Is Infrastructure Our Economy’s Only Hope for Recovery?

Is Infrastructure Our Economy’s Only Hope for Recovery?
Posted on Thursday July 15th by Melissa Lafsky

http://www.infrastructurist.com/2010/07/15/is-infrastructure-our-economy...

The U.S. economy remains in highly-questionable shape, and many experts are asking where the source of recovery will come from. Over at Salon, Michael Lind has come down firmly on the side of domestic public growth — more specifically, infrastructure.

Here’s the crux of his argument: American consumer demand has shrunk, and will never really recover to its former levels. So Washington’s solution has been to turn to foreign demand as the savior of our economy. But neither foreign private demand nor foreign public demand will solve our problem, since other countries don’t want to buy our exports and our pesky rules about free markets, industrial espionage and human rights — which aren’t shared by major exporters in, say, Asia — will keep us from really competing in foreign countries.

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Granted, we’re hardly against an increase in infrastructure spending to battle the nation’s troubles. In fact, one could argue that our very existence is geared towards seeing this possibility become a reality. But we also believe that the path to growth isn’t by calling for mini-revolutions — it’s by evincing change from a grass roots and policy level.

Though on this point, well, we couldn’t agree with Lind more: “Infrastructure spending and improved public healthcare increase the productivity of America’s businesses and workers. Trophy houses and day spas do not.”

So what’s left? Domestic public demand — aka infrastructure. For the next decade or so, Lind says, the American government will need to fill in a good chunk of the missing demand for American businesses and labor, and thereby compensate for all the private sector deleveraging that occurred when the asset bubble burst. Here’s how he thinks it should all go down:

To avoid competing with private enterprise, the government should produce public goods that increase overall productivity and that the private sector has no incentive to provide, in good times or bad, such as infrastructure and social services like policing, health care, education and care for the young and old. In addition to mobilizing idle resources and labor directly, both infrastructure and public service spending could help business in general by boosting the purchasing power of Americans who are now unemployed.

Infrastructure-led growth could boost private-sector productivity if it lowered energy costs for businesses and households, reduced freight and passenger congestion or increased the efficiency of telecommunications while lowering the cost. At the same time, infrastructure-led growth could bolster American manufacturers and suppliers and prepare for an export rebound in the future, as long as Buy American laws required that all infrastructure inputs like steel, concrete and electronic components, and all equipment used to construct infrastructure, including machine tools and construction vehicles, must be made in the U.S.

All of which sounds pretty great, in theory. Except there’s the one glaring issue that needs to be dealt with: How do we pay for it? Lind’s answer is pretty much guaranteed to make him very unpopular with a large number of people: “By more borrowing and by higher taxes that fall disproportionately on the rich. Both would channel now-idle savings into enhancing the infrastructure networks and manufacturing base of the U.S.”

Increasing our already-staggering national debt is a popular idea with very few people. Raising taxes is popular with even fewer. As for the “tax the rich” idea, well, the stalled attempts to change the capital gains tax (which basically allows the richest financiers in the country to get away with getting only around 15% tax rates on their eight- or nine-figure incomes) indicates that the wealthy have enough political clout to keep major tax reforms from becoming a reality, at least for the time being. Lind suggests that these new taxes take the form of a federal value-added tax (VAT) and higher property taxes on the rich. Both of which would require a White House and Congress that cares not a whit about getting reelected in order to pass. And all the meanwhile, some are arguing that the answer to our economic woes is less taxes, to stimulate growth in the private sector.

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7 Responses to “Is Infrastructure Our Economy’s Only Hope for Recovery?”
Nick Says:

July 15th, 2010 at 2:35 pm
You obviously don’t follow the polls Melissa. Among voters, raising taxes on the rich is the most popular solution for reducing the deficit. 74% say we should have higher taxes on the rich. And speaking of the deficit, 70% of voters believe creating jobs is more important than reducing the deficit.
Further, you say “and all the meanwhile, plenty of people are arguing that the answer to our economic woes is less taxes, to stimulate growth in the private sector,” then you link to an editorial by… Newt Gingrich? Classy. Because the $1 trillion Bush tax cuts on the rich were so effective at creating jobs and reducing the deficit.
How about asking a Nobel Prize-winning economist. Say, Paul Krugman?

Andrew H. Says:

July 15th, 2010 at 2:48 pm
This process of improving the nation’s infrastructure starts with a reimplementation of the Glass-Steagall Act. Under a Glass-Steagall standard, most of our nation’s debt would be eliminated because it was in the form of a bailout to financial institutions, saving their rampant speculation and gambling. This standard means that anything relating to a productive economy and holds physical value is backed and speculation goes out the window. Second, a bank then cannot participate both in commercial and investment banking measures; only its commercial banking functions will be backed. From here on, the understanding of an economy will be based on a Physical Economy, not a Monetary Economy.

“These measures are absolutely indispensable before coming out. On that basis, that means we have long-term, fixed exchange rate relations with nations. We have to fix that up quickly. We have to have a Glass-Steagall type of standard for international affairs, as well as within nations. We have to then design large-scale credit agreements, which will enable us to develop essentially, the basic economic infrastructure of the kind of world economy you want to come into being. And we need the mechanisms, which are essentially Roosevelt-style mechanisms, but designed for the present condition.”

Once Glass-Steagall is in place, the ability for credit towards infrastructure projects can occur. We would be investing in infrastructure because it would be what improves the productive powers of labor and gives a nation a several generation perspective for infrastructure projects.

“We have a mission-oriented reform, to save the world economy. Which means we’re going to invest—most of the emphasis will be immediately on basic economic infrastructure: mass transportation, high-energy-flux-density power; water management systems, educational systems, restore a Hill-Burton system of health care, instead of this AIG thieving version of health care.”
-Lyndon LaRouche, April 2010

Source: http://larouchepac.com/node/14916

We will continue to see massive austerian budget cuts to state budgets that support its population, including infrastructure measures that this website elaborates on. In general, “a monetarist economy assumes that there’s a statistical relationship among financial events, which defines the way economies function”. Whereas in a physical economy, “everything we should spend money for, has a physical basis. And what we’re concerned about always, is the increase of the physical productive powers of labor, and at the same time, with the physical benefit of those powers—including the social benefit”.

Yes, we can agree that infrastructure will improve the economy. But it’s more than that. It’s about a Physical Economy. Glass-Steagall is the beginning of that change. And unfortunately, our President does not agree.

Bob Says:

July 15th, 2010 at 3:57 pm
I don’t know if its our “only” hope of recovery but it is certainly something that cannot be ignored.

Alon Levy Says:

July 15th, 2010 at 7:59 pm
Andrew, the majority of the national debt the US has today has nothing to do with bailouts. The federal government actually made money on the financial bailouts, with the exception of a few tens of billions of dollars to AIG. It lost more money bailing out the automakers than the big finance institutions.

Melissa, the reason infrastructure can’t support a recovery is that it’s not exportable. It’s ancillary to exportable industries. At best, infrastructure can reduce the cost of living, which in the short run can substitute for some economic growth; in the medium and long runs, it has no hope of replacing it. Let’s say the US embarks on a national mass transit initiative, reducing average household transportation cost from 20% of income to 10%. This is a net 11% growth in real income, which is impressive, but it can’t be done again: you can’t cut transportation costs to zero. In contrast, increasing economic production by 11% not only can be repeated, but has been repeated once every 5-10 years, decade in and decade out.

And the dig at China for not respecting human rights laws is unfair; the things the US is actually good at exporting - biotech, software, high-value manufactured goods - require a lot of education, which means China treats people in those industries fairly. A programmer in Shanghai who makes $50,000 a year may be getting less money than he would in the US, but he’s not being exploited.

jimharper Says:

July 16th, 2010 at 8:21 pm
We have a savings rate of at least 8% right now. That’s high. Too high. Interest rates are low. Lots of idle capacity. About thirty year’s backlog of stuff to be fixed and improved. If not now, when? Its not the overall solution to our problems, but we have plenty to do for the next decade or so. Article in my local paper talked about a bond issue for local community college. They predicted an interest rate of 1% or 2% on the debt. One percent! Unless its a supremely bad project, which is certainly is not, we would be crazy not to do that project.

Stimulus accounts for less than 6% of budget deficit over next ten years. TARP is almost nil. Wars are in between TARP and stimulus. About 17% is the Medicare drug benefit. (Done completely on the cuff with an associated interest cost, now).

Alon Levy Says:

July 16th, 2010 at 8:34 pm
Jim, do you have a citation for the 8% saving rate? The NY Times’ Economix graphics had the national savings rate inching down to 1% pre-recession, then rising and peaking at 6%, and now going down and hovering around 4%. This is not high. France and Germany maintained nearly 15% personal savings pre-recession, and Japan had 8%.

Zach Says:

July 17th, 2010 at 1:26 am
1) Most of the annual deficit is due to falling tax revenue due to the slack in the economy; most of the accumulated debt is due to the Bush tax cuts earlier this decade, and the Reagan tax cuts before that. Lowering them yet again will blow an even bigger hole in the budget. Large tax cuts lead to massive deficits.

2) Some level of deficit spending may be warranted, if it would spark demand. However, all spending is not equal; it makes a difference how you channel that revenue…this is called the multiplier effect. Spending on items like infrastructure (and especially unemployment benefits) has a much higher “bang for the buck” than a tax cut. This has been mathematically shown time and again.

3) There are several reasons for this:
3A) The impact of any tax cut in a down economy is immediately blunted by the fact that a household has to have incoming revenue in order to benefit from the cut. A tax cut is not going to significantly boost the purchasing power of those who are unemployed, underemployed, in school, or have simply stopped looking for work; likewise a tax cut is not going to boost spending by a company with sales that have fallen off.
3B) if a tax cut is expected by the public to be only temporary, then they will likely not elevate their level of spending over the long term;
3C) likewise if it is a modest tax cut (think of the $300 rebates we had a few years back), then it may temporarily lower inventories of small items (like microwaves), but there is no automatic reason why this would inspire a business to invest in actual expansion (new tooling for additional production lines/additional hiring/new offices/new distribution outlets, etc), because the underlying economic dynamic did not change because of the $300 rebate.

4)As mentioned, there are several channels where the government can spend to increase demand that are far more effective than tax cuts. Infrastructure spending is a powerful tool, partly because by their very nature multi-year projects will lift demand over the long-term (demand for personnel, which sparks hiring and training, demand for material from commodity to final product, which sparks investment throughout the supply chain), but also because the project itself can spur economic development. Hydroelectric dams along the Columbia River not only created irrigation for farmers, but lowered the costs of electricity for the aluminum and aerospace industries in the Pacific Northwest. More light rail, when combined with pockets of dense zoning, will spark housing and office construction in those zones, and so on.

5) If we have options on what channels we want to use to drive spending, we also have options for how to raise that money. You mentioned deficit spending, as well as a variety of taxes on the wealthy. One source that could also be lucrative is a modest increase in some tarriffs (emphasis on “modest” and “some”).

6) Therefore, if we want to drive demand but also keep the deficit under control, then we should target deficit spending on those items such as infrastructure that have high multipliers, raise taxes on the wealthy, have a modest rise in tariffs, and of course, rebalance all federal spending towards that which is really effective (over the years Wall Street banks, oil & gas, and big pharma, etc, have leveraged their influence with Congress to win various subsidies and artificially high payments from taxpayers. Many billions of dollars could be saved there alone).

I strongly believe that we can spark demand through smart deficit spending on infrastructure.