What is the head of the IMF on about?

Forth Road Bridge, originally uploaded by bridgink.

The Forth Road Bridge, built in 1964, is starting to show its age, and a replacement is needed. It is likely that weight restrictions will have to be introduced within the next five years and the new bridge will have to be opened by 2016. How should it be paid for? The Private Finance Initiative method is the most likely. But why?

The bridge is essential to sustaining land values on the north side of the Firth of Forth and its influence extends far beyond that. The logical method of payment would be through a bond issue, supported by revenues from a land value tax, but that is not going to happen.

But all of this has a bearing on a statement by the new head of the International Monetary Fund, Dominique Strauss-Kahn, approving of the US government's financial policy of injecting funds into the economy through tax cuts.

What is wrong with that policy? First, there is no guarantee that tax cuts will maintain consumer demand. Second, consumer spending is as likely to be on imports as on home-produced goods and services. Third, if it goes on imports, it will add to the balance of payments deficit and result in a falling dollar and increasing prices of imports, generally perpetuating the circumstances that have brought about the present problems. Fourth, the policy is inflationary, at the expense of savers who are being made to pay for the foolishness of reckless borrowers and lenders. Fifth, it is questionable whether the amount is sufficient to have a useful impact. Sixth, what has gone wrong is one of those cyclic collapses that will have to work itself out; there can be no soft landing.

So what has the Forth Road Bridge got to do with it? In conditions of recession, the best thing that governments can do is take advantage of the situation to enhance and renew infrastructure. If deficit budgeting is used in this way, no harm is done as the infrastructure helps to sustain and enhance the country's capacity to create real wealth. The difficulty is that infrastructure projects have a long lead time. But in Britain at least, there are many sound schemes that have been deferred from lack of funds, notably, the upgrading of the railways and the construction of urban light rail schemes, some of which might be brought forwards. It would be surprising if the same situation did not apply in the US. What proposals are there, for instance, to improve flood defence systems to prevent recurrences of the New Orleans disaster? So there are real wealth-creating projects needing to be done. But if the deficit is just used to keep a consumer boom going, it is irrresponsible.