“Those who cannot remember the past are condemned to fulfil it.”
-George Santayana, Life of Reason
The ultimate objective of any “pump priming” plan is to motivate producers to hire more workers and generate more goods and services. Simply spending a lot of money isn’t the real purpose. Even if they see an increase in sales, employers will only step up production (and employment) if they are reasonably confident that the demand will continue. If they are pessimistic, they will “wait and see” instead of taking the risk of investing in higher capacity, and the extra demand will only result in a price increase. This is especially true of industries that are monopolistic or near-monopolistic (which is most American industries these days). A company with no competition, or a few friendly “rivals”, doesn’t need to worry about its competition stealing an opportunity from it – it can afford to hold off. Both the high degree of monopolism in our economy, and the general pessimism that has reigned since the massive act of naked corruption perpetrated in the form the bank bailout, mitigate against any positive business response to higher demand.
A stimulus program can only work by putting money into the hands of consumers who will actually spend it on domestic product. Money that winds up in the hands of the wealthy does no good at all; they’re already consuming as much as they want. Money that gets hoarded because of deflation or simply because people fear for their jobs does no good either. Money that is spent on imported goods (meaning almost any goods) mostly helps China, not us.
What happens to the money the Federal misgovernment spends on construction programs? Well, in the first place, most of it will be balanced by cuts in State spending. The States normally pay for construction themselves, and right now almost all of them are in dire financial straits. Federal construction spending will just allow the recipients to cut back their own construction spending – with the taxpayers of other States picking up the tab instead of their own.
Out of whatever increase is left, a good bit will be siphoned off by the inevitable corruption of the bureaucracies involved, and then the big contractors will get a healthy cut. None of that money goes into consumption; it goes into the hoards of the rich (who, if they’re wise, will invest it overseas). What about the part that goes to the workers? Well, it keeps the citizens off of unemployment, meaning once again that the States can cut their spending further. The construction industry also employs a large number of illegal aliens, who typically send as much money as they can to Mexico (where a U.S. dollar is still worth something). Of the small portion that does turn into higher consumer spending in the U.S., the bulk will probably go straight to Asia.
Why would Obama pick such an ineffective economic plan? The construction industry is usually considered a leading economic indicator, but only someone as stupid as an economist would think this meant that the housing slump was the cause of the depression. The housing slump was just one of the early symptoms of a deeper cause (which I may get around to explaining someday). The real reason all the money is going into construction is that it’s an easy way to reward not just states, but cities and counties, very selectively. It’s a simple wealth transfer, from Obama’s political enemies to his supporters. That’s Chicago politics – it has crap to do with national economic recovery.
A real economic plan would address the underlying causes – but failing that, even a makeshift scheme should take some cognizance of reality. This depression is similar to the Great Depression in many ways, but different in others. The so-called “stimulus” not only ignores the differences, but contradicts the similarities. Consider:
FDR financed the New Deal largely through very heavy taxation of the very wealthy. He borrowed some money, but not more than the country could afford. Taxation of the rich was a necessary remedy at the time, and it is a necessary remedy now. Obama’s plan is to depend entirely on borrowing and allow the wealthy to continue paying very little taxes. Thus the continual drift in the maldistribution of income is not addressed, and surpluses of investment funds will continue to fuel speculative bubbles.
The U.S.A. entered the first Great Depression with very little debt and could afford considerable borrowing. We have entered the current depression already carrying a crushing debt load. To continue this colossal spending (and it must be sustained, if it is to have any impact) can only be done by borrowing or printing money, since taxation of anyone but the poor has already been ruled out. With the U.S. government insolvent and hyperinflation looming, it’s doubtful whether borrowing can continue much longer. How fast can the government print money before people stop accepting it as payment? We’ll likely find out soon enough.
Why does the spending have to be sustained? Because, once again, it’s not enough for consumers to spend money; producers must first sell off all the surplus inventory they have accumulated and then be persuaded that the sales increases will continue for long enough to justify the expenses of bringing production back up to speed. It will be a slow process because each of them will be waiting for the economy to take a definite upward turn before proceeding, yet that upturn will not happen until enough of them have gone ahead on faith. This is one reason the Bush “stimulus” package failed to accomplish anything; everyone knew that any sales increase in April 2008 would be temporary, not something to base business plans on until after it worked – which it plainly couldn’t, with such a small time window.
Another key difference between this depression and the Great Depression is the nature of international trade. Until the Seventies, America was the world’s great exporter, and had large trade surpluses. The notorious Hawley-Smoot protective tariff was a disastrous mistake because it was the rest of the world that needed protection from cheap American goods – which is certainly no longer the case! The modern American economy needs protection from the impoverished labor of Asia and the Caribbean, if we are to maintain a standard of living higher than theirs. Any economic stimulus that allows the money to flow overseas to nations from whence it will not return, can only succeed in boosting those economies.
Mr. Obama cultivates the appearance of thinking that history has cast him as Franklin Roosevelt; if he truly believes this, he is sadly mistaken, as he has not one-tenth of the latter’s political courage and has merely continued with business as usual, instead of undertaking radical reform (or any reform at all). He has cast himself as Herbert Hoover.