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Paul A. London

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Why Spending on Infrastructure Matters

Posted: 07/11/2012 12:47 pm

Middle class Americans hear different stories from Republicans and Democrats about why employment is not growing faster and what it will take to revive it. They need to cut through the BS and recognize what the problem is. History can show us the way.

Republicans say the economy is being held back by new regulations and excessive spending by the Federal and state governments. Democrats say the problem is lack of demand, and the solution is public and private spending on roads, bridges, and other infrastructure to temporarily replace the purchasing power the middle class lost when home prices fell and jobs disappeared. Democrats are right, but if the public makes the wrong choice, this country will be mired in recession for a decade with political implications that no one wants to consider.

So here are the bald facts for people to consider. The prices of homes fell 30-40 percent nationwide from 2007 to 2010, wiping out 40 or 50 percent of the net worth of middle class households. The value of the real estate assets of American households fell from a peak of $22.7 trillion in 2006 to $16.6 trillion in 2010, destroying an astounding $6.1 trillion of household wealth. None of that $6.1 trillion decline had been recovered by the first quarter of 2012.

What this means for the economy today is that middle class consumers no longer have collateral or a nest egg that would allow them to spend the way they did before the collapse. Through most of the first decade of the 21st century, mortgage borrowing gave the economy a lift. Since 2008, by contrast, American homeowners have been reducing their mortgage debt, creating a huge drag on employment and growth.

Why did housing prices collapse? Because financial institutions were allowed to fiddle with fancy financial instruments unsupervised during the years when Republicans controlled the Congress, the White House, and the policies of the nation's most important financial regulator, the Federal Reserve. Financial slight-of-hand always has been the soft underbelly of economies both here and overseas, but Republicans -- hobbled by their "private-sector-can-do-no-wrong" blinders -- have never recognized this incontrovertible fact.

Today the central question Americans want answered quickly is what can be done to overcome the impacts of the housing crash on jobs and economic growth. With so many foreclosed and unsold houses on the market, prices will not recover quickly, so consumer borrowing cannot be the engine of recovery.

More business borrowing would help, and it has recovered significantly -- as has private-sector investment -- since bottoming in 2009. But business borrowing in 2011 remained $816 billion below where it was when the crisis began in 2007. It is simply fatuous to blame this on regulation, which is barely more onerous than under the previous administration, rather than on the huge drop in demand for housing, cement, steel, office and retail space and a raft of other goods and services.

The only solution is government spending on public works and infrastructure until Americans have money in their pockets again. Such spending could end this Great Recession the way spending for World War II ended the Great Depression. Modest amounts of government investment at the Federal, state and local level could be used to attract private money into many needed projects, which should be structured as public-private partnerships. World War II is the model. Republicans said America was broke in 1939, but we weren't. We had huge idle resources as we do today and lacked only money, which it turned out the government and the Federal Reserve could create and deploy. Are we too stupid to learn from history?

 
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