Wednesday, May 21, 2008

Reich: Break the cycle of recessions via capital projects

Former Clinton Labor Secretary Robert Reich proposes an interesting idea - a national capital budget which would prioritize and fund road and bridge maintenance and new building that would have the effect of stabilizing the economy.

But the biggest challenge now, as it was before the 70s, is lack of aggregate demand. Consumers don't have enough money in their wallets to keep the economy growing. And the Fed is stuck. If it cuts interest rates much further it risks pushing the dollar lower. But that will spur inflation as everything we buy from abroad costs more.

So what's the answer? We've got to go back to fiscal policy -- big time..

The best and easiest candidate for the large-scale stimulus that's needed is spending on the nation's crumbling infrastructure. America has deferred billions of dollars of maintenance on bridges, sewers, water systems, levees, and dams.

It's a fascinating idea though, as Reich notes, not an entirely new idea. It's patterned on the fiscal policies that grew out of the Great Depression, using large scale government projects to spur economic growth.

It's an idea that not only makes economic sense but also makes practical sense in terms of rescuing our crumbling infrastructure. Here in Colorado we're staring at a minimum $500 million a year in spending just to address the backlog of various transportation maintenance projects. That number grows to $1.5 billion if we want to look at new projects. Other states are facing similar budget crunches. A failing infrastructure endangers lives and costs the economy money as it slows the transportation and delivery of goods. In this regard Reich's proposal is really a two-fer in economic terms.

Here's how Reich envisions the new capital budget working,

Problem is, the public doesn't trust the government to spend money on infrastructure wisely. Why should it, when so many earmarks go to dumb infrastructure projects like "bridges to nowhere"?

So here's the deal: The next president should establish a national capital budget that lists infrastructure projects in priority order, for the nation as a whole. No more earmarks. The capital budget will reflect the nation's true infrastructure needs. The government would fund that capital budget the way capital budgets should be funded - through borrowing that assumes a realistic return to those capital investments. This is what any smart business does.

Politically and practically this is an important feature of the Reich proposal. Politically it guarantees a level of transparency and accountability, features that any large scale policy proposal like this must contain if it hopes to ever see the light of day. Practically speaking it prevents individual Congressmen from wielding too much personal power or influence over the various projects. I'm not naive, obviously politics cannot be entirely eliminated but I think that restricting the ability of the Congress to direct much of the spending according to their personal whims would go a long way to ensuring not only public support but the long term success of the project.

It's an idea straight out of the New Deal - use government to drive demand while at the same time providing millions of jobs and improving our shared infrastructure.


rusty said...

how about investment in rail and public transportation infrastructure? personal cars and long-haul semitrailer trucking of freight will become uneconomic soon due to rising energy costs.

otherwise a good idea.

Steam Powered Opinions said...

Totally agree. There's no reason we couldn't have a WPA for new rail and public transport.

rusty said...

one other suggestion for Reich's plan and I realize this is hairsplitting, but:

"America has deferred billions of dollars of maintenance on bridges, sewers, water systems, levees, and dams."

..many of the sewers, water systems, levees, and dams don't need maintenance, they need to be scrapped altogether and redesigned from scratch. we need to return many areas to a more natural floodplain. disruption of seasonal flood pulses has pushed all that sediment and nutrients out to the gulf and is effectively killing it. areas other than the mississippi basin have their own problems.

Again, I like Reich's idea but he needs to make the sustainablity component a centerpiece of a large national infrastructure plan. others have also touched on this need.