President-elect Obama's plan is based on the assumption that federal spending can compensate for the lack of private sector consumption and investment.
President-elect Barack Obama is promising a stimulus program large enough to “jolt” the economy back on track.
Metaphorically, Obama apparently views the economy as in some sort of cardiac arrest, requiring the federal government to act as a defibrillator.
Obama hasn’t specified the size of the federal shock, but leaks and estimates have it in the range of $500 billion to $1 trillion. The theory is federal spending can compensate for the lack of private sector consumption and investment.
The notion that the federal government can manage business cycles should have died with the stagflation of the 1970s. But it has returned, with a vengeance.
Here’s why such a jolt stimulus is more of a contribution to a return to stagflation than a robust economy.
In the first place, the federal government has no money.
The Keynesian theory from which the stimulus derives its intellectual nourishment assumes that the federal government acts in a countercyclical fashion. During good times, it runs a budget surplus to keep the economy from overheating. During bad times, it deficit spends to keep up aggregate demand.
In the modern era, the federal government deficit spends in good and bad times. So, to fund an economic stimulus, it has to borrow the money.
To the extent it borrows money that otherwise would have been invested or spent in the United States, there is no net economic gain. To the extent it borrows money that otherwise would have been spent or invested elsewhere, there might be some net domestic gain.
But even that is not a clean economic advantage. The United States has relied upon imports to hold down inflation and American manufacturers rely heavily on exports. So, the federal government absorbing funds that would otherwise be invested or spent elsewhere does hurt some American consumers and workers.
Economists can debate Keynesian economics long after everyone else has become bored and left the party. I’m a doubter, but put that aside for now.
Even if Keynesian economics has some validity, the federal government has been in a semi-permanent stimulus posture ever since the end of World War II.
Since 2001, the federal government has spent $2.1 trillion more than it collected in taxes. If that didn’t prevent the recession, why the assumption that another half a trillion to a trillion will shock us out of one?
Obama says he will initiate an infrastructure spending program that rivals the federal highway program President Eisenhower launched. Well, in inflation-adjusted dollars, the federal government already is spending more than twice as much on transportation infrastructure as it did during the height of the highway program.
The states and cities say they have hundreds of billions of dollars worth of projects ready to go, if the federal government would just cut the check. Obama clearly is predisposed to do exactly that.
This, however, assumes there is no constraint on the supply side among businesses and workers who do that kind of work. That’s just not the case.
The construction industry has taken quite a tumble, but primarily in residential housing. According to the Census Bureau, spending on nonresidential construction is actually up – 8 percent for private construction and 7 percent for public works over the previous year.
There has been a decline in heavy and commercial construction employment, but not nearly as severe as in housing. Nor are residential construction workers easily transferable to heavy or commercial construction. It’s a different set of skills.
The economy is working through two large corrections, from an overinvestment in housing and overborrowing in general. A large infrastructure stimulus won’t change the need to work through those corrections. Instead, it will increase federal borrowing thus creating a drag on private sector recovery, while inflating private sector construction costs.
This doesn’t mean that the federal government needs to be idle during an economic downturn. The lower middle-class is particularly hurt in a down economy.
The federal government can help them cope by such things as extending unemployment benefits, guaranteeing the refinancing of underwater mortgages, and income transfers such as the rebate.
However, these should be viewed and debated as social welfare measures, not economic stimuli.
The federal government can’t manage business cycles. But it can help people cope.
Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: robert.robb@arizonarepublic.com