Declaring War on the Meltdown/Part 2: Taking on Debt For Infrastructure

Last week, I suggested a bold plan to declare war on the meltdown. I discussed how our misadventure in Iraq had drained a trillion dollars from our economy, just like doctors used to drain blood from a sick patient. Senator McCain's basic answer is to tighten our belts, in effect to drain more blood from the patient. The patient needs a 21st-century transfusion, not an 18th-century bloodletting. When the patient is a national economy, a transfusion means not just a transfusion of money, but money that is spent on building or creating things that have lasting wealth. In bad times like these, that means the government has to spend money to build things that we desperately need: roads, bridges, schools, courthouses, sanitation systems and a new energy infrastructure.

Over the last few days, this idea has been increasingly embraced. In this week's Newsweek, Fareed Zakaria argues that "in the short term, all the solutions to the current crisis require that governments take on more debts and larger obligations. This is inevitable and necessary." He notes, however, that simply giving more tax cuts is "like asking a drunk to go to AA next year, but in the meantime to have even more whiskey. A far better stimulus would be to announce and expedite major infrastructure and energy projects, which are investments, not consumption, and therefore have a much different effect on the country's fiscal fortunes".

"Investments, not consumption", get it? We would be spending capital (money) to create another kind of capital (infrastructure). We will actually have directly created something to show for our investment. (As opposed to, say, blowing up Baghdad, or creating greenhouse gasses from our consumption of oil.) We will have new wealth. To create the wealth, we will have hired people to design, create and build things. That will create more wealth. We work our way out of our hole, just like we did in the thirties. This is not a novel idea.

On this week's Meet the Press, Senator John Corzine suggested the same thing. Just as he did on the first day of the crisis when he happened to be in Miami (that mid-September morning, the Senator had watched his investment in Goldman Sachs lose a quarter of its value), Senator Corzine suggested that $50 billion or more (perhaps out of the rescue package) be focused on building infrastructure and creating jobs and wealth. Barack Obama has suggested that $150 billion be spent over the next 10 years to create new sources of energy, creating millions of new jobs, and has talked about building new infrastructure in America, rather than Iraq.

Tom Brokaw followed Corzine's pronouncement with the predictable question that would make him appear to be the grownup in the room: "how are you going to pay for all that infrastructure". Politicians are sometimes afraid to answer that question frankly, because they get painted as a non-grownup. In fact, the grownup answer is, "take on debt, and pay the debt off during the life of the project".

Indeed, after arguing that the solution to our meltdown is for the government to take on debt for infrastructure, grownup Zakaria notes parenthetically that debt for major infrastructure investments "are not listed separately in the federal budget, but that's just bad accounting".

Why is it bad accounting? Because the costs of capital projects that are going to last for future generations should be paid for by this generation and future generations. They are precisely the kind of projects that should be capitalized and paid for over time. It is not unfair to "saddle our grandchildren with debt" if it is to help pay for assets that enhance their quality of life long after we are gone. It is only unfair to ask them to pay for us to party now. That is why the budget director of that wild-eyed liberal Dwight Eisenhower actually set up separate budgets for operating and capital. Operating budgets should be pay-as-you-go. Capital budgets that provide for the creation of assets that will be enjoyed for generations to come should be paid for over time. That is good, responsible, conservative, grownup budgeting and accounting.

But won't we just be "printing money" to pay for the infrastructure debt? Won't that just stoke inflation and destroy the dollar? Well, it appears that one of the twisted "silver linings" of the last few days is that all of the other major economies are going to have to do the same thing. We are all admitting that we're going to need to print more currency. While that means that we all may eventually have to deal with some level of inflation, the dollar will not lose value against the euro or the yen. And imagine if we all spend money and time actually building things that enhance our wealth and quality of life. That would be a good thing.

Senator Obama may not feel the need to announce bold programs at this stage of the campaign. But as I noted in my last post, declaring war on the meltdown with an army of ready, willing and able workers to create lasting wealth is both good policy and good politics. Because it's good policy, the new Administration might very well need to go in this direction, whether it's announced now or not. If he needs to go in this direction, by adopting the accounting standards of a Republican president, the new president can responsibly place these investments in the capital budget where they belong, as we execute our war on the meltdown.

Comments

[DuganS1]

The effect of $50 billion of spending on "infrastructure" projects would not be very stimulative to the economy nor would it add much to amount already being spent on construction projects. People don't seem to understand that it would take a long time for the $50 billion to filter through the economy to be stimulative. It makes much more sense to extend unemployment benefits, increase food stamp benefits, or simply hand out the money in tax rebate checks to lower income earners. This would get the money circulating quickly through the economy and have an impact immediately on GDP. Most people also don't realize that close to $100 billion has been spent every month this year on construction alone, and that's with residential construction being down tremendously from last year and more so from 05 and 06. $22 billion was spent in June of this year alone on construction projects in power, highway and street, sewage and waste disposal, transportation, and water supply. Just how much of an impact do people think an additional $50 billion will have over a period of a couple years? Not much in my opinion.

[joebhed]

The problem is -
ALL money is created as debt.

No, no.
You don't understand.
THAT is the problem.

There is a valid point being raised that we should all pay attention to if we want another way of doing things.

Consider that ALL money is created as debt.
In any year, you could build schools or bridges.
Or you could foster more production and consumption.
Either way, you create jobs, use resources and increase economic activity.

For some reason, with so-called "infrastructure" investments, it makes sense to pay for that bridge three times over.
Buy, if we're just stimulating, or enabling, production and consumption, it does not.

Here's a secret.
Whatever you do, don't tell the Republicrats.

It does not make any more sense to pay for a bridge three times over than it does to pay for my social security. Or for building houses.

In the CREATION of new money we sow the seeds of our own demise by requiring that the money be repaid three times over.
Once for the bridge, and twice for the bankers.

The bankers who have the privilege to fleece the consumers and taxpayers by creating that money as debt out of thin air.

These feel-good solutions are a yoke around our necks.
And we can cast off that yoke with government-issue, debt-free money.
Pay for that bridge only once.
And save me my tax money, please.

[KillTheMessenger]

How do we pay for infrastructure?

Do I really have to say it? It's the dirty three letter word that nobody dares to use in this country.

It's called

T A X

[K.J. Dwyer - Huffpost Blogger]

As usual, spot on.

It's more than a little ironic to me that the sum total of neo-conservatives' efforts to "kill the beast" for the last 30 or 40 years is going to wind up creating huge government rescue packages, a whole new wave of regulations on the free market, enormous government­-sponsored infrastructure projects and a New Deal II with all of its attendant socialist programs.

Were it not for the misery that a great number of Americans are about to experience, it would be funny. As it is, however, it's just a sad, pathetic realization of how utterly short-sighted, greedy and ultimately STUPID conservatives have been, are and always will be.

A real grown-up realizes that there is no form of government that is purely free or oppressive. These pathetic binaries (black/white, right/wrong, evil/good) are the stuff of pea-brains and it's time for us all to grow up, acknowledge the truth and advance the species.

That it requires events such as the present economic crisis to bring it home to "Joe six-pack" points out how desperate we are as a nation for something resembling critical thinking. In addition to all of the programs you mention, Americans in general need to smarten up considerably. We are WAY behind the curve in education and unless we want to continue to cede future elections to the likes of Sarah Palin, we've got to make some serious investments in that arena, as well.

[joebhed]

Actually, huge government rescue packages are paid for by American taxpayers, paid three times over on those $USD-denominated debts created by private bankers and lent to the US government.
So, I don't feel great about that government rescue package.

As for that new wave of regulation coming down, it's all part of the customary, yet unpopular, corporatis­t-controll­ed economic business cycle.
Boom, deregulate. Bust, regulate.
Begin again. Et cetera.

There will be real gain as we switch from a money-centric economy of derivatives of hedged futures on SIVs, and towards using the money supply for creating jobs for Americans. What the heck. Not bad.

You would think that would have been the role of the Federal Reserve within its overall economic and financial power that includes full employment without inflation.
Oh, yeah, I forgot.
That WAS the role of the FED.

It's one of those problems that comes up when those with the financial powers of this country are self-regulated.
But they made so much MONEY !!

If we live in an economic system where all money required for normal economic progress must be paid for three times over, we are akin to indentured servants.
Those with the privilege of creating that money as debt with interest are those to whom we serve.

The solution to the political, economic, financial, social problem confronting us is the establishment of a government-issue, debt-free money system in this country.

Forget socialism.
Free enterprise.

[DuganS1]

The US is not "way behind the curve in education". Outside poor performance among the urban poor, our education system is very strong. We should, however, motivate more kids to pursue fields related to math ,science, and engineering, and really push kids into studying these aras at the graduate and PHD levels, otherwise we'll need to continue bringing in larger and larger numbers of foreign talent on H1B visas. Second, I don't understand the comments about the conservatives being short-sighted, greedy, or stupid. If you're talking about the Bush administration, they've pursued a liberal economic policy, not a conservative one, and the failure to regulate falls onto the lap of Democrats as much as Republicans.

[Paul]

Perhaps the money could come by collapsing the military industrial complex.

Our national security would be better served by building a reliable 21st century mass transit system instead of more aircraft carriers, atomic submarines and stealth bombers.

If no one needed to own a car in the US, oil prices would drop to depression-era levels. We would not have to make deals with corrupt countries who happen to sit on top of oil and the middle east would no longer be in the national interest. Hugo Chavez would go broke, along with our would-be competitors in Moscow.

Best of all the investment would put people to work in the US, create long-term value and keep the money here at home instead of sending it to China and Japan.