Thursday, January 22, 2009

Brian Shields analyzes Wilmington micro-pork in the upcoming stimulus package

The devil always resides in the details. Brian Shields at The Mourning Constitution takes a detailed look at Wilmington's requests for $52 million in stimulus money that will ostensibly create 84 new jobs. That's slightly over $619,000 in proposed Federal spending for each new job created, but here's the real problem:

Now obviously, the only jobs that are going to be grown here are either long term city government jobs, or one time contractor jobs. Neither situation is a long term private sector solution, which was kinda the point.

This is pretty much why the new stimulus package represents new pork from the same old sausage factory on the Potomac. It's obviously laudable to replace sidewalks and water mains and all that, but if the Wilmington average of $619k per job generated (whether it's permanent or temporary) means that we'd have to spend $1,865 Trillion to get to the 3 million new jobs we've been promised.

Before you jump me and say, Wait a minute, this money will also generate new jobs because of the orders for pipes, solar panels, concrete, etc. etc. to provide materials, and also new commercial jobs for people selling stuff to those people who now have new income, I'm aware of that. The problem is that while such indirect stimulus might happen, it can only really be quantified after the fact and pretty much by statistical inference rather than hard data.

Let's take pipes for example. It is unlikely to be the case that Big Pipe will take on new employees to meeting Wilmington's demand for new water mains. Big Pipe is first going to attempt to fill these orders out of unsold inventory, or even to purchase the inventory of bankrupted Little Pipe companies to meet the demand before it hires even a single new worker. That just happens to be how the market functions. It is in the best business interest of the suppliers to meet these orders with the smallest possible workforce, primarily because Big Pipe knows that once Wilmington and two dozen other cities have replaced their water mains it will be several decades before another order of that magnitude comes along.

That's the unfortunate downside to massive short-term infrastructure investment that nobody who believes in neo-Keynesian economics wants to talk about. The stimulus package--even if it works as advertised--creates an artificially and temporarily enlarged construction and building supply industry where wages and prices go up in tandem because the government can print as much money as it wants to spend.

But eventually, the major roads and bridges have either been rebuilt (or the government runs out of money or intent to keep funding the projects) and that surge capacity becomes largely surplus to the necessary maintenance capacity to keep that infrastructure running for an expected forty-year life-time. The Keynesian bet, of course, is that other projects will come along in an expanding economy to keep things rolling once they have been jump-started.

Here's the unpleasant fact: the only reason this eventually worked for FDR (after failing all the way through 1938-39 to reduce unemployment below 19%) was that World War Two came along. The war provided an artificial need for massive industrial production (Paul Krugman calls it a jobs program) and there was no let-down after 1945 because thanks to the war we had the only intact major industrial base on the planet. Thus we had open markets and no competition for nearly twenty years.

However, union folks should take note of the fact that the wartime expansion of the industrial plant in American was funded by FDR's government directly on their backs. Once the war started, unions were required by law and regulation not to seek wage-increases or strike. As a result, by 1946, the real wage (adjusted for inflation) of, say a steel worker, had actually dropped to below what it had been in 1938, while the industries and the government--either through profits or new taxes--racked up billions in new money. [I'm not going to give you an easy convenient link to document this; go read Joseph Goulden's The Best Years, 1945-1950 if you want the data.]

Moreover, just as some in heavy industry were beginning to worry in the 1950s about long-term prospects, along came the Cold War and massive government investments in defense spending, which have continued to the present day.

So here's the point: massive Keynesian spending on national infrastructure sounds really good to a lot of people, but the economic activity only really pays off in the long term if you can manage to follow it up with a world war as a jobs program, and have that war devastate most of your competition's industrial base. A little fact that Paul Krugman always conveniently leaves out of his calculations....


Anonymous said...

The other issue is these one off contractor jobs will have to be performed at prevailing wage, meaning you get the same work done and for only 1.5x more than need be spent.

Tyler Nixon said...

"A little fact that Paul Krugman always conveniently leaves out of his calculations...."

Well it's a bit hard to bring the man even up to the 1950's in his thinking, when he is so terribly stuck in the 30's.

It strikes me as though revisionists like Krugman conflate FDR's relative success in stabilizing the bank situation, immediately when he took office, into a myth of long-term success for his (totally separate) national works program and centralized economic interventionism that followed through the rest of the 30's. FDR calmed everyone, but they continued suffering - save the make-workees, in the short term.

Krugman's brain is stuck on 1933, slobbering over how our latter-day version of shoring up the banking system might similarly portend a (much more massive) attempt to takeover our national economy.

Maybe he sees WWIII right around the corner, so we can fully relive his antiquated fantasies about bringing socialism to American, 1930's style.

Miko said...

The connection to the war is far from obvious. Some economists (but not all, of course) think that the Depression was basically over about 3 months before Pearl Harbor.

The danger of attributing things like this to historical events is that it's hard to know which ones to pick. For example, wouldn't it be just as valid to say that the Depression ended only after the Conservative Coalition gained enough power to overturn a large number of FDR's Keynesian legislation?

Also, regarding the ripple effect of new jobs, we must remember Bastiat. If the government weren't creating those pork jobs, it would have borrowed less, leaving more in the hands of the borrowers (which, since we were borrowing in dollars, could be foreign nationals without changing the rest of this argument since they'd still have to spend it here for it to be anything other than a slip of paper), which would lead those borrowers to use the money in some other way, and create exactly the same effect as the job-creation program. In fact, it'd probably create a slightly stronger effect since there wouldn't be a loss from the market distortions created by the government policy.

G Rex said...

"...we'd have to spend $1,865 Trillion to get to the 3 million new jobs we've been promised."

Now I see, it's trickle down economics for Democrats.

And why isn't Tyler pleased that the city of Wilmington will finally fix sidewalks?

Tyler Nixon said...

"And why isn't Tyler pleased that the city of Wilmington will finally fix sidewalks?"

LOL, G. City of Wilmington or federal taxpayers?

We're already (Wilmington taxpayers) paying for sidewalks, they're just not fixing them.

I don't think my federal taxes should bail their ass out any more than they wanted to have the legislature bail them out on the backs of homeowners already paying for, but not getting, this chater-mandated service.

Pigs at the trough can never get enough.