1.(20 points) Public Investment for the Recovery[1]

OCTOBER 5, 2020

ByVitor Gaspar,Paolo Mauro,Catherine Pattillo, andRaphael Espinoza

The authors argue that

Low interest rates globally also signal that the time is right to invest. Savings are plenty, the private sector is in waiting mode, and many people are unemployed and able to take up jobs created through public investment. Private investment is depressed, owing to acute uncertainty on the future of the pandemic and the economic outlook. Thus, in many countries, the time is now to undertake high quality public investment, in priority projects. It can be done by borrowing at low cost.

Public investment can play a central role in the recovery, with the potential to generate, directly, between 2 and 8 jobs for every million dollars spent on traditional infrastructure, and between 5 and 14 jobs for every million spent on research and development, green electricity, and efficient buildings.

And then we are told that

"For some countries, however, borrowing to invest will be difficult because financing conditions are tight. Even so, a gradual scaling-up of public investment financed by borrowing could pay off, as long as rollover risks (risks associated with the refinancing of debt) and interest rates do not increase too much and governments choose investment projects wisely. Countries may also need to reallocate spending or raise additional revenue for priority investments. ... However, during this time of high uncertainty, public investment can boost private investors' confidence in the recovery and induce them to invest too, in part because it signals the government's commitment to sustainable growth. Public investment projects can also stimulate private investment more directly. For example, investments in digital communications, electrification, or transportation infrastructure allows new businesses to emerge. Likewise, our results show that investments in healthcare and other social services are associated with sizable increases in private investment at the one-year horizon.

In sum, public investment is a powerful element of the stimulus packages to limit the economic fallout from the pandemic. Even as countries continue to save lives and livelihoods, they can lay the foundation for a more resilient economy by investing in job-rich, highly productive, and greener activities."Emphasis added

Do these views make sense to you?To me they indicate that so long as all goes as planned and we have the perfect foresight to decide in which sectors the government should invest, then everything will be OK.Offer a detailed explanation of your reasoning.

[1] https://blogs.imf.org/2020/10/05/public-investment-for-the-recovery/?utm_medium=email&utm_source=govdelivery