A Trap in Obama’s Spending Plan

[Louis Proyect]

(A sign of the times. Uchitelle quotes Counterpunch contributor Bob Pollin.)

NY Times, December 21, 2008
A Trap in Obama's Spending Plan
By LOUIS UCHITELLE

As the recession deepens, President-elect Barack Obama is gearing up 
to spend hundreds of billions of dollars on public investment 
projects, counting on them to lift the economy, as they have in the past.

But this time that may not happen. Public spending, American style, 
has worked best in good times, when people have jobs and executives 
are eager to invest. A new public highway is soon lined — in good 
times — with stores and malls filled with consumers. A dollar spent 
by government generates three or four from the private sector.

That symbiosis makes a humming economy hum more, as it did in the 
1950s and '60s. But it may not work that way when the American 
economy is in full retreat, as it was in the 1930s and seems to be today.

As a measure of the current disaster, the Federal Reserve last week 
lowered interest rates to an unheard-of near-zero percent and offered 
in effect to give away money if a fearful nation would only spend it. 
But panicked by investment losses or fearful for their jobs, people 
tend to hold back. In such circumstances, a new road could be lined 
not by shopping malls, but by empty, overgrown land.

That is the risk facing Mr. Obama's plan. By January, Congress will 
probably be asked to approve an outlay of more than $700 billion. 
Spent in one year on construction, research or equipment, it might 
well offset the contraction at first. But unless it also revived 
general confidence, the economy could collapse again, once the money was gone.

"If that spending can't get the private sector going, then it is just 
a make-work maintenance operation," said Stanley Moses, an economist 
at Hunter College in New York.

History illustrates how tricky it can be to make public spending work 
as intended. The many dams Franklin D. Roosevelt's administration 
built generated an abundance of electricity, lowering its cost so 
that families could afford to operate the appliances then becoming 
available. The construction itself put money into workers' pockets. 
But the appliances were too costly for most families during the 
Depression, and the manufacturers wouldn't extend credit. For all the 
money spent by the Roosevelt administration, public investment was 
failing to jump-start a key private-sector industry.

His administration was inventive, however, and found a way around the 
problem by subsidizing installment purchases. That was when appliance 
production finally rose. In time, installment plans evolved into 
consumer loans and charge cards, and that helped make the American 
consumer economy the envy of the world.

These symbiotic relationships between the public and private sectors 
— playing off each other in ways hard to anticipate and hard to 
channel — became an essential ingredient of American prosperity from 
World War II until the mid-1970s.

"It is not in the nature of a market system to have adequate private 
investment all of the time," said Robert Pollin, co-director of the 
Political Economy Research Institute at the University of 
Massachusetts at Amherst. "So we used public investment to smooth 
things over and improve the climate for private investment."

That changed. In the 1970s, the public reacted against high taxes and 
growing budget deficits, and conservatives argued that putting money 
in private hands would lift the economy more effectively. Public 
investment tapered off, and was used less as a tool of economic 
policy as the economy experienced the increasingly sharp ups and 
downs of the 1980s, 1990s and the new century.

Now, in the opening months of the worst bust since the Great 
Depression, Mr. Obama is expected to seek sustained outlays over at 
least two years to repair roads, bridges and waterways; to build and 
repair public schools; to expand the broadband network; to digitize 
medical information; to advance green technology. An economic adviser 
says his goal is "to encourage private investment, particularly in 
areas where we have too little investment today, for example, solar 
systems and wind power."

But Mr. Obama is bucking a deep private-sector funk, a bit like what 
Roosevelt described in his first Inaugural Address as "fear itself — 
nameless, unreasoning, unjustified terror which paralyzes needed 
efforts to convert retreat into advance." Borrowers and lenders have 
pulled back. Business investment has plummeted. So has consumer 
spending. "A psychology of bad times is becoming the mindset of the 
public," says Andrew Kohut, director of the Pew Research Center, a 
survey operation.

Like Roosevelt's dams, Mr. Obama's expenditures will no doubt 
generate jobs and wages in the construction phase. But in 1937, 
Roosevelt, thinking that the private sector could sustain itself, 
pulled back on public spending. Some historians say this was a big 
reason the economy sank again. .

Mr. Obama faces a similar danger. Green-technology spending might 
spawn a far more efficient solar panel, but investors still might 
shrink at manufacturing it. What if consumers — having lost equity in 
their homes and scrimping on cars, vacations, even college tuition — 
were reluctant to buy and install the panels? "There are so many 
problems today and no good news, and that is enough to stop the 
impact of what Mr. Obama does," said Mr. Moses of Hunter College.

The president-elect and his advisers recognize this danger. But they 
— and many others, including some Republicans — see no other choice. 
"The most important thing the new administration can do at a moment 
when the collective psyche has been so shattered is to spend money 
now on tangible things," said Mark Zandi, chief economist at Moody's 
Economy.com, who advised John McCain's presidential campaign. "People 
want to see up front a repaired bridge, a new energy technology, a 
better water system. They want to feel these will have huge benefits 
down the road, and that might get them spending again."

Whatever the obstacles, Mr. Obama's plan would mean giving up the 
view — widely held since the 1970s by economists, policy makers and 
business executives — that the private sector, by itself, is the key 
source of prosperity and full employment, and government spending is 
inefficient.

Perhaps with that in mind, Mr. Obama evoked as an illustration of his 
plan's breadth not the desperate 1930s, but the prosperous 1950s and 
'60s. That was when President Dwight Eisenhower and Congress set out 
to build the Interstate System of highways — a gift to an expanding 
auto industry and to trucking that also linked the country, 
encouraging all sorts of other investments.

But there is a big difference between Eisenhower's era and Mr. 
Obama's. By 1950, the Depression's gloom had been banished by the 
common effort of World War II, followed by immense postwar demand for 
American production. Road building was just one public investment 
that set off huge private outlays. The space program stands out; so 
does military spending, which spurred computer development and 
created the Internet. And Medicare, born in the 1960s, became 
intertwined with private medicine.

Such symbiotic successes prompted a French journalist, Jean-Jacques 
Servan-Schreiber, to issue a warning to Europe in 1968. In "The 
American Challenge," a best seller, he wrote that "the government 
official, the industrial manager, the economics professor, the 
engineer and the scientist have joined forces" to support American 
economic growth, and that the juggernaut would soon reduce Europe to 
an American colony.

He was wrong. Europe outpaced the United States in its embrace of 
public-private symbiosis. And now Mr. Obama proposes, in effect, to 
restore the formula in this country.