Why infrastructure spending won't work: A "progressive" perspective.pdf

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    Published Sep 10 2011 byTransition Milwaukee (http://www.transitionmilwaukee.org) , Archived Sep 10 2011

    Why infrastructure spending won't work: A "progressive" perspectiveby Erik Lindberg

    For mainstream Keynesian Democrats who have not yet become troubled about resource depletion and its rather intimate

    relationship with the economy, infrastructure spending makes obvious sense. It represents investment in the economy of the

    future and in this sense will be self-liquidating or dividend-paying. But that this belief is not the main motivating factor for

    infrastructure spending is in itself telling about economic assumptions. The main reason for infrastructure spending, of course, is

    to create jobs and the much anticipated multiplier effect.

    With the multiplier effect, the construction workers who build a new bridge, for instance, will spend money at local restaurants and

    bars, the owners of which will be able to hire more people and perhaps finally buy that new car . This in turn will help the car-

    salesman build a new house, creating construction jobs, while also helping factory jobs in Detroit (maybe). Working its way down

    the line, economic activity multiplies itself, spurring more and more economic activity.

    Except for the existence of an important factor in the economy that I will mention shortly, this sort of bootstrapping would seem

    uncannily similar to the voodoo economics that Reagan inflicted upon us over 30 years ago, from which these same mainstream

    Keynesian Democrats assume we are still suffering from (theyre not entirely wrong). This factor in the economy that ensures that

    the notion of the multiplier effect not entirely a case of magical thinking has to do with a very real part of the economy that is

    based on consumer confidence and consumer spending. Consumer spending is so important to advanced economies because

    unless something keeps the money moving, the system of exchange and trade will freeze up. Consumers, in a market economy,

    are the best source of sustainable spending that weve managed to come up with.

    This is precisely what happened during The Great Depression. The productive capacity of American workers was fine, but owing to

    a lack of sufficient wages and ultimately a financial meltdown, which is a fancy way of saying a complete loss of confidence in the

    system which, it turns out, depends largely upon belief, the economic system seized up. Think of the financial system as a

    circulatory system. If its arteries get clogged with plaque, the body shuts down. Not entirely unlike exercise, which we might

    loosely say pumps blood through the system and unclogs the arteries, infrastructure spending pumps money through a clogged

    system and frees it up, so that trade and commerce will recommence and our happy, energetic, newly confident patient will have

    more energy, some of which might be used on even more exercise.

    The problem with this is a fundamental failure on these economists and politicians to distinguish between a necessary condition

    and a sufficient condition. Just because sluggish economic activity can send an economy spiraling into recession or depression,

    thus making a certain level of confidence and spending a necessary condition, does nothing to prove that the economy cant seize

    up for entirely other reasons, just as our patients heart might stop for reasons having nothing to do with plaque in the arteries.

    What passes as a good economy may need a good circulatory system, but thats not all it needs.

    To the extent that its main benefit is the multiplier effect of its ability to get the economy moving as they say, infrastructure

    spending may not fix what ails the economy. Because it is so basic and has enjoyed a 200 year run without any problems,

    economists seem relatively oblivious to another aspect of the economyone we might refer to as the real economy. Economic

    activity, it is largely forgotten today, is a matter of turning natural resources into usable goods and services. The economic growth

    that spending, whether on infrastructure or anything else, is supposed to spur, is at root a matter of turning more natural

    resources into more stuff, either by having more people do it, or by doing it more efficiently.

    It is in this way that infrastructure spending might help the real economy. Having roads, bridges, highways, internets, libraries,

    schools, canals, scientific discoveries, good ports, and so on is of course necessary and helpful for this process of making more

    stuff. As Democrats correctly point out, massive expenditures by the government in infrastructure has, as they suggest, paid

    dividends. Thus not only did the projects of the Great Depression put millions of workers back to work, it created the foundation

    for 40 years or so of economic growth.

    Why wont this work now? One could use the terms increasingly common among post carbon thinkers about the peaking of oil

    and other resources, as well as the collateral damage that were causing to the planet and simply note that the natural resources

    we tend to turn into usable stuff, as well as the energy used to fuel the machines, is no longer available, or soon wont be, in the

    easily accessible quantities necessary to economic growth. I am suggesting more or less the same thing, though by focusing on

    infrastructure, we might further illustrate some of the dynamics of a post-peak economy.

    We might, in this vein, make a distinction between pre-peak infrastructure and post-peak infrastructure. Lets start with the latter.Most infrastructure programs are designed to repair older, disintegrating infrastructure. If it is allowed to continue on its current

    path to decay, as liberal minded people are likely (or more likely) to note, it will cause great economic damage down the road,

    making it impossible to maintain our high level of economic activity. This is true. For those parts of our infrastructure that will still

    be useful in a post-peak economy, I am all for taking some our decreasing national treasure and spending it on their upkeep.

    But the crucial point is that failing to maintain our roads and bridges will kill economic activity, which is different from the

    conditions that our pre-peak ancestors and forbearers confronted. Then, infrastructure spending was not just a matter of

    preventing future decline, it was still capable of increasing future activity. Because our country and much of the planet is so well

    (or overly) developed at this point, repair wont EXPAND our economic realm, as they may have done at earlier points in our

    history. With an empty frontier at the beginning of our history the creation of navigable waterways, for instance, opened up

    incalculable realms in which natural resources could be gathered to make more stuff. The creation of an Interstate Highway

    system after the war didnt necessarily bring roads to new places. But it did greatly increase the speed of travel (and thus not only

    of trade, but more importantly of production). Thus the multiplier effect. By making it possible for people to access new frontiers

    of production and of natural resource extraction, they could create the conditions for even more access and production. All that

    was needed was the spur of a good system of loans, a push in the right direction with big projects like railroads that would trouble

    finding sufficient private investment, and an influx of government spending when aversion to risk grew larger than the perceived

    rewards of setting out towards new frontiers of commerce.

    There are of course exceptions, but the infrastructure spending proposed these days will not open up new realms or greatly

    increase the efficiency of current communication or educational systems. At best, we can slow the rate at which they fall apart.

    Instead of a multiplier effect, it is more like an addition effectbut only to the extent that adding to a negative number may only

    decrease the rate of subtraction.

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    Because our economic system, especially the financial section of it, does not benefit all that much from a slower rate of

    contraction, infrastructure spending will be ineffective from the standpoint of spurring economic growth or of maintaining it into

    the future. To put this in terms of the multiplier effect, infrastructure spending, as we discovered after its last round, creates

    temporary jobs and a great big debt, rather than permanent growth, dividends, and increased and self-sustaining economic

    growth. The reason is that the multiplier effect works when there is an overabundance of real-economic potentialnatural

    resources waiting to be turned into useful stuff, especially the sort of stuff that might make future production even more efficient.

    In this case a clogged circulatory system may in fact be the only thing preventing economic growth. Without this abundance laying

    in wait, the notion that a stimulus will cause the money invested in the system to multiply, rather than just be added in, has in

    fact been a form of voodoo economics.

    The current and widespread economic confusion, I think, is largely