It’s Not What You Spend It’s The Way That You Spend It
- And That’s What (Might) Get Results.
In Summary
The Obama administration is planning to execute a $775 billion fiscal stimulus package. Much of this will be in the form of tax cuts or expenditure on rebuilding infrastructure. Although this will give a temporary boost to the economy, it is likely that the benefits will be short lived. For the program to have a more lasting effect, spending should be directed to projects that stimulate or directly increase national productive capacity.
Why I say this is….
Keynes in his "General Theory" pointed to the fact that there are inefficiencies in Adam Smith's "invisible hand" that may lead to an economy operating at less than full employment. To overcome this he recommended counter cyclical government spending.
In one of his lighter moments he suggested burying money in a coal mines and then providing government licenses to dig. He suggested that the resulting influx of people and support businesses (those selling the picks and shovels, transportation services, accommodations etc) could create a vibrant economy where none existed before. He then went on to say that if such a plan could be effective, similar results could of course be achieved with more social benefit by spending the money on social programs: roads schools hospitals, housing, etc. i.e. on building and rebuilding infrastructure.
This philosophy, government spending with the objective of increasing demand, was the main driving force behind FDR's large expenditure programs in the 1930s which were arguably effective in ultimately pulling the US out of the "Great Depression".
Similar policies today are likely to be far less effective. In the 1930's there was very little national infrastructure relative to today. The improvements in roads, in the availability of electrical power, in rail, postal services, housing, health, communications, etc, that took place under FDR's New Deal created massive opportunities for entrepreneurs to engage in new lines of business. Projects that had previously not been viable suddenly became so. Essentially, the improvements in infrastructure vastly increased the capability of the economy to produce goods and services.
Today the situation is different. The roads may be bumpy and the bridges may be rusty. But the infrastructure is already in place. Repairing roads and bridges will not significantly add to productive capacity. Unlike in the 1930s, improving the roads, piping and wiring of the country is unlikely to create a single new business opportunity - other than to those temporarily involved in the construction efforts. (A dramatic improvement in rail services could perhaps have significant benefits). In the 1930s, building a new road created the possibility of business between 2 cities. Today, road improvements give us nothing more than a smoother ride.
Some parts of our infrastructure may present a serious safety risk, and clearly it should be a priority to fix these problems. In addition, doing so will of course create a temporary boost in employment and income, and will probably restore some economic confidence. However, once the improvement program is finished, we will be back where we started - admittedly with less bumpy roads and safer bridges.
Japan has implemented a number of fiscal stimulus packages over the last 2 decades. This seems to have resulted in little success in ending the stagnation of their economy. Most of these programs have focused on infrastructure development, comprising the usual suspects – roads, bridges, airports, and of course the bullet train system. However, by the mid 1980s Japan already had a very effective transportation and road network. As a result much of the spending has really just been “for its own sake” – rather than with the objective of making significant improvements in productive capacity. As one might expect, these fiscal programs have resulted in a brief blip in economic activity during and briefly following the time when the expenditures are made, subsequently falling back to previous levels.
Currently the U.S. faces serious underlying structural economic problems. The last 20 years have seen a significant decline in the manufacturing sector. The common myth is that this is not a problem as the economy has re-oriented to “services”. It turns out that this re-orientation was essentially to the Financial Industry. Between 2001 and 2006 Financial Industry profits accounted 37.38% of the total of US Domestic Industry profits. Much of these profits, however, were “phantoms” resulting from increasing asset prices and are now are being given back as asset prices plunge.
In brief the U.S. has a largely a broken manufacturing system and now a broken financial services system to boot. In order to pull the economy out of this morass the U.S. will require a major re-orientation of productive efforts from the current versions of our failing Financial and Manufacturing sectors to ……something else. The difficulty is knowing exactly what that “something else” should be. The U.S. is generally recognized as the world’s most successfully entrepreneurial nation, and it should probably be left largely to the world markets and to our legions of small, middle-size and large entrepreneurs to decide what the “next big thing” or things should be.
In the short term, a fiscal stimulus program will boost economic activity and confidence, but if we want this to be more than just a “financial bridge to nowhere” it is vital that, as it was in the 1930s, much of the expenditure should be focused on projects that increase productive capacity of individuals, of the economy and that increase opportunities for entrepreneurs. Exactly what programs should be supported would require considerable research and analysis. So the following are just a few “off the cuff” thoughts for starters:
A nation wide expansion of the California Hydrogen Highway concept, creating a network of filling stations to provide hydrogen or other alternative fuels, would dramatically increase the viability of producing alternative energy vehicles; universal government paid childcare would instantly free up millions of home bound parents and allow them to join the productive work force or start small businesses;
an expansion of funds available for part time college and technical skills programs could assist in retraining the work force to meet the new demands of the changing economy; and a large expansion of grants and loans to small entrepreneurs would create incentives and opportunities to explore new areas of business.
In conclusion, a large fiscal stimulus package is probably vital to prevent further deterioration of the U.S. economy. However, if this is mainly directed towards refurbishment of existing infrastructure and other unproductive projects, the benefits will be short lived. In order for the stimulus to be the effective in truly generating long term revival, the focus should be on projects which can be expected to provide new business opportunities and improve productive capacity rather than just on spending for its own sake.
In Summary
The Obama administration is planning to execute a $775 billion fiscal stimulus package. Much of this will be in the form of tax cuts or expenditure on rebuilding infrastructure. Although this will give a temporary boost to the economy, it is likely that the benefits will be short lived. For the program to have a more lasting effect, spending should be directed to projects that stimulate or directly increase national productive capacity.
Why I say this is….
Keynes in his "General Theory" pointed to the fact that there are inefficiencies in Adam Smith's "invisible hand" that may lead to an economy operating at less than full employment. To overcome this he recommended counter cyclical government spending.
In one of his lighter moments he suggested burying money in a coal mines and then providing government licenses to dig. He suggested that the resulting influx of people and support businesses (those selling the picks and shovels, transportation services, accommodations etc) could create a vibrant economy where none existed before. He then went on to say that if such a plan could be effective, similar results could of course be achieved with more social benefit by spending the money on social programs: roads schools hospitals, housing, etc. i.e. on building and rebuilding infrastructure.
This philosophy, government spending with the objective of increasing demand, was the main driving force behind FDR's large expenditure programs in the 1930s which were arguably effective in ultimately pulling the US out of the "Great Depression".
Similar policies today are likely to be far less effective. In the 1930's there was very little national infrastructure relative to today. The improvements in roads, in the availability of electrical power, in rail, postal services, housing, health, communications, etc, that took place under FDR's New Deal created massive opportunities for entrepreneurs to engage in new lines of business. Projects that had previously not been viable suddenly became so. Essentially, the improvements in infrastructure vastly increased the capability of the economy to produce goods and services.
Today the situation is different. The roads may be bumpy and the bridges may be rusty. But the infrastructure is already in place. Repairing roads and bridges will not significantly add to productive capacity. Unlike in the 1930s, improving the roads, piping and wiring of the country is unlikely to create a single new business opportunity - other than to those temporarily involved in the construction efforts. (A dramatic improvement in rail services could perhaps have significant benefits). In the 1930s, building a new road created the possibility of business between 2 cities. Today, road improvements give us nothing more than a smoother ride.
Some parts of our infrastructure may present a serious safety risk, and clearly it should be a priority to fix these problems. In addition, doing so will of course create a temporary boost in employment and income, and will probably restore some economic confidence. However, once the improvement program is finished, we will be back where we started - admittedly with less bumpy roads and safer bridges.
Japan has implemented a number of fiscal stimulus packages over the last 2 decades. This seems to have resulted in little success in ending the stagnation of their economy. Most of these programs have focused on infrastructure development, comprising the usual suspects – roads, bridges, airports, and of course the bullet train system. However, by the mid 1980s Japan already had a very effective transportation and road network. As a result much of the spending has really just been “for its own sake” – rather than with the objective of making significant improvements in productive capacity. As one might expect, these fiscal programs have resulted in a brief blip in economic activity during and briefly following the time when the expenditures are made, subsequently falling back to previous levels.
Currently the U.S. faces serious underlying structural economic problems. The last 20 years have seen a significant decline in the manufacturing sector. The common myth is that this is not a problem as the economy has re-oriented to “services”. It turns out that this re-orientation was essentially to the Financial Industry. Between 2001 and 2006 Financial Industry profits accounted 37.38% of the total of US Domestic Industry profits. Much of these profits, however, were “phantoms” resulting from increasing asset prices and are now are being given back as asset prices plunge.
In brief the U.S. has a largely a broken manufacturing system and now a broken financial services system to boot. In order to pull the economy out of this morass the U.S. will require a major re-orientation of productive efforts from the current versions of our failing Financial and Manufacturing sectors to ……something else. The difficulty is knowing exactly what that “something else” should be. The U.S. is generally recognized as the world’s most successfully entrepreneurial nation, and it should probably be left largely to the world markets and to our legions of small, middle-size and large entrepreneurs to decide what the “next big thing” or things should be.
In the short term, a fiscal stimulus program will boost economic activity and confidence, but if we want this to be more than just a “financial bridge to nowhere” it is vital that, as it was in the 1930s, much of the expenditure should be focused on projects that increase productive capacity of individuals, of the economy and that increase opportunities for entrepreneurs. Exactly what programs should be supported would require considerable research and analysis. So the following are just a few “off the cuff” thoughts for starters:
A nation wide expansion of the California Hydrogen Highway concept, creating a network of filling stations to provide hydrogen or other alternative fuels, would dramatically increase the viability of producing alternative energy vehicles; universal government paid childcare would instantly free up millions of home bound parents and allow them to join the productive work force or start small businesses;
an expansion of funds available for part time college and technical skills programs could assist in retraining the work force to meet the new demands of the changing economy; and a large expansion of grants and loans to small entrepreneurs would create incentives and opportunities to explore new areas of business.
In conclusion, a large fiscal stimulus package is probably vital to prevent further deterioration of the U.S. economy. However, if this is mainly directed towards refurbishment of existing infrastructure and other unproductive projects, the benefits will be short lived. In order for the stimulus to be the effective in truly generating long term revival, the focus should be on projects which can be expected to provide new business opportunities and improve productive capacity rather than just on spending for its own sake.
5 comments:
Bulls eye
I like your suggestions for projects here are others:
Increased funding to nanotech research.
Increased funding to Biotech.
Building huge solar panels in space to collect free energy (a la Gerard K O’Neill L5 project).
Hey Josh! I'd leave out nanotech; Drexler is a snake oil salesman and a science fiction author. I worked next to fellows who took "nano" money; the word is just a synonym for chemistry. Most of the "nano" dudes were chemists or materials scientists. The idea of looking at little things as machines doesn't really help any. It's still just chemistry.
A friend of mine (who I found by researching my name of all things) has a cool webpage called "nanoshite" which goes into amusing detail.
http://lachlan.bluehaze.com.au/nanoshite/newnanoshite.html
I see - nanoshite - funny
That's the problem with all program type spending, 75% goes down the rat hole.
Phil's free nanny idea is pretty good since it frees up labor however on the lower end of the scale I suspect.
But the US really needs a game changer – another internet.
Otherwise we will inevitably drift down to wage parity with China/India.
Great post. Your arguments make a lot of sense, even if they deflate triumph, the balloon, somewhat.
The economy is much more developed now that it was in the 30's so there is less room for drastic renovation. I would guess China will get there too eventually but for now, they can keep growing at these crazy rates.
Even with the New Deal, though, did the government really create a new economic paradigm ? I thought it was more like jobs building/stimulus with the biggest stimulus actually being the war. The highways were the in the 50s. The GI bill was responsible for educating a generation of Americans while international structures (Marshall plan, Bretton Woods) stimulated export markets.
To be fair, Obama has been clear that there are two jobs, one short term and one long term. While health care is regulated heavily and can be reformed by government (more or less), creating a green economy is something the government can only spur with seed money and a redesigned regulatory frame work but which American entrepreneurship will have to create.
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