The world’s central bankers have done such a rotten job for so long that their constituency of satisfied customers is now down to two: equity investors, who’ve seen their stocks soar to the stratosphere for no fundamental reason, and governments, who’ve been able to pile on massive indebtedness at virtually no cost. But even those customers aren’t going to be satisfied for long. Stock prices are cruising for a bruising, and when rates rise every government on the planet will be bankrupt.
So isolated have the central bankers become that exasperation with their policies is approximately the only thing the political left and right can agree on. Those on the right are opposed to government control of the price of money, but they don’t offer much in the way of alternatives.(1) Those on the left are frustrated by the slow economic growth they ascribe to the central bankers’ policies and which has so seriously disadvantaged the poor and middle classes, leading to skyrocketing inequality everywhere.(2)
To their credit, however, the left does offer a potential solution, what we might call “the progressive prescription.” The idea, based on the old Civilian Conservation Corps that flourished during the Great Depression, is that the US government would spend massively on infrastructure projects, simultaneously putting people to work, stimulating the economy, and rebuilding our crumbling infrastructure. Larry Summers, who advocates this approach, calls infrastructure spending “as close to a free lunch as we can ever get in economics.”
But is it? Let’s examine some of the objections to what, on the surface, sounds like a plausible idea.
There’s no way to pay for this. Summers advocates a 40 cent increase in the gas tax, but, first, that’s a political impossibility, and, second, it would do more to slow the US economy than the infrastructure spending would do to increase it. Also, since when do progressives advocate such overwhelmingly regressive taxes? The only other way to pay for infrastructure spending is to increase US government debt. But the economic problems we face have been caused precisely by what Kenneth Rogoff calls the indebtedness super cycle: “[T]here can be little doubt that a debt super cycle lies behind a significant part of what the world has experienced over the past seven years.” Piling on more government debt won’t help the economy – quite the opposite.
We already tried this and it was a catastrophe. After the collapse of Lehman Brothers, the Fed and the Treasury panicked Congress into voting for a massive, nearly $1 trillion spending program to fund “shovel-ready” projects. The so-called American Recovery and Reinvestment Act of 2009 passed without a single Republican vote in the House and with only two Republican votes in the senate.(3) In other words, it was Democratic pork barrel legislation that did nothing for the economy and that merely increased the Federal debt load. (If the Republicans had controlled the Presidency and both houses of Congress at the time, it would have been Republican pork barrel legislation.)
In other words, governments are hopelessly unsuited to mounting large spending projects because the temptation to use the proceeds to get reelected is simply too great. It’s one of the general problems with democracies, and not just in the US. See, for example, the fiasco of the new Brandeburg airport in Berlin.(4)
It’s a short-term fix for a long-term problem. Even if Congress could somehow come up with a sensible infrastructure spending program, the effect on economic growth would be modest and temporary, while the effect on US government debt would be large and permanent.
It wouldn’t help the people who need it most. The CCC was the single most popular of all the New Deal programs because it seemed to provide Larry Summers’ “free lunch.” Unemployed, unskilled young men (including my Great Uncle Harry) were shipped off to rural areas where they planted three billion trees, built rural roads, fought forest fires, constructed or upgraded hundreds of national and state parks, sent money back to their families, and so on. What was not to like?
But today the kinds of infrastructure work the country needs can’t be built or repaired by unemployed, unskilled workers. Repairing bridges and roads requires high-level engineering skills and the ability to operate complex machinery. Expanding high speed Internet to underserved parts of the country requires even higher skill levels. The upshot is that a major infrastructure spending project would be a boondoggle for people who don’t need it, and no help at all to the people who do.
Unfortunately, the progressive prescription, while attractive on its face, is a nonstarter. If we want to get the economy working again, we’ll have to look elsewhere for ideas.
(1) The closest thing to what we might call an idea on the right is tax reform. But the Republicans can’t agree on what form that would take, and in any event it’s a political nonstarter, especially under Obama/Clinton administrations.
(2) As Kenneth Rogoff recently pointed out, the IMF has reduced its estimates for global growth to the lowest level since 2009.
(3) I don’t count Arlen Specter’s vote because he was already in the process of switching parties.
(4) USA Today put it this way: “The saga of Berlin’s new airport has turned into a national joke and a source of humiliation for a people renowned for being on time. Yet it is just the highest profile in a string of big-ticket projects — including a concert hall in Hamburg, railway tunnels in Munich and Leipzig, a subway line in Cologne and a Stuttgart underground train station — that have been plagued by huge cost overruns and delays. The airport fiasco presents a staggering picture of incompetence.” 4/9/13
Next up: Why We Don’t Take Our Meds
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