Will shovel-ready infrastructure projects fix unemployment?

Well, we are in a real pickle here. The article says that more government borrowing will crowd out the private sector.

Most of the economists on CNBC are worrying about a depression. I have heard this phrase "uncontrollable downward spiral." I believe that unemployment will go up to 10% over the next year or so.

And USA today said the following:

"For no good reason — other than a philosophical aversion to taxes and reluctance to call for sacrifice — Bush squandered the budget surplus he inherited and almost doubled the national debt at a time of relatively robust economic growth. In so doing, he stimulated the economy when it was not needed, making it harder to do so now when it is. His fleeting and politicized attempts to address looming cost crises in Social Security and health care were fruitless, and both problems deepened."

So what we have seen is that Bush overstimulated the economy by having tax cuts for 8 years and he never cut spending. So let us add this up.

>tax cuts for 8 years and we are back into a recession and the tax cuts are ineffective

>deficits and debt already on the books, making it hard to borrow to get out of a crisis

>factories closing and our jobs going overseas

>cities and states going broke

>the fed has already lowered interest rates to the lowest levels, and probably can do no more

>our money going to Iraq

>stores full of Chinese goods

>there is nothing to propel us for the future as the government has cut back on medical research and Bush vetoed embryonic stem cell research. Nothing on energy independence. 

>There is a backlog of 700,000 patents

>Any new products, does not necessarily mean jobs here, the jobs can go to another country.

Some people will say the government does not create jobs. But I beg to differ. The government got us out of the great depression. It was WW2. The factories got orders for planes, ships, jeeps, and tanks. Hundreds of factories turned out products bought and paid for by our government or our tax money. 

Today, in the case of Iraq, it has been a drain on our economy. It deprives our economy of the needed dollars.

People say the private sector can create the jobs. If you are in a recession or depression, no one is buying, so how does the private sector create jobs. Even if they could, they can send the jobs to another country, or maybe hire a few people for one plant. During WW2 you had hundreds of plants for one cause.

My only answer as I have said before is infrastructural spending (limited), energy independence, mandatory vocational training, embryonic stem cell research, and all of the science, research and development possible. That means a cooperation with business and government. For example, 14 U.S. companies are asking for 1 billion dollars to work on a new battery for cars. We have 700,000 patents and the government can be like a bank to the entrepreneurs. 

In any case, we have to deal with the economy and globalization. Globalization will be the single most important economic to deal with. We need to find jobs that will stay in this country, as we cannot compete with third world wages. And without jobs, you cannot solve one other problem in this country.

Much as you might like, our troops are, ah, too busy elsewere to deport the 12 million just now.   

I can't think of many usages of money that couldn't be interpreted to help illegal immigrants in ONE way or another. Except maybe building a border fence. Although, the people supposed to build it would probably subcontract to illegal immigrants anyways.

I know a fellow that recently retired from the finance industry in Australia.  I was asking him about this.  Here's the exchange:

Hello, Lindsay.Glad to see you writing about this.I was involved in a discussion of this elsewhere recently, and I have yet to find any clear answers.

I would like to refer to the equation of exchange: M * V = P * Q

Now, traditional Keynesian stimulus relies upon the M; while supply-side stimulus relies upon the P; and trickle-down theory relies upon the V, although its set of assumptions as preconditions has proven it to be rather ineffectual.So the choices appear to be huge inflation with Keynesian stimulus, or deflation with supply-side.

There remains the possibility that the Keynesian approach might result in less inflation that would otherwise occur, due to the 'irrational exuberance' priced in to the market. 

Now, as GDP is calculated on the basis of household consumption, private investment, and government spending, with imports and exports taken into account, this would suggest that a recession is a dangerous time to cut gov't spending. Household consumption is down reflecting debt load. Investment is down reflecting a crisis of confidence.

That would leave imports/exports as the safest way to boost GDP. I'm sure the precipitous fall in oil prices would take care of some of that; but the real culprit is China.But still, I don't see a system of tariffs as being particularly productive. On the other hand, we are at a time when many of our people have been poisoned by Chinese goods, and increasing tariffs to cover the costs of increased inspections would likely be prudent; a 'most suspicious nation' trading status, if you will. 

Thoughts? 

Now, I was listening to a radio show with a British economist (sorry, can't remember the fellow's name-- you can call him 'Bruce'), and he appeared for all the world to be a proponent of regulation. But when asked directly about it, he stated that, "The problems are much more fundamental than that." 

I am at a loss to decipher this. What could be more fundamental to the business environment than the regulatory environment? Perhaps the currency itself? 

What do you say? 

---Progressive Traditionalist

HI PT  

Thanks for your visit and here are my thoughts:  

Reference : Danger of a short term spike in inflation caused by the stimulus package.  

The danger to what might otherwise be rampant inflation of the stimulus package is mitigated (if not eliminated in the short term) by your current low aggregate demand and the collapase of global commodity prices. 

Reference : Danger of deflation or stagflation.  

The danger of stagflation similiar to what Japan endured will be largely avoided providing the we learn from their mistakes and avoid them. 

In Japan the government refused to acknowledge the insolvency of just about all of the leading banks which resulted in lending be curtailed for investment as banks tried to recover from their insolvent positions. 

Hence the economy was held hostage for a decade which resulted in a constantly declining market. Had the Japanese government recognized the insolvency of their financial banking system early on and ensured the banks wrote off all of the bad loans the economy could have recovered as confidence to invest originated from that clean start. Instead they relied exclusively on monetary policy with zero interest rates which led to crippling stag inflation.  

The US in contrast has faced up to this problem quickly and mostly decisively but as I said in my posting I would much prefer to see the slate wiped clean and all of the toxic debt disposed of one way or another.  

This would require an enormous degree of planning to minimize the collateral damage to certain industries but it would give a clean start to the financial system.  

Reference: Importance of the investment multiplier  

One needs to ensure the stimulus package directs investment in industries which have a known multiplier effect and to exporters or those competing against imports.  

Hence any increase in exports and a reduction in imports will culminate in an improved trade Balance to expand the potential size of GDP and avoid any later drag on aggregate demand leading to inflation. 

It is not difficult to identify those Industries with high Investment multipliers. E g for every initial dollar spent there is subsequently invested in new resources/ plant to support the increased demand a multiplier, usually pf the order of 3 to 1. Examples might be roads, bridges, new green field’s factories and so forth. These industries targeted preferably will also be either exporters or have the potential or assist ones that already export or are industries which compete against imported product.  

The idea of a net overall tax cut is bad policy in my view. Give relief certainly to low income earners and where it is sensible but make sure overall the effect is neutral to overall revenue since your tax base is aleady unsustainable.  

Exports and productivity will need to increase in my opinion for the US to emerge from the current downturn and once again become a vibrant economy.  

There is no question the long term goal for future prosperity will require an export led recovery to avoid the risk of either inflation or deflation.  

Reference: The US is probably one of the most over regulated economies if the western world.  

I would argue that you need better quality more desciptive type regulation but less in the quantum. 

Certainly there has been some very poor regulation under your prescriptive type controls as it’s easier for companies to give the regulators the impression they are confirming to the letter of the law rather any desire to adhere to its spirit- usually more important than the regulations themselves.  

Hence I think you are better served under one regulatory umbrella with much more expertise and a commitment to repeal existing legislation and revert to wherever practical broad based principals with an accent more on the ‘spirit of the law.'  

What I mean is an emphasis of having to demonstrate one met certain principles rather than on paper simply give the appearance of compliance to long onerous provisions.  

Reference : China  

China needs the US as much as the US needs China. The first priority for Obama I think is to visit China, before any stimulus package is even passed.  

China will continue to buy US Treasurers but the US needs to engage China as a partner rather than as the enemy. Joint Ventures can be forged rather than the outsourcing nightmare of old which decimated some industries and led to the false claims about higher rates of productivity in the US economy which is essentially a myth.  

Best wishes

I know it's a mixed bag.  I think every one will find something to agree with and something to disagree with in there. 

It's that some silver bullet is going to make the painful adjustments of this business cycle go away.

Not to help the loyal opposition but if the Obama economic program is going to be sold that way in 12-24 months it will have all the credibility of the Bush Iraq policy after awhile.

The government has in the past , planned stuff. (interstate highways et al). But these were planned as a prudent investment of public dollars over a generation. If the "plan" is simply to throw money at the economy in hopes of making the recession go away before the midterms, the only thing that will go away is the money.

Can you point me to one serious economist or historian who supports the "FDR made the depression worse" idea? By serious I mean not working for a blinkered think tank. Or Fox News.

While you work on that, here is a quote from that noted liberal, Newt Gingrich, on FDR.

If you truly love democracy and you truly believe in representative self-government, you can never study Franklin Delano Roosevelt too much. He did bring us out of the Depression. He did lead the Allied movement in World War II. In many ways he created the modern world. He was clearly, I think, as a political leader the greatest figure of the 20th century. And I think his concept that we have nothing to fear but fear itself, that we'll take an experiment, and if it fails we'll do another one -- and if you go back and read the New Deal, they tried again and again. They didn't always get it right, and we would have voted against much of it, but the truth is we would have voted for much of it.

Shovel-ready, as I understand it, means a project that is ready to commence construction. In other words, it is a project that has completed all planing, engineering and regulatory pre-requisites and is therefore ready to start hiring and building.

There are many shovel-ready projects that were brought to that point before the downturn and now lack funding. Funding them is a quick way to ramp up employment on projects that have already dotted their i's and crossed their t's in terms of need, support, fitness, etc. They are an easy win.

In other words, the demand side threshold has already been met.

I challenge you provide a link to a SINGLE credible economist who points to the war economy as "the only thing" that brought us out of the Depression.

It is impossible to prove a negative, so you can't prove what would have happened under the New Deal if the war had not happened. However, you are choosing to overlook the fact that FDR inherited a terrible mess from Hoover, and was already making tremendous strides in resolving it when the war broke out. Here is the data, from this and this source.

ROOSEVELT ADMIN PRE-WWII

• 1932
  • Unemployment Rate: 23.6%
  • 12  million total unemployed
  • Debt: $19.4B
• 1940
  • Unemployment Rate: 14.6%
  • 8.1 million total unemployed
  • Debt: $43B
• Deltas
  • Unemployment Rate Change: -9.0
  • Total unemployment percentage change: -36.7%
  • 3.9 million removed from unemployment
  • Increase in debt: $23.6B

ROOSEVELT WWII

• 1941
  • Unemployment Rate: 9.9%
  • 5.5 million total unemployed
  • Debt: $49B
• 1944
  • Unemployment Rate: 1.2%
  • 670,000 total unemployed
  • Debt: $200B 
• Deltas
  • Unemployment Rate Change: -8.7
  • Total unemployment percentage change: -87.9%
  • 4.9 million removed from unemployment
  • Increase in debt: $151B

So, yes, clearly, WWII had a big impact, no one denies that. But just as clearly, people were being put back to work before the war broke out.

So, I repeat: show me someone credible who points to the war economy as "the only thing" that brought us out of the Depression.