Keynesian Economics: Planting Apple Trees and Expecting Oranges

In the past, I have always argued that it was the devaluation of the dollar that kept Keynesian fiscal stimulation from truly pulling any economy out of a recession.  I still believe that to be true because massive spending and the resulting weak dollar adversely affect consumer spending.  Then, just last week, I had an epiphany (of sorts) that better explains why Keynesian fiscal stimulation, like the Obama Stimulus Plan, is ineffectual.  It all has to do with apples-and-oranges spending. So, let me explain.

Keynes, like almost every other economist, believed that an economy is driven by two sources of demand (aka spending):  (1) the Private Sector (made up of consumer and business spending) and (2) the Public Sector (made up of spending by federal, state, and local governments).  Further, he correctly believed that recessions are typically caused by a slowdown in private sector spending.  But, where he gets it wrong is in his belief that the federal government should increase spending through work-projects to compensate for the loss of private sector demand. However, the spending for federally-sponsored work projects is nothing like the loss of either consumer or business spending.  Federal projects involve buying massive amounts of things like concrete, asphalt, sand, gravel, steel, etc. along with purchasing heavy equipment to build roads, bridges, airports, or whatever.  Consumers typically spend their money locally on things like entertainment, food, clothing, TV's, and so on.  Five guys, filling potholes, twenty miles away from a restaurant struggling to stay in business isn't going to save that restaurant and its employees from unemployment.  This is why Obama's stimulus hasn't "really" made a single dent in the number of unemployed.  Further, because most federal work programs are so material and equipment intensive, the amount of jobs being created is actually miniscule.  Therefore, no amount of federal projects can truly offset the loss of jobs in the private sector. And, when the project is over or when the stimulus funds dry up, the federally-supported workforce goes back to being unemployed.

In a nutshell, Keynesian fiscal stimulus fails to stimulate the specific sectors of the economy that need to be stimulated to pull the economy out of recession.  And, if the economy does improve while Keynesian stimulus is being applied, its only because the economy is correcting on its own.

Workers Puttering Around....AGAIN!

It seems as if we never learn from the past. During the Great Depression, FDR, his economic team, and the then-Congress thought that "road building" and "public works projects" would get the economy back on its feet. So, they implemented the WPA (Work Progress Administration) to employ the unemployed in things like building roads and bridges and other public works activities. But, after years of failing to provide tangible economic recovery, the term WPA, instead, became jokingly known as Workers (just) Puttering Around.

When Obama and his Democratic majority pushed through the Stimulus Package, they, too, advertised that "shovel-ready" road-building and other public works activities would bring America back to it's feet with jobs-a-plenty. Now, a year later, we have an unemployment rate in double digits at 25 percent higher than what Obama had promised; and, that rate could possibly increase further. Also, there is no significant indication that any"shovel-ready" public works activities have made a single dent in the continued loss of jobs (Click to See the Full AP/CNBC Story: "What Stimulus? Road Projects Aren't Boosting Jobs Much").

The stupidity of the so called "shovel-ready" stimulus plan was that it ignored all that had been written about how ineffective the WPA was during the Great Depression. Almost every job created by the WPA turned out to be short-lived, temporary employment. As a result, there was no ripple effect throughout the rest of the economy.

To revisit the WPA again, during this recession, shows how absolutely ignorant Obama and his economic team are of history. Even this lone blogger predicted failure when I wrote the entry "The Lessons of the WPA and the Great Depression" in October of 2008 -- three months before Obama got into office and four months before the Stimulus Plan was enacted. I will say it once again: The only purpose of the Stimulus Package was to pay back the labor unions (teachers, police, fire fighters, SEIU, AFL-CIO, etc) for supporting an Obama run for the White House and to gain a Democratic control of Congress in the last election. Getting the economy back to work was the last thing on Obama's mind when he signed the Stimulus Plan into law. And, every day that goes by just proves me right!

The States: Not Too Shovel Ready!

This picture is of our shovel ready project. His name is Rowdy and, from the very day we got him, he has kept my wife and I busy with a day and night need to be shovel ready. If only we could get the billions of dollars for our little project.

According to Barack Obama, the stimulus plan had to be approved posthaste in order to get this country back working again. There was no time to look into things. Just do what he says and approve it. According to Obama, the States had hundreds of projects (shovel ready) just waiting for funding. Right?

Well, his near trillion dollar, jobs-awaiting stimulus package is approved and the money is ready to go out the door but, there appears to be one big problem. It seems like the States, themselves, aren't quite shovel ready. Sure, they claim to have a lot of shovel ready projects but it now appears that they are in a form of "analysis paralysis" because they can't decide what to do first (See Full Story).

Little Rowdy keeps us shovel ready because we don't want things laying around that we could step in. Barack better get his shovels ready and working or, otherwise, he too, will be stepping in it. Just my opinion.

A Real Life Story Of How Shovel-Ready Projects Are Probably Doomed to Fail

I live in Las Vegas. U.S. Highway 95 runs from the south end of this city to the north. It is literally the main artery in this town. U.S. 95 was originally constructed in 1971 to handle about 25,000 cars a day. Today, almost 10 times that number of autos use this roadway on a daily basis.

In 2000, the Federal Government approved and began a project to expand "95" from 6 lanes to 10 in order to handle the current and the anticipated daily traffic increase of up to 300,000 cars. It is a Federal road and the expansion was paid for by you and I, the taxpayers. The project was within months of completion; but then, in walks the Sierra Club with a Federal Lawsuit (See Full Story). With a newly hatched environmental and health study in their hands, they were able to tie up the completed expansion of this road project for two years. The primary finding of that study was that any persons who lived or worked near highways could suffer increased health problems. Additionally, they used the close proximity of 3 elementary schools and a day-care center to season the scare and heighten any public concerns.

The Sierra Club won their suit in a friendly Federal Court. In fact, it was the always-liberal and wacko court of the 9th Circuit Court of Appeals in the heart of ECO-nutland - San Francisco -- that gave them their win. Besides delaying the project, the cost of the delay to the Federal government was in the hundreds of thousands of dollars. Also, the suit's settlement specified that additional "health protective" measures must be added to the project; which resulted in substantial cost overruns. These measures include massive high noise and exhaust abatement walls along the highway. There were also several "pollution measuring" stations mandated in the finalization of the suit.

Like much of the ECO-nut activities in this country, all this legal wrangling by the Sierra Club looked to have merit in the micro view but makes little sense at the macro level. First, there was this nonsensical attitude that if you build or expand a road, the cars will come; as if the cars didn't exist until the road was built. Duh! All those cars were already here! And, by not having the efficiency of an expanded highway to handle more and more cars; the health risks to the entire city of Las Vegas were raised. It seems that the people filing the lawsuit, and that judge in the 9th circuit court don't understand that a car idling at a dead-stop, in traffic, is getting ZERO miles per gallon and just needlessly pumping out exhaust pollution. Further, many cars in this city were being forced to take alternate routes through the city streets to avoid the traffic on 95. This, too, resulted in lower gas mileage and higher and higher rates of exhaust pollution. Pollution that affected the whole city and not just those who worked or lived in close proximity to "95".

The silliness of the abatement walls is the belief that somehow they would shield all those near U.S. 95 from any pollution. Pollution isn't like some immobile hunk of rock that will stay where you put it. Over time it will just go over those walls. Further, those walls are insuring that pollution is being trapped and concentrated at peak driving times before it can dissipate into the atmosphere or "climb" over those walls. As a result, every car's driver and all of its passengers (and, some might be kids) on that highway are being exposed to abnormally high levels of trapped exhaust emissions. That's at least 200,000 people in their cars per daily commute who are at higher health risks; not just the residents in those 380 homes and 27 apartment buildings, three schools, two community centers, and a care center that the Sierra Club identified in their lawsuit as being at risk. Where's the Sierra Club's study on that!

The purpose of bringing this all up is the fact that this was a landmark case of sorts. With this particular win, any activist organization in American can literally stop a road or bridge expansion project, either Federal, state, or otherwise, for the same reasons. That means that much of the infrastructure stuff in this stimulus package could be hit with a proverbial health related roadblock. That also means that much of the stuff that Obama and the Democrats seem to think will happen on a "timely" basis, probably won't happen at all "or" for at for least two or more years as many of these things wind their way through litigation. Those people who were supposed to be gainfully employed by these projects will either be just sitting around awaiting court decisions or, more likely, collecting more government money in the form of unemployment comp.

As with much of the legislation that our Congress finally approves, the only gainful employment will be for our nation's lawyers.

As usual with this blog...one last thing. Don't expect the billions in the stimulus plans to be used any time soon in expanding our electrical grid (electrical transmission facilities) so that all those Obama-proposed solar and wind power generation sites will have a place to send the electricity that they are supposed to produce. If ever there was a target for lawsuits, the expansion of the high voltage lines across this country will be it. There are already many well known studies that have identified the health risks, including cancer, that are associated with electromagnetic radiation emanating from high tension power lines (Please Click To Read This Related Entry In Wikipedia). Again, it will be the lawyers, and not the American workers, who will be stimulated (actually over-stimulated) by this part of the Obama/Pelosi/Reid stimulus package.

Detour image by lenseyed's photostream on Flickr with Creative Commons Licensing. Some rights retained. (Click to View Other Works).