Preponing Public Expenditure
Nick Rowe:
Worthwhile Canadian Initiative: The preponed government spending multiplier may exceed one: I get the sense that a lot of extra government spending in the last couple of years was to build stuff that would have been built anyway. They just built it a bit earlier. It was preponed government spending.... [M]ake two more assumptions to keep the thought-experiment as clean as possible.
The real rate of interest on government bonds is zero....
The stuff the government builds is mothballed at zero cost until the time it would have been built otherwise.... Maybe a bit unrealistic, but it makes the thought-experiment cleaner.
What's so neat about this thought-experiment is that we can totally ignore the present value of the future tax liabilities. They are exactly the same.... [W]e can totally ignore whether the government expenditure is useful and productive or not. It's going to be done anyway... preponing the government expenditure is useless by assumption, because it's mothballed during the preponement years. So it can't be a substitute or complement to private consumption or investment....
If the economy has unemployed resources due to deficient demand, both this year and next, then there is no real benefit from preponing the government spending by one year. We get higher demand, output and employment this year, and lower demand, output and employment next year. Adding the two years together the multiplier is zero.
But if the economy has unemployed resources due to deficient demand this year, but not next year, there are benefits.... We get an extra bridge (or whatever) almost for free. The resources that would have been used to build this bridge next year are now freed up to build something else instead. Like a second bridge. And the resources used to build the bridge this year weren't doing much anyway....
If we prepone the bridge, government expenditure will be lower next year. That means private consumption will be higher next year. (Because government spending crowds out private spending under "full employment"). Assume people know this. The Euler equation for intertemporal optimisation tells us that an increase in expected future consumption will cause an increase in desired current consumption. So preponing the bridge also increases current consumption...
Of course, if monetary policy were quick enough and aggressive enough, this would all be academic. But then, I am an academic.
