Expect big-time spending in a new administration

By Kennedy Maize

 

What will the new president really do once on infrastructure spending, despite the anodyne economic platitudes of the campaign?

My guess is we will see the greatest economic stimulus effort since WW2. Deficits be damned. That’s probably good. The economic enemy is deflation, not inflation, if the Great Depression is any guide.

Keynes, Bernanke, and other scholars of the depression showed that falling prices – and the increase in the value of the dollar, which fewer people held – were drivers of the economic hard times. Today, with financial markets worldwide intertwined, that may be even more the case.

I’m not an economist, but I’ve read pretty widely in the field. My sense is that neither Obama, the likely winner, nor McCain (is he Bret or Bart Maverick?), are making much sense about economic issues so far.

Unfortunately, political folk wisdom prevents the candidates from speaking the truth. The conventional wisdom – see Washington Post columnist David Broder, who should know better as a child of the Depression – is that we must cut back on spending, save more, invest more prudently (that is, don’t give credit to folks who need it), and otherwise engage in the policies of Herbert Hoover and FDR prior to WW2.

That made sense during a period of sustained growth during the Clinton administration. With tax revenues flowing in from a booming economy, the government could accumulate a substantial economic cushion. Bush spent it all, and more, to his discredit, much of it on his feckless adventures in the Middle East. Now the economy is in free fall

I don’t buy the conventional wisdom that we need to return to the Clinton policies. That strikes me as fighting the last war – the stagflation of the 1970s and 1980s, which Clinton policies and the strong economy overcame – and ignoring the realities of what faces us today.

Credit markets are cramped. Lenders don’t trust counterparties. The result of that flows across the global, interconnected economy, producing a worldwide depression (dare I use the word). Mostly thanks to W and his incoherent economic policies, all of which drained from his determination to conquer the world, the world faces a sure recession and a possible depression. Bush’s policies placed hegemony ahead of the economy, and now we are all paying the price.

With credit unavailable or unaffordable, economists tell us that economies move toward cash. Gold becomes the medium of exchange and dollars a fiat (nothing to do with the Italian car company, affectionately know as “fix it again, tony) currency. That further distorts markets, leading toward worldwide economic gridlock. It’s not a pretty sight, and millions of middle-class, working-class people will suffer. No major infrastructure projects will be built. That’s where we are today.

What to do? Spend, spend, spend. Pump up the economy with cash and credit liquidity.

I suspect that both Obama and McCain (or at least their economic advisors) understand what’s going on, and what to do about it.  They are not willing to publicly challenge the folk wisdom as Nov. 4 approaches. But when Obama delivers his first State of the Union address, look for radically different policies than we have seen the candidates advance to date.

Expect big spending on infrastructure – maybe even an interstate, interconnected electric grid. Bridge repairs will become popular. So will sewage treatment and water quality projects, maybe even replacement and upgrades of water and sewer pipes in urban areas (which would employ a large number of workers at good wages, at a task desperately needed).

The trick for taxpayers (and Congress, there’s the rub) will be to develop mechanisms for distinguishing good projects from bad in this coming rush to spend. I confess that I don’t have any ideas about how to do this.

But I suspect there are folks in think tanks, government, and in the political parties who can propose effective ways to separate quality infrastructure spending from greasy pork, bridges that serve the larger public from bridges to nowhere.

So what society needs to do, led by a new president of whatever party, is revitalize the way we look at infrastructure investments. We can’t remove these decisions from naked politics, but we need to find a way to use the politics of infrastructure spending to inform decisions that blend politics with prudence.

I know, it’s easy to say. Not easy to do. But it’s the only way we can direct federal funds toward national objectives in a sensible way, without wasting enormous amounts of taxpayer money on stupid, but locally-popular, spending. Some waste is inevitable, but the way government allocates resources today almost guarantees that waste will overcome value. That must change.

The way to rescue today’s economic mess is to spend a lot, but prudently. It’s not an easy task.

Any ideas?