The dangers of Obama's public-works juggernaut

[annarborgator]

This sums it up nicely:

Irvine, Calif. – President-elect Barack Obama has promised to jolt the American economy out of its depressionary spiral with the mother of all fiscal stimuli. While Mr. Obama seems to have little choice in this policy matter, his desperate gambit has a high probability of failure – and may make the recession worse. Don't believe the Washington chorus: We can't spend our way to economic recovery.

Though politically unpalatable, the wiser approach would be to let economic nature take its course. Such tough love, while painful, is the surest way to a healthy recovery in both jobs and asset prices.

Obama's choices are very limited, in part because US monetary policy is broken. The US economy has reached a critical recessionary point where any additional interest-rate cuts will do little to coax reluctant investors back into the game. Rates are already close to zero, so there's not much left to cut in any case. That leaves only fiscal policy.

Like any economy, America's gross domestic product (GDP) is driven by four elements: consumption, business investment, exports, and government spending. The first three elements are in free fall. That leaves the government as the "spender of last resort."

Obama is betting heavily that massive government spending will create millions of new jobs. Still, it must be asked: Why does Obama prefer a fiscal policy geared toward increased spending rather than the tax cuts he promised ad nauseam during his campaign?

The answer is painfully simple – and illustrates the Bush-crafted box Obama finds himself in. Beleaguered consumers would probably not spend any new tax cuts but rather pay off debts – or stuff them under the figurative mattress.

That's why Obama is taking a cue from Franklin Roosevelt and planning to invest massively in public-works projects, such as repairing the nation's crumbling roads and bridges, expanding broadband access, and creating "green" jobs.

Yet even this ambitious plan – a product of the Keynesian belief in government efforts to induce spending and investment – may not achieve its intended result.

First, and foremost, there is the matter of how Obama's mother of all budget deficits will be financed; there's talk of $700 billion in new spending over the next two years. There are only two politically feasible ways: sell bonds or print money (raising taxes is off the table.)

With bond financing, one of two things can happen – both bad. The first possibility is that China will accelerate what it has been doing for years – buy America's bonds to finance the US budget and trade deficits. The clear danger is that America will sink deeper into China's debt, thereby (further) mortgaging its future while exposing itself to political pressures over everything from trade policy to Taiwan.

A second possibility is that China, preoccupied with its own weakening economy, will not finance America's debt but use its reserves internally.

In this scenario, the US Treasury Department will be forced to sell US government bonds into a credit-constrained market. This will drive up interest rates and "crowd out" business investment. This is why fiscal policy often fails – any rise in less-productive government spending is more than offset by a fall in typically far more productive business investment.

The third possibility may be most dangerous of all – printing extra money. Mechanically, this involves the US Treasury issuing new bonds to finance the deficit. Rather than these bonds going to public market, the US Federal Reserve buys them – while printing enough new money to pay the bill. The increase in the money supply would almost certainly debase the US dollar and cause an inflationary spike that would prematurely choke off recovery.

The dangers do not end there.

There are also the well-known "size and timing" problems. It's very difficult to calculate exactly how much fiscal stimulus is needed – too little doesn't get the job done, too much ignites inflation. It also takes a lot longer for government spending to work its stimulative magic than monetary policy. This is because new infrastructure takes significant time to plan and build. Moreover, in the worst-case scenario, the full impacts of a fiscal stimulus come long after the economy has fully recovered and wind up overheating the economy, causing inflation problems.

In light of all these dangers, would it not be better to simply let economic nature take its course? Falling prices of real assets such as oil, food, homes, and cars would eventually rekindle demand. Falling prices of financial assets such as stocks and bonds would set the stage for a bull market recovery, with all its salutary effects on consumption and investment.

Has America gotten so soft and so fearful that its citizens run to the government during a recession? We must at least have this debate before setting out on such a perilous course.

http://news.yahoo.com/s/csm/20081209/cm_csm/ynavarro;_ylt=Aue1RXdX9PIrPbC3kZeFepOs0NUE

[radbag]

can't wait for him to get in office already so he can actually enact and govern.

americans voted for him in record numbers...americans who've never voted up til now put him there based on his promises....can't wait to see what happens when he actually gets there.

[G8rMom7]

I keep thinking of all the college age and early 20's voters he got who are expecting to get a job when they graduate and when they graduate they're going to be handed a shovel and told to start digging. I wonder what they'll think when there are not high paying executive positions for them to strive for. eh.

I do wish we would just let the economy do it's thing but then on the other hand I'm as scared as the next guy.

[bluegrassg8r]

The legions of Obama enablers are about to discover the Achilles heel of socialism: Somebody has to run the factory, and someone has to work in the factory.
Obama's reintroduction of the CCC is hardly groundbreaking but it will certainly be new to the most selfish generation of people ever.

[radbag]

....................................but as long as money is not ones motivation, those college grads should just be content with receiving the praise and the trust of their employers.

[G8rMom7]

^^^Even if money is a motivator for some...not all obviously, many of them still want to be in a position of leadership and have a fair amount of responsibility which many factory workers would have no hope to achieve. Not sure if your post above was a dig at me and my comment on the other thread about not being motivated by money, but just wanted to clarify.

I have had a union job in the past and when I moved into managment I took a pay cut...no more overtime. But I wanted to be in a position of leadership and I wanted to have a more steady schedule. So it's a balance of priorities is my point I guess.

I just don't think that hard labor is what most kids graduating from college are hoping for...all those hopeful TV and movie writers are gonna be out of luck...even NBC is not going to have dramas in their prime time 10 p.m. hour every night anymore! LOL

[radbag]

nah - not a dig.