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Friday, December 30, 2011

Increase Investment During Recession

It is a no-brainer that the best time for government to increase investment is during a recession.  But instead, the US is reducing government investment.  It is absurd.
Recessions are the best time because:
1. Interest rates are low.
2. Resources are unemployed.  Both capital and labor is idle which is a tremendous waste.
3. There is a multiplier effect which reduces the severity of the recession.  When the government pays workers, they have more money to buy things and that helps the rest of the economy.
4. Even if you think that the multiplier effect is low, there is less probability that increased government investment creating inflation during a recession and higher inflation could actually help an economy during a recession anyhow. 
Here is another measure which just looks at government construction projects using another data set.  I adjusted for inflation using 1995 as the base year.  The stimulus only ameliorated the plunge in (mostly state and local) construction projects:

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