Among economists on the other side of the political spectrum, Jason Furman has always been one of my favorites. He has a new article in Foreign Affairs entitled The Post-Neoliberal Delusion, which evaluates the economic policies of the Biden administration. In a number of specific cases, he supports Biden administration policies. But Furman also raises a number of concerns, including the following points:
The new economic philosophy that dominated during the Biden years emphasized demand over supply. It considered concerns over budget constraints overstated and placed its faith in predistribution as a way to change the trajectory of the macroeconomy. It promised policies that could simultaneously transform industries, prioritize marginalized groups in procurement and hiring practices, and serve broad social goals. Ultimately, this post-neoliberal ideology and its adherents did not take tradeoffs seriously enough, laboring under an illusion that previous policymakers were too beholden to economic orthodoxy to make real progress for people. . . .
New ideas about these old problems will never yield successful policies, however, if they dismiss budget constraints, cost-benefit analysis, and tradeoffs. It’s fine to question economic orthodoxy. But policymakers should never again ignore the basics in pursuit of fanciful heterodox solutions.
Furman also has a very informative twitter thread that includes some graphs that were left out of the article. This one caught my eye:
There are two ways to convert nominal variables into real variables. One approach is to deflate a nominal variable by an index measuring the overall cost of living, such as the CPI. Another approach is to deflate nominal spending by changes in the price of the specific variable being considered. Furman used the latter approach here, which seems appropriate in this case.
How do I know that Furman didn’t deflate by the CPI? Look at the divergence since 2020. Nominal spending on highways is up roughly 50%, from about $100 billion to $150 billion. Real spending is down about 10%, from $100 billion to $90 billion. That roughly 60% divergence is far larger than the increase in the overall price level since 2020, which is closer to 20% or 25%.
How can we explain this large divergence? One possibility is that supply constraints make it difficult for the US to dramatically ramp up highway construction in a short period of time. If the government then implements a rapid increase in nominal highway spending, the immediate impact is mostly higher construction cost inflation, not more highway output. It’s like 100 people trying to squeeze through a narrow door at the same time. Note than this is not just a question of how much highway a construction firm can produce; constraints might also involve getting environmental clearances for new projects, meeting mandates to use union labor, achieving various “diversity” benchmarks, and/or other types of regulations.
In my view, the most effective way to get more infrastructure is not to spend vast funds on new federal programs. Money is spent most efficiently when it is raised at the local level. Instead, the best way to promote more spending on infrastructure is to reduce regulatory barriers such as environmental impact statements, “Buy America” policies, union mandates, and other impediments to cost efficiency. If we were to dramatically reduce the cost of building infrastructure, local governments would have an incentive build more, even without federal help.
New York City is many times richer than Chengdu, China. Yet Chengdu built the world’s third longest subway system over the past 15 years, a time during which which New York spent lots of money on a new subway line and achieved almost nothing. New York might wish to bring Chengdu construction firms and workers over here to replace their substandard subway system with the sort of modern, clean and efficient system that they have in Chengdu. This need not involve “immigration”–they could used Singapore-style temporary workers.
PS. I don’t know how much the Chengdu system cost to build, but AI overview suggests that subway construction in China costs roughly $140 million per kilometer. In that case, Chengdu’s 634km system may have cost roughly $90 billion. In NYC, subway expansion costs nearly $1.5 billion per kilometer.
