Finally, Some Real Stimulus
President Obama's announcement about business tax breaks, following the $50 billion infrastructure plan, shows he finally understands that his administration, not the Fed, must end this downturn.
Reboot America manifesto signer Marshall Auerback on how Obama has figured out the folly of interest-rate policy as economic elixir. Plus,
join in with over 150 economists and historians who have pledged to get America back to work.
Winston Churchill famously remarked how "the Americans will always do the right thing… after they've exhausted all the alternatives." Perhaps this is the best way to regard President Obama's Labor Day proposals: yesterday's $50 billion investment in the nation's roads, railways, and runways, along with today's plan to allow companies to write off 100 percent of their new investments in plant and equipment through 2011, a plan that White House economists say would cut short-term business taxes by nearly $200 billion.
The stated purpose—timed for the holiday—was jobs. In reality, given that last year's $787 billion package wasn't sufficient to tame unemployment, another quarter-billion in pump-priming isn't a likely long-term solution. The U.S. labor market remains locked into a situation where the tepid employment growth barely absorbs new entrants and the most disadvantaged workers are being trapped in long-term unemployment.
Yet this two-step set of announcements is important. Yes, it will create some jobs. The last stimulus wasn't big enough, but still created 700,000 jobs just in the first quarter of this year, according to the nonpartisan Congressional Budget Office, lowering the unemployment rate by about 1 percent. (Another study by former Fed governor, Alan Blinder, and economist Mark Zandi concludes that unemployment would have peaked at 16.5 percent, instead of the actual 10 percent.) In other words, every bit helps.
But more critically, Obama conveyed a seemingly Damascene conversion in terms of recognizing that the road out of this economic mess stems from fiscal policy, not monetary policy. Most notably, government spending along the lines of yesterday's proposal has historically launched some of the greatest private-sector booms in our history.
Regarding the latter, rather than bail out insolvent banks, infrastructure spending provides a multiplier effect, not mention jobs for Main Street over Wall Street. The idea of public-works strategy for national recovery has had broad ideological respectability from the days of Alexander Hamilton and Abraham Lincoln to those of Franklin D. Roosevelt and John F. Kennedy. If Democrats can brag about the proud heritage of the Works Progress Administration and the Public Works Administration from the era of the Great Depression, there are still a few Republicans who remember the Golden Age of interstate highway construction that commenced in the 1950s with President Dwight D. Eisenhower. Indeed since the national shame of Hurricane Katrina, Americans have become outspokenly nostalgic about competent federal governments and magnificent public achievements.
Even Adam Smith, long beloved by free-market conservatives, was very much in favor of public works and public institutions that facilitated commerce.
Unfortunately, the last few decades have seen very little investment in infrastructure in the U.S. The American Society of Civil Engineers began grading the state of the nation's infrastructure in 2001 to raise awareness of the silent crisis. They determined that every area from aviation to roads to wastewater needed serious attention. The problems in the electric grid were not addressed, among other areas, leading to the major blackout in 2003. In ASCE's latest report card issued in 2005, the group determined that the U.S. has made little progress, earning a collective "D." To repair all the areas of infrastructure to good condition or a grade of "B" would cost $1.6 trillion over five years. Obama's plan yesterday barely touches that figure, but it still would be good enough to rebuild 150,000 miles of roads, construct and maintain 4,000 miles of railways, enough to go coast-to-coast; and rehabilitate or reconstruct 150 miles of airport runways, while also installing a new air navigation system designed to reduce travel times and delays.
These are the kind of projects that create long-term prosperity. Even the author of the Wealth of Nations, Adam Smith, long beloved by free-market conservatives, was very much in favor of public works and public institutions that facilitated commerce. He acknowledged as much: "The object of the public works and institutions above mentioned is to facilitate commerce in general. But in order to facilitate some particular branches of it, particular institutions are necessary, which again require a particular and extraordinary expense." And the $200 billion tax credit? While a nice cosmetic gesture for a community that views this president as "anti-business," I'm not sold that it will help with demand as much as measures targeting consumers. Firms will only borrow, produce, invest, and employ now if they feel as they will be able to sell the output in the future—the key is stimulating consumption, not investment. Thus, tax cuts would be better introduced for households, whose dire financial situation is holding back growth. Much like his approach to the banking system, Obama is too eager to practice stimulus from the top down rather than bottom up.
But at least he's now practicing stimulus! Within 48 hours, he has re-focused the recovery around fiscal policy, rather than publicly fretting about deficits.
Why has it taken Obama so long to find religion? Well, for one thing, elections have a way of concentrating the mind. More fundamentally, the president has remained in thrall to a neo-liberal philosophy which has persistently overhyped monetary policy as some kind of panacea. Monetary policy alone cannot provide the solution. It's not a suitable tool for controlling longer-term problems such as price bubbles in specific asset classes, because the interest rate weapon is a very blunt one. Much like chemotherapy killing good cells, along with cancerous ones, interest-rate increases can bludgeon productive parts of the economy, which aren't suffering from excess. Fiscal policy is more precise, less a meat cleaver than a scalpel.
Yesterday and today, the president took a step toward recognizing that the Fed-dominated basis of macroeconomics consensus that has dominated the policy debate for three decades culminated in the worst financial and economic crisis in 80 years. Now it's time to take it further.
Marshall Auerback is a senior fellow at the Roosevelt Institute and consulting strategist with PIMCO, the world's largest bond fund. He is also a fellow for the Economists for Peace and Security and regularly blogs at www.newdeal20.org.