Public Infrastructure Investment: IMF v. Mankiw

Abdul Abiad, David Furceri, and Petia Topalova report on a new analysis and sensibly state:

Many advanced economies are stuck in a low growth and high unemployment environment, and borrowing costs are low. Increased public infrastructure investment is one of the few remaining policy levers to support growth. In many emerging market and developing economies, infrastructure bottlenecks are putting a brake on how quickly these economies can grow.

Greg Mankiw responds:

The IMF endorses the free-lunch view of infrastructure spending. That is, an IMF study suggests that the expansionary effects are sufficiently large that debt-financed infrastructure spending could reduce the debt-GDP ratio over time. Certainly this outcome is theoretically possible (just like self-financing tax cuts), but you can count me as skeptical about how often it will occur in practice (just like self-financing tax cuts). The human tendency for wishful thinking and the desire to avoid hard tradeoffs are so common that it is dangerous for a prominent institution like the IMF to encourage free-lunch thinking.

Did Mankiw miss the memo? We are far below full employment and monetary policy alone has not restored full employment. Even if fiscal stimulus is not self financing, the IMF case is still solid. Funny how times change. Back in 2001 Mankiw was endorsing all sorts of budget busting fiscal stimulus on the grounds that we were below full employment. And back then we were not in a liquidity trap so using monetary policy alone was a more viable option.