Monday, 16 February 2015

Let clear thinking blossom

I love Lesley Riddoch's Blossom. It contains lots of ideas that I really want to spend time thinking about on the interplay between local autonomy and productivity. Eventually I may write a proper review... However, even towards things that you really like, it's often easiest to react to aspects you don't like. And I don't like the confusion between investment in human capital, and the use of capital spending as countercyclical fiscal policy. So I'm going to react...

As Nick Rowe makes clear in "Human Capital" and "Land Capital", the term capital is used to capture a concept related to time. Spending on early years' intervention, in the sense that it produces a "return" 20 years + later in the form of a more productive and educated next generation, is capital spending. Spending on childcare, in the sense that it allows parents to improve and maintain their skills in the workplace, which will boost their income into their 40s, 50s & 60s, is capital spending. No doubt about it.

However, Riddoch says "when capital investment is under discussion, childcare is rarely mentioned. ... Scottish politicians and civil servants have backed construction projects as the best way to kick start the economy, restore optimism and provide jobs. ... in 2013, Scotland's Finance Secretary, John Swinney, published a list of preferred 'shovel-ready' projects including £34 million worth of trunk road schemes, a £5.7 million revamp of ferry ports, £308 million for NHS buildings and £65 million on college upgrades. ... 2013 could just as easily have been the Year of the Soft Hat - with £394 million invested in human capital, not road junctions."

The rationale for using "capital spending" as countercyclical fiscal policy is that it can be lumpy, not that there is something magical about capital spending relative to revenue spending in terms of boosting the economy (at the margin). If the government wants to build a public physical asset which has a lifetime of 40 years, it doesn't really matter whether it does it this year or next year, therefore it is best to do it when private demand is low to stabilise overall economic activity. However, if a programme of early years' intervention is deemed valuable, then we cannot wait for the economic cycle to implement it - it has to be done at specific ages of the children. Childcare programmes could be shut down in a booming economy - but this wouldn't be consistent with expectations of parents, and would likely be very politically unpopular. The inflexibility over time of the spending decisions on such programmes means that they are very properly regarded as revenue spending programmes - even if they do build human capital.

Lesley Riddoch is absolutely correct to argue for such spending programmes, but not to present them as alternatives to construction projects for countercyclical fiscal policy: such programmes cannot be used countercyclically.

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