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 (they’re 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 we’ve 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 can’t seize up for entirely other reasons, just as our patient’s 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 that’s 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 economy—one 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 won’t 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 we’re 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 won’t 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. Let’s 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 won’t 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 didn’t 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 effect”—but only to the extent that adding to a negative number may only decrease the rate of subtraction.
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 potential—natural 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 caused because the condition in which there is an overabundance of real economic potential has become accepted as natural and inevitable fact by economists, to the point that they are not good at recognizing a the fact that this condition may no longer exist. This is not even a factor which is put into the equations, at least as they are popularly presented.
Until they are, expect disappointing programs and a conservative element that has at its disposal increasing evidence of the failure of government spending. Unfortunately, their belief that the only thing standing between us and economic growth is government interference is even more naive, though from a political standpoint, when it fails, and it will or would, there is not an obvious politician responsible for the wasted money or the failed jobs program.