For Immediate Release: Wednesday, April 18, 2012
Contact: Phoebe Silag or Karen Conner, news@epi.org 202-775-8810

Increased public investment would create jobs and drive long-term productivity growth

A significant increase in public investment would create jobs in the short run and raise the growth of average living standards in coming decades, a new Economic Policy Institute report finds. In Public Investment: The next “new thing” for powering economic growth, economist Josh Bivens discusses the benefits of investment by federal, state and local governments in physical infrastructure, research, education, and green investments like clean power and weatherization.

Bivens argues that increasing public investments should be an urgent policy priority. In the short term, public investments would provide a significant boost to an economy in which the unemployment rate has been 8.2% or higher since February 2009. In the longer run, increasing public investment by just under $250 billion per year on average for the next 10 years (an increase equivalent to roughly 1.6% of overall GDP) would boost gross domestic product by 0.9 to 2.8 percent in 2021.

Bivens further argues that the biggest political impediment to maintaining, let alone expanding, public investments ­­– the preoccupation with reducing the federal budget deficit – is not grounded in sound economics. Concerns that public investment financed by deficits in the near term would crowd out private-sector spending (i.e. displace other economic activity) are unwarranted because aggregate demand in the economy is currently so low. And because public investment would improve the economy without raising interest rates, debt-financed spending could actually “crowd in” private-sector activity – a primary determinant of business investment is the current state of the economy.  Even if the economy returns to full employment, fears that productivity will suffer because increased public investments crowd out private activity are baseless, as evidenced by substantial research demonstrating that the rate of return to public investment likely exceeds that of private investment.

“The wealth of the United States is crucially dependent on public investments and public capital,” said Bivens. “Slashing government spending to achieve near-term deficit reduction in the name of insuring that funds are available for private capital formation makes no sense if valuable public investments are sacrificed along the way. This is just one more demonstration of how myopic the economic debate about budget deficits has become in the United States.”