The question has been asked, time and again, as to whjat return People's Quantitative Easing could provide on the sums invested. One way to determine that is to look at estimates of the GDP generated per £1 invested. I have not needed to do this: Standard & Poor (a rating agency) have already done so in a report published in January this year.
Inadequate investment in infrastructure has become a significant obstacle to doing business in the U.K., and the WEF's Global Competitiveness Report ranks the quality of the country's overall infrastructure 27th in the world.
Output per hour in the U.K. is below the average for the rest of the G7 industrialized economies; last year, one hour of work in the U.S. produced 40% more than one hour of work in Britain.
In our view, insufficient investment in infrastructure has been one of the key factors explaining weak productivity performance in the U.K.
As they then note:
We estimate that an increase in public spending in one year of 1% of GDP .... would result in a multiplier effect for the U.K. of 2.5 over three years.
We also project that such investment would add more than 300,000 jobs in the same year as the increase occurred.
S & P stress that their estimates are conservative. But what they are saying is £17 billion spent on infrastructure (and I think that a modest sum given the need) would create 300,000 jobs and over three years create GDP growth of more than £42 billion.
And in case of doubt as to return, a £42 billion GDP growth would probably yield £15 billion in tax, at least, so the investment almost pays for itself on that basis alone.
Bit I stress, this does not create a reason for borrowing. The economy is functioning at well below capacity: this is one reason why the yield is so high. And borrowing would withdraw funds from the economy that should be used by the private sector. So a new cash injection is to be preferred. And at these rates of return the risk is not just minimal, it is virtually non-existent.
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Richard – this is THE post. This is the one that is simple enough for any fool to understand, and the point about it generating enough tax to pay for itself is the magic bullet that shows that, regardless of the various ‘printing money’ arguments, PQE works. I urge you to get this as widely read as you possibly can.
I will be…
I can see no attempt in that Standard and Poor work to separate out two entirely different multiplier effects. First one inevitably gets a multiplier effect from ANY increase in demand, no matter what the extra money is spent on. That needs to be subtracted from any OVERALL multiplier effect allegedly coming from infra spending. I.e. do that subtraction and the multiplier for infra looks much less impressive.
That chimes with the fact that there’s a lot of argument over whether HS2 is worthwhile: i.e. many say there is no return or multiplier there at all. As for the channel tunnel, the original investors lost nearly all their money. As for roads, traffic flows freely in the large majority of roads a large majority of the time. In short, I wouldn’t advocate a CUT in infra spending, but the idea that a huge increase brings huge returns looks very questionable.
That’s not what they’re saying, at all
Read it
That’s great news Richard and I wholeheartedly agree with Tom.
On a less interesting note you’ve got a couple of monster typos in there: “Savings & Poor ( a rating agency)” and “borrowing would withdraw funds from the economy that should be sued by the private sector”
I’m not sure who should be suing who in that last example but I would be wary of the “crowding out” mythology. You won’t want to be misleadingly quoted on that one.
Corrected
Thanks
Too much haste….
I agree wholeheartedly, and I have a follow up question about this point:
“… borrowing would withdraw funds from the economy that should be used by the private sector …”
If the government issues a new bond, is it not possible for the purchasing bank to create new money with which to buy the bond? .. instead of using existing money to buy it? And therefore issuing new bonds (i.e. borrowing) need not always decrease the funds available to the private sector?
Isn’t the multiplier of 2.5 only applicable if the same level of investment is made in the Eurozone as well ? – 1.9 if only in the UK (not to be sniffed at). – I’m not sure what the planned level of infrastructure investment for the rest of the Eurozone currently is – and therefore which figure (2.5 or 1.9) is more applicable.
From the report:
With an accumulated infrastructure investment deficit of more than £60 billion (US$95 billion), a clear opportunity
exists. We estimate that an increase in public spending in one year of 1% of GDP (coordinated across the EU) would
result in a multiplier effect for the U.K. of 2.5 over three years. This is a higher effect compared with the boost to
spending in the U.K. alone, which we estimated at 1.9. The main reason is the additional boost to U.K. GDP due to
increased demand from its European trade partners. We also project that such investment would add more than
300,000 jobs in the same year as the increase occurred.
If there are other comments are right then the UK estimate is low anyway
And their methodology is very cautious so I think that constt5aint looks artificial to me
Aren’t these the same people partly responsible for the banking crises with their triple A rating of CDO’s?!?!
It is very very wrong to make the argument that borrowing removes funds from the economy but printing cash does not and is therefore better. As I have said before, the job of the economist is to explain the unseen. To explain why printing cash has a very similar effect (I would argue worse) and why the logic is not as it appears. Why the appearance of a free lunch must be wrong. I challenge you, Richard, as an economist to explain the ‘unseen’.
It has been here, already, many times
An extra 1% of GDP for infrastructure spending is a good target and the 1.9/2.5 multiplier is plausible. But achieving this is not simply a matter of injecting the cash to fund it.
The report stresses the need for judicious selection and execution of projects. We also need to consider resources. At the macro level there is spare capacity but disaggregating shows potential constraints around land and some categories of skilled labour. These can be overcome but that will need time and planning.
Realising the benefits of infrastructure is about delivery as well as funding.
Totally agreed
Isn’t the – European investment advisory hub – a step in the right direction to help with planning and delivery
http://www.eib.org/eiah/
http://www.consilium.europa.eu/en/policies/investment-plan/investment-advisory-hub/
The services provided by the hub will include:
– providing technical assistance to authorities and project promoters
– helping project promoters to develop their projects so that they fulfil the eligibility criteria according to the EFSI regulation
– helping to make EFSI support available throughout the EU through efficient use of local knowledge
– acting as a platform for peer-to-peer exchange and sharing of knowledge on project development
The hub will provide advice on:
– the use of technical assistance for project structuring
– the use of innovative financial instruments
– the use of public-private partnerships
– the relevant EU legislation
Next steps
– The Council adopted the EFSI regulation on 25 June 2015.
– Signature of the EFSI regulation is foreseen before the end of June, allowing it to enter into force at the beginning of July 2015.
– The first EFSI operations are expected in mid-September.
Interesting
But not funding itself
The UK in the meantime leaves this ‘to the market’
Please have a look at the FT online front page.
http://www.ft.com/cms/s/0/0c11cb18-5176-11e5-8642-453585f2cfcd.html
It’s already disappeared from the web front page…
Dear Richard, If this policy is so ‘obvious’, why isn’t everyone doing it. Sorry to be so naive but it seems a complete slam/dunk. From my own private, non-specialist point of view I cannot see why the government is not building more affordable housing, with affordable rents. As in football the rich are getting even more obscenely richer whilst the poor languish in an ever more wretched state.
You ignore the go fact that some do not want such things to happen
And they are the people with the power to prevent this