Governments should include more information and communication technology investments in their economic stimulus plans, according to an adviser to President Barack Obama's transition team. But governments must also move quickly to realise the desired short-run stimulus effects of these investments.
"ICT has larger economic impacts than other kinds of investment areas in the economy," says Robert Atkinson, the founder and president of the Information Technology & Innovation Foundation, in a telephone interview. ITIF is a think tank in Washington, DC, that advised Obama's transition team on the economic impact of new technology investments.
Atkinson said technology investments were largely responsible for US productivity gains over the last decade, and further investments in this area will bring more. The same benefits can be realized by other countries, including developing countries, that invest in technology infrastructure, he said.
"If you invest in ICT infrastructure in an economic downturn, you not only get better short-term job creation effects but you get better long-term productivity impacts," Atkinson said. "Why not do that instead of giving people a tax credit or something like that to go spend on t-shirts."
The U.S. government's stimulus plan allocated significant funds for technology investments, such as US$7.2 billion for building broadband networks, but Atkinson said it could have done even more. "The market could have absorbed at least US$15 billion," he says.
With many countries already mired in recession, the window is closing for stimulus packages to have an impact. Governments must move quickly, Atkinson said.
"You want these projects to hit the ground running over the next 18 months, and ideally sooner than that," he said.
The key to understanding why economists believe stimulus plans should take effect as quickly as possible lies in the basic differences between Classical and Keynesian economic models.
In the Classical model, government spending does not affect the labour market, which determines output. This model is based on the assumption that wages and prices react quickly to keep labour markets in equilibrium. It also assumes that periods of higher unemployment are caused by a mismatch between the skills workers have and the skills that companies demand.
In Keynesian economics, a model that was born largely out of efforts to explain the causes of the Great Depression, there are times when prices and wages don't change quickly enough, resulting in higher unemployment. In this model, increased government spending raises economic output while also increasing expected real interest rates. This is where a stimulus package can help boost the economy.
These two models aren't mutually exclusive. The Classical model is often seen as a description of how economies work over the long run, while Keynesian economics explains short-run changes in an economy over periods of approximately 18 months.
If governments take too long to put economic stimulus plans in place, they run the risk of missing this window of opportunity to spur output. If that happens, the result is an increased budget deficit and, eventually, higher taxes without the short-run gains in economic output. But there would still be some lasting economic benefit from investments in technology.
"If you make these investments and you make them right you can certainly have long-run economic impacts, which can be very sizable," Atkinson said.