The Gruen Transfer

Henry Ergas responds to David Gruen’s defence of the indefensible:

Gruen says the infrastructure spending is justified because it adds to productive capacity.

But this is true only if the benefits from that spending exceed its costs. If they don’t (think national broadband network or pink batts), then the community loses twice: from the waste, as scarce capital is diverted from better uses; and from the distortions caused by the higher taxes needed to cover the projects’ costs.

As a result, far from expanding productive capacity, projects such as these cause it to shrink. This used to be part of Treasury religion; it is startling that there is no mention of it in Gruen’s speech.

posted on 19 December 2009 by skirchner in Economics, Fiscal Policy

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