Tuesday, January 29, 2013

Deficit-Financed Economic Growth: Infrastructure vs Entitlements

The Financial Times has a blog post by John H. Makin and Daniel Hanson about sustainability of trillion dollar US government deficits. Their general conclusion is that the deficits are ok for now because of the current extremely low borrowing costs. One of their statements piqued my interest:
Eventually, the Federal Reserve’s QE programme of large government debt purchases at a current rate of $800bn per year, largely aimed at sustaining the growth of outlays on entitlements that do not support economic growth, will cause inflation to rise.

With regard to future growth, the current deficit spending differs significantly from the time of the Great Depression. In the 1930s, the US government borrowed money to build modern infrastructure, which during and after the World War II helped rapid industrial growth. At the time, entitlements were tiny and (self-)financed by the new Social Security tax. In contrast, today's infrastructure investments are small while entitlement payments are quite large. The only area of large-scale infrastructure build-up seems to be shale oil and gas pipelines. Will this be enough?

tags: economics, distribution, government, problem

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