that the highest economic growth could come out of a coalition of the SPD, Greens, and FDP (widely called a “traffic light” coalition) and 18% felt the same about an alliance of the CDU-CSU, Greens, and FDP (known as a “Jamaica” coalition).

“Should either a so-called traffic light or a Jamaica coalition be formed, respondents believe the effects on growth, inequality, the public debt ratio, the unemployment rate, and carbon emissions would be more restrained,” Potrafke noted.

Polls wide open

Currently, there are a variety of possible coalition options, with most facing stumbling blocks to formation, meaning that there are likely to be protracted negotiations after the election due to policy differences between the parties in areas ranging from economics to climate targets.

“Coalition formation might take some time,” macro analysts from Teneo Intelligence said in a note Monday.

“Less than one week ahead of the 26 September federal election, the Social Democrats continue to lead in the polls. However, the Christian alliance appears to have recovered some ground. But even if the SPD wins, this does not necessarily mean that Finance Minister Olaf Scholz will become the next chancellor; CDU/CSU candidate Armin Laschet could still try to outmaneuver Scholz, for instance by trying to form an alternative government with the Greens and the center-right Liberals (the FDP).”

Journalists and party members watch on a screen from the press centre (L-R) Olaf Scholz, German Finance Minister, Vice-Chancellor and the Social Democrats (SPD) candidate for Chancellor and Armin Laschet, North Rhine-Westphalia’s State Premier and the Christian Democratic Union (CDU) candidate for Chancellor as they attend an election TV debate in Berlin on September 12.
JOHN MACDOUGALL | AFP | Getty Images

The CDU-CSU is used to being in power, but that could all change after next Sunday’s vote; both the SPD and Greens’ candidates for chancellor, Olaf Scholz and Annalena Baerbock, have suggested that neither of them has much appetite for a coalition with the CDU-CSU.

“I think that, after 16 years, many voters would like for the CDU to finally go into opposition again,” Scholz said during the last TV debate between the main contenders for the chancellery on Sunday.

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Canadian dollar, TSX slide ahead of uncertain election outcome

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Canadian dollar

The Canadian dollar fell to a one-month low against its U.S. counterpart on Monday and the Toronto stock market posted its biggest decline since January as Canadians headed to the polls and worries about China roiled global financial markets.

The loonie was trading 0.3% lower at 1.2810 to the greenback, or 78.06 U.S. cents, after touching its weakest intraday level since Aug. 20 at 1.2895.

Prime Minister Justin Trudeau may cling to power after the dust has settled from Monday’s election, but he is likely to lose his bid for a parliamentary majority.

Foreign investors have worried that the election could result in a deadlock that hampers Ottawa’s response to the COVID-19 pandemic and further slows the economic recovery from the crisis.

“No matter the result of the Canadian election, the winner may soon have to face the prospect of a sharp slowdown in China,” said Adam Button, chief currency analyst at ForexLive.

World stocks skidded and oil, one of Canada‘s major exports, settled 2.3% lower, as troubles at property group China Evergrande sparked concerns about spillover risks to the economy.

“It’s a very confusing time and that’s impacting the marketplace,” said Irwin Michael, portfolio manager at ABC Funds in Toronto.

Investors in equities are casting a nervous eye over some of the campaign promises made by Canadian political parties, including Trudeau’s vow to raise corporate taxes on the most profitable banks and insurers.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 335.82 points, or 1.6%, at 20,154.54, its lowest closing level since July 22.

Financials, which account for about 30% of the TSX’s valuation, fell 1.8%, while energy was down 2.8%.

Canadian government bond yields were lower across a flatter curve, tracking the move in U.S. Treasuries. The 10-year fell 6.6 basis points to 1.216%.

 

(Reporting by Fergal Smith; Additional reporting by Gertrude Chavez-Dreyfuss in New York and Sagarika Jaisinghani and Medha Singh in Bengaluru; Editing by Peter Cooney)

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