GUEST EDITORIAL: ECONOMICS 301
Today, I bring you the first in an irregular but ongoing series of commentaries by various experts in various fields, not because I suspect you, gentle reader, of becoming bored of my dulcet prose, but because the world is wide, its opinions legion, and outlets willing to mix and match the topics of the Anti-Blog are rare.
Rare but essential.
Before proceeding, two items of note: First, the photo above is the most literal example of “The Two Americas” I could find in my personal files. Shot in New Harmony, Indiana. Ancient log cabin and farm house framed by Richard Meier’s atheneum. As noted scholar John C. Mellencamp might opine, “Ain’t That America?”
Second, tonight is Election Eve, 2008. If it’s true that we get what we deserve in elections, then what on earth are we about to get? Two very wealthy commoners, mavericks to the core? Or a closet socialist bent on destroying first the U.S. and then the solar system?
On to the work at hand, with credits to follow:
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In 1933, one of President Roosevelt’s first actions to help the country recover from an already three-year-old Depression was to spend large amounts of money on public infrastructure. One relatively small program, the Civilian Conservation Corps, took armies of unemployed men and had them build trails, improve parks – virtually anything you could do with hard labor and a shovel. Today, more than 75 years later, you would be hard-pressed to find any community in America that still doesn’t enjoy the fruits of that labor.
A few years later, Lord John Maynard Keynes published his “General Theory of Employment,” which explained why deficit spending might help an economy in recession to recover. Of course, by then the fiscal conservatives in government had convinced FDR to raise taxes to pay for his government programs, and the economy double-dipped back into recession. It wasn’t until the massive mobilization of WWII (and the rise once again of the federal budget deficit) that the American economy got fully back on track.
There are of course significant differences between the current crisis in the markets and the Great Depression, but the structure of the narrative is eerily similar. According to the economic historian Charles Kindelberger, the pebble that started the financial avalanche in the late 1920s was a failure of agriculture markets in Latin America and the over-exposure of British railroad interests to such risks. At the same time, financial markets were overexposed to derivatives (simple ones called “buy” and “sell” options) and the market was at an historic high. Once the crash took place, there was a liquidity crisis, during which banks did not want to lend money (sound familiar?). And so, in an interconnected world, crop failures in Argentina led to financial paralysis, which led to real economic slow-down.
Are we doomed to repeat the experience of the 1930s? I don’t think so. For one, the current Federal Reserve Chairman, Ben Bernanke, is one of the leading experts on the Great Depression, and is unlikely to make the same mistakes. (He might make different ones, but presumably, those will lead to different outcomes.) Another reason is a conceit I acquired in graduate school: economists know a lot more now about how the economy works than they did 75 years ago.
But perhaps everything we’ve “learned” is part of the problem. In the 1930s, there was still serious discussion about Soviet-style non-market economic systems. We now “know” that markets work, and therefore, we might not question certain assumptions. Thus, ex-Fed Chairman Alan Greenspan, appearing last week before a Congressional Committee, expressed surprise that banks, in attempting to maximize profits, did not correctly evaluate the risks of certain classes of assets. The retired high priest in the temple of capitalism publicly admitted that the received scripture might not have been divinely inspired.
I still don’t think we’re doomed to a repeat of the 1930s. The Great Depression might well have been triggered by agriculture in Argentina or a stock market collapse in New York, but ultimately, it was caused by three years of misguided policies under President Hoover and (in hindsight) the remarkably stupid decision by FDR to raise taxes and lower spending in 1935-36.
Neither of the two current candidates for President are running on a platform of balancing the budget. One wants to cut taxes; the other, to raise spending. Ben Bernanke will remain Chairman of the Federal Reserve for the next few years, which means that monetary policy will be conducted by someone with a deep understanding of the monetary mistakes made during the 1930s.
And Congress is contemplating action to create a fiscal stimulus package. Much of the current focus seems to be on investments in transportation infrastructure (particularly highways and bridges). Such infrastructure spending is likely to be more effective than tax rebates – evidence from the last rebate stimulus shows that much of the money received by taxpayers ended up in savings accounts or paying off old debt, rather than in new purchases.
As we were reminded by the tragic bridge collapse in Minneapolis a year ago, this country has woefully fallen behind in infrastructure maintenance. Every state and every Municipal Planning Organization has a list of projects in its back pocket. We would be able to move very quickly to implement a limited fiscal stimulus based on infrastructure investments.
It is possible that these might not necessarily be the best projects – almost by definition, if they’re not funded, it’s because other projects were considered somehow “better.” Moreover, major infrastructure projects (for instance, expanding light rail in St. Louis) require a 4-6 year lead-time in planning, and therefore are unlikely to get done as part of an emergency fiscal stimulus. But rebuilding bridges, while not necessarily the sexiest of infrastructure projects, still leave the country far better off than other ways we might spend the money.
In the “General Theory of Employment,” Keynes introduced the notion of a fiscal stimulus by noting that, if the government buried a million dollars in a garbage dump, people would take their shovels to the dump and dig it up. Later economists focused on the multiplier effect Keynes discussed – the dump diggers would take their cash and spend it on groceries, clothing, etc., which would then help keep the shopkeepers and the farmers employed.
Economists seem to have overlooked another of Keynes’ points: if we’re going to spend a million dollars, shouldn’t we end up with more than a hole in the dump?
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Mark Fogal has long studied policy and politics, as an economics graduate student, a pollster, an environmental lobbyist, and currently as Manager of Regional Policy Research at East West Gateway Council of Governments, the regional planning organization for the St. Louis metropolitan area.
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Monday, November 3, 2008
