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

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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.