Obama's New Deal
By Andrew Jeffery Dec 10, 2008 8:30 am
Infrastructure touted as road to economic recovery.
72 hours ago, President-Elect Barack Obama announced plans to reinvigorate the American economy with the biggest public-works project since the 1950s. Criticism of what's being called the “New New Deal” has been scant, as even ardent capitalists seem willing to wax socialist if it gets the country back on track.
After all, with unemployment on the rise, the financial system crumbling around us, General Motors (GM), Chrysler and Ford (F) facing extinction and a host of other economic maladies plaguing the system, anything has to be better than the status quo.
Details of Obama’s intentions remain sketchy at best, but fixing highways and bridges, updating the rail system, new telecommunications infrastructure, modernizing health care and improving the public school system are atop the President-Elect’s holiday wish list.
Commodity prices soared on the heels of the announcement, as investors poured money into US Steel (X), Freeport McMoRan (FCX) and others who pull stuff out of the ground that hurts when it falls on your foot, as Dennis Gartmen is now famous for saying. With all that new construction, steel, copper and the like will once again be in high demand.
If, of course, the plan even works.
Detractors cite impracticality as one of the primary flaws of the massive spending program. Many wonder if it’s realistic to expect the government to spend hundreds of billions of dollars efficiently, getting money and jobs to where they’re needed most. The $700 bailout plan, now half spent, hasn’t exactly been a model of prudent use of taxpayer funds.
Others wishing to rain on Obama’s populist parade question the economy’s ability to absorb millions of jobseekers, few of which have been trained to lay new railroad, pour cement or install fiber optic cables. America’s labor pool has become increasingly focused on service-sector jobs, yet the new public works focus on traditional blue-collar employment. Structuring debt securities doesn’t exactly translate into structural engineering.
Finally, there’s that whole pesky issue of the national debt. Obama has repeatedly vowed to ignore near-term budget deficits in favor of getting the economy back on track. But at some point, the printing presses will seize up, and Washington’s debt experiment will run aground.
The world seems able, although not altogether thrilled, to absorb an American budget deficit now running at around $1 trillion per year. Can it handle $2 trillion? What about $3 trillion? Or $5 trillion?
At some point, trillions do in fact start to matter. If holders of US Treasuries start to get skittish and demand a higher return on their not-so-safe-haven investment, government debt will become that much more expensive, deepening the deficit and resulting in the mother of all feedback loops.
No one’s quite sure what will happen if we really do bankrupt the country trying to save it - some mildly terrifying cocktail of deflation, a dollar collapse and hyperinflation all rolled up in one. It’s an outcome no one really wants to provision for.
To be sure, it’s hard to find many who hope Obama fails, preferring instead to look back at 2009 and chuckle, remembering when the country went all in and made that straight flush on the river.
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Reply
2008-12-10 08:50:30
Debt
Aren't the US printing presses already very worn out by now?
I wish I could just print more and more money when I wanted something..
money for nothing....
What is a dollar worth? A lot of debt and that's all
The name dollar should be changed to IOUalotofmoney
I wish I could just print more and more money when I wanted something..
money for nothing....
What is a dollar worth? A lot of debt and that's all
The name dollar should be changed to IOUalotofmoney
2008-12-10 10:54:23
Some basic principles:
- The money for such a program comes from taxes or printing presses.
- Printing presses, via inflation, is a tax on every owner of dollars.
- Taxes means that the decision about how to spend a dollar is made by the government instead of the taxpayer. Does the government have a good track record of managing such decisions?
- Taxes deprive all other industries of the money that would otherwise spent by the taxpayer.
BEST CASE: this is a zero sum game.
MOST LIKELY: government will be inefficient and the gains made by this program will be offset by the losses to the rest of industry & consumers.
This may support a short term rally but surely will only result in an extended recession?
- The money for such a program comes from taxes or printing presses.
- Printing presses, via inflation, is a tax on every owner of dollars.
- Taxes means that the decision about how to spend a dollar is made by the government instead of the taxpayer. Does the government have a good track record of managing such decisions?
- Taxes deprive all other industries of the money that would otherwise spent by the taxpayer.
BEST CASE: this is a zero sum game.
MOST LIKELY: government will be inefficient and the gains made by this program will be offset by the losses to the rest of industry & consumers.
This may support a short term rally but surely will only result in an extended recession?
2008-12-10 11:42:04
Moral Hazzards, Slippery Slopes, and Hope
Nobody is talking much these days about the first two.
Seemingly the moral hazzard part is awaiting the results of the deed. Rather like waiting to see if a pregnancy results from a rape - and there won't have been a crime if there is no pregnancy.
The slippery slope part has morphed into down the tubes.... no slope, just straight down.
Hope for failure is about like hope for success - not a good strategy, but about all that's left in either case.
Unfortunately the hope is based on trying things that have never worked.
Perhaps if the failures becomes bad enough and obvious enough the government will try things that work? Unfettered Capitalism works.
Seemingly the moral hazzard part is awaiting the results of the deed. Rather like waiting to see if a pregnancy results from a rape - and there won't have been a crime if there is no pregnancy.
The slippery slope part has morphed into down the tubes.... no slope, just straight down.
Hope for failure is about like hope for success - not a good strategy, but about all that's left in either case.
Unfortunately the hope is based on trying things that have never worked.
Perhaps if the failures becomes bad enough and obvious enough the government will try things that work? Unfettered Capitalism works.
2008-12-10 13:53:09
Unfettered Capitalism Hasn't Worked
in fact, it's been an epic failure and about to destroy the economy. That's what we've had the past 8 years is unfettered capitalism run amok; the fallout certainly wasn't due to too much regulation. The past several years gave us phoney profits, phoney jobs, and phoney businesses but real losses.
As far as finding workers for infrastructure projects, granted, many displaced workers don't have the current skills for building bridges, railroads, sewers, and fiber optics. But the learning curve isn't steep. As a former construction engineer on many projects in Texas, I found that while the foremen needs experience, the laborers don't require advanced skills, just good health and the willingness to work long hours in all kinds of weather.
While there are many voices in the media calling to allow some industries to fail through the creative destruction of capitalism, these same voices usually are from people who are already set for life by being lucky at birth. It's easy to say, 'let them fail', when you're not one of them and have no risk to your livelihood.
As far as finding workers for infrastructure projects, granted, many displaced workers don't have the current skills for building bridges, railroads, sewers, and fiber optics. But the learning curve isn't steep. As a former construction engineer on many projects in Texas, I found that while the foremen needs experience, the laborers don't require advanced skills, just good health and the willingness to work long hours in all kinds of weather.
While there are many voices in the media calling to allow some industries to fail through the creative destruction of capitalism, these same voices usually are from people who are already set for life by being lucky at birth. It's easy to say, 'let them fail', when you're not one of them and have no risk to your livelihood.
2008-12-10 14:36:09
Projects are now being readied
The local govt here is accelerating projects to capitalize on the expected federal funds. These projects have been planned for years - a highway bypass and a sewage treatment plant - but have moved slowly. I'll bet many local govts around the country are doing the same.
2008-12-10 16:17:45
new new deal
How was it we got out of the Great Depression? Massive deficit spending to make bombs and bombers to drop them from (and the associated jobs -- the smaller efforts from 1933-39 didn't do the trick)? Why is building new roads and jails likely to be less helpbul than those bombs were, economically speaking?
2008-12-10 16:34:50
Unfettered Capitalism Hasn't Worked
What we had the past couple of decades is unfettered regulation including lowered standards and even government encouragement of Fannie and Freddie to make zero-down, low-interest loans to high, higher, and highest risk borrowers.
Of course the Fed kept interest rates low to enable the bubble to expand to a ridiculous size. Fiat money by the Fed is not a form of Capitalism... just more government tinkering tools.
Folks who keep talking in terms of the past 8 years are both myopic and mis-understanding of Capitalism.
Only the government can create distortions large enough to wreck an entire country's economy and make the innocent pay the bill. Laws and regulations are their means.
Of course the Fed kept interest rates low to enable the bubble to expand to a ridiculous size. Fiat money by the Fed is not a form of Capitalism... just more government tinkering tools.
Folks who keep talking in terms of the past 8 years are both myopic and mis-understanding of Capitalism.
Only the government can create distortions large enough to wreck an entire country's economy and make the innocent pay the bill. Laws and regulations are their means.
2008-12-10 18:25:20
new new deal
I used to believe this too but recently have been reevaluating. I think now that what got us out of the Great Depression wasn't really the New Deal government spending or even the build up for the war so much as it was the fact that after the war we had our factories intact while most of the rest of the world had to borrow to rebuild. This gave us a giant head start in the post=war world economy. That and, of course, the fact that we were the victors.
It now appears to me that there is great economic advantage to have a world war not fought on your land.
The question is how do we engineer such a feat this time around?
2008-12-10 19:46:27
new new deal
The question is how do we engineer such a feat this time around?
Afghanistan & Pakistan
Afghanistan & Pakistan
2008-12-10 20:44:48
Terrifying cocktail
Mr. Jeffery wrote: "some mildly terrifying cocktail of deflation, a dollar collapse and hyperinflation all rolled up in one. It's an outcome no one really wants to provision for."
I do agree that this is pretty much certain. I have been mulling over what this will mean. I make a less than optimistic case here, be warned.
First, early on globalization will continue and the US standard of living will drop by about 75%. Wages for comparable work done in Mumbai and New York City, Shanghai and Detroit, will converge sharply. This will lead to serious protectionism. World trade will shrink. Globalization then comes to a near halt.
Deflation of prices will accelerate in categories of "want to have" as opposed to inflation in categories of "must have". We have seen only the very beginnings, only the camel's nose under the tent, of this trend.
A dollar collapse will mean exchange controls and probably confiscation of inflation hedging assets like metals. Oil prices will depend on world demand. Other countries could (and likely would) have economies more depressed than the USA and world demand for oil could fall very greatly, maybe by 75%.
Politicians will be looking for scapegoats. "The Rich" is always a good one, or "ruling class". Demagogues will flourish in politics even more blatantly than during this last election.
The whole world economy has to be rebuilt on new technology that works. Raw consumption just won't hack it. The great problem is that political and government intervention in this process will destroy it. Pretty much "what people want" will have to be ignored along with their "opinions". The banking system, national and international, will have to be put on a much less arbitrarily administrative basis, whether gold based or not.
I do agree that this is pretty much certain. I have been mulling over what this will mean. I make a less than optimistic case here, be warned.
First, early on globalization will continue and the US standard of living will drop by about 75%. Wages for comparable work done in Mumbai and New York City, Shanghai and Detroit, will converge sharply. This will lead to serious protectionism. World trade will shrink. Globalization then comes to a near halt.
Deflation of prices will accelerate in categories of "want to have" as opposed to inflation in categories of "must have". We have seen only the very beginnings, only the camel's nose under the tent, of this trend.
A dollar collapse will mean exchange controls and probably confiscation of inflation hedging assets like metals. Oil prices will depend on world demand. Other countries could (and likely would) have economies more depressed than the USA and world demand for oil could fall very greatly, maybe by 75%.
Politicians will be looking for scapegoats. "The Rich" is always a good one, or "ruling class". Demagogues will flourish in politics even more blatantly than during this last election.
The whole world economy has to be rebuilt on new technology that works. Raw consumption just won't hack it. The great problem is that political and government intervention in this process will destroy it. Pretty much "what people want" will have to be ignored along with their "opinions". The banking system, national and international, will have to be put on a much less arbitrarily administrative basis, whether gold based or not.
2008-12-11 08:47:00
new new deal
As "the victors" of WW2, do I misrecall that we gave and lent to the "vanquished" folks, and helped them rebuild, exactly the opposite of what we'd done after WW1? Didn't our economy rebound during WW2, long before we could get any economic advantage from having intact factories after the war?
2008-12-11 09:22:33
new new deal
The rebound did indeed begin during WWII but, as you stated, based on deficit spending. This is not sustainable. Without the ability to sell our manufactured goods around the world to countries whose infrastructure had been devastated I now believe our own economy would have slipped back into depression at the end of the war.
As for lending and helping the vanquished folks rebuild, this was only possible because we escaped the destruction they endured and of course, this lending and rebuilding only strengthened our economy relative to theirs.
I think this analysis is more reasonable than what we were taught in school. Does it really make sense that a country can ultimately get out of debt through deficit spending alone?
Absent new markets in which to sell goods and services I believe capitalist systems inevitably implode. Population increases can provide some of this growth but markets don't seem content with that slow a pace and sooner or later it seems supply and demand (and the distribution of wealth) gets out of whack and we need war or revolution to re-prime the pump.
I believe we are entering one of these periods now. Of course, this process takes may years to unfold. Looking at the Great Depression, it took from 1929 to 1941 for us to enter the war so I'm not predicting a real cataclysm for another 10 years.
June 14th, 2018 to be precise ;-)
2008-12-11 09:33:59
new new deal
Does anyone really believe we can sustain massive deficit spending forever, and therefore advocate that? But as a temporary (3-4 years) "shock" to a moribund economy, it may make more sense than tiny stimuli of the kind that kept people eating in the 1930s, but did not rebuild a good economy.
2008-12-12 10:47:45
new new deal
The answer to your question is an unequivocal yes: virtually every elected and appointed official since 1980 has believed, if one uses their actions as a guide to their beliefs - that the massive accumulation of government debt is of no consequence. Reagan's answer to the "malaise" of the late 70s was massive deficit spending - remember the 600-ship navy?
Richard (really? his name is censored here?) Cheney is on record as saying "deficits don't matter." All the hullaballoo about the "balanced budget amendment" back in the 80s and 90s was just that - hot air.
The only difference between Reagan and Roosevelt as far as I'm concerned is that where Roosevelt spent on infrastructure (WPA, TVA, etc), Reagan spent on war machines. Yes, of course Roosevelt spent on war machines too. One might argue that the spending on infrastructure creates greater wealth over time (once the dam is built, power flows to more homes at lower cost, freeing otherwise "trapped" resources; or once the road is built, goods can flow farther and wider at lower cost, etc). In the end I'm not sure it matters, because ultimately the nation is insolvent, and it appears that's where we are today.
People want to blame Bush or blame Clinton or now, blame Obama, because they are ideologues. The fact is that we as a nation have spent at least the last 30 years creating this mess. We are not getting out of it by playing back more of the same idiotic, ideological demagoguery that has facilitated our self-destruction, yet the people who hold the reins of political power will most assuredly press forward with it. Divide and conquer is a millenia-old strategy because, sadly, it works.
Richard (really? his name is censored here?) Cheney is on record as saying "deficits don't matter." All the hullaballoo about the "balanced budget amendment" back in the 80s and 90s was just that - hot air.
The only difference between Reagan and Roosevelt as far as I'm concerned is that where Roosevelt spent on infrastructure (WPA, TVA, etc), Reagan spent on war machines. Yes, of course Roosevelt spent on war machines too. One might argue that the spending on infrastructure creates greater wealth over time (once the dam is built, power flows to more homes at lower cost, freeing otherwise "trapped" resources; or once the road is built, goods can flow farther and wider at lower cost, etc). In the end I'm not sure it matters, because ultimately the nation is insolvent, and it appears that's where we are today.
People want to blame Bush or blame Clinton or now, blame Obama, because they are ideologues. The fact is that we as a nation have spent at least the last 30 years creating this mess. We are not getting out of it by playing back more of the same idiotic, ideological demagoguery that has facilitated our self-destruction, yet the people who hold the reins of political power will most assuredly press forward with it. Divide and conquer is a millenia-old strategy because, sadly, it works.
2008-12-15 17:30:19
new new deal
You might want to consider "total national debt as a percent of GDP" as a sensible broad measure of the results of deficit spending. I looked at that measure at the end of each presidential term since '41, and notice that there was a huge jump from '41 to '45, but then a long-term decrease extending through the '81 budget at the end of the Carter term. And a little one during the Clinton period.
In short, I don't think it is accurate to indicate that we are as inclined toward deficits as you do, but rather that the recent excursion is an unwelcome aberration. I rather suspect that it may take a giant jolt to get us rekindled, followed by another spell of undoing what we did.
Regards,
In short, I don't think it is accurate to indicate that we are as inclined toward deficits as you do, but rather that the recent excursion is an unwelcome aberration. I rather suspect that it may take a giant jolt to get us rekindled, followed by another spell of undoing what we did.
Regards,
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