Tuesday, August 26, 2008

Make Work, Save the Economy?

One of the ideas that is getting thrown around a lot at the Democratic Convention is the idea that government can automatically provide "high-paying jobs" to our nation's workers through "rebuilding the national infrastructure" and this is a good thing.

The rationale is that many people are out of work, and that the nation needs infrastructure improvements...put the two and two together, and the answer seems perfectly rational! Woo-hoo! Soon we'll be rolling in the dough!

However, by only looking at "save the environment" and "improved roads" and "higher wages," the Democrats are actually missing a big chunk of the picture, namely the fundamentals of economic growth and productivity, hence preventing them from seeing the fact that, in material terms, we will necessarily have to be poorer to carry out their ambitions.

Let's consider the "save the environment" approach. The Democrat approach can be summed up in the Al Gore approach, which aspires to carbon-free electricity within 10 years. The problem here? Massive retooling of the energy industry must be done in order to accomplish this, which requires untold billions of dollars and tearing down a lot of existing infrastructure that's still useful. Hence, retooling the entire energy industry means we are actually destroying wealth rather than creating, and sacrificing other goods in order to pay for the new "green stuff." While it's true we may be better off in the long-run and even in the short run, as we may avert highly damaging global warming and we greatly value clean air, in the direct material sense, we'll be worse off. That means these workers aren't actually producing anything of direct value to the economy. Since the Democrats are touting this as the solution to our economic problems, I am left scratching my head.

The same logic applies, for the most part, to the reconstruction of the nation's roads as well. It isn't actually adding any value to the economy, since it is only maintaining what we already have as opposed to the construction of new roads and railroads to tie the nation together. It's rather hard to justify an economic policy that is based on merely keeping up with where we are right now.

It IS true that government spending can be helpful during a recession (or near recession). Reimbursements can help alleviate some of the pain of economic adjustments, or specific groups in general. Government spending can also be used to manage demand (IE, kick start it) so the economy starts humming again. Government spending is also helpful if it invests projects that provide the essentials for economic growth, like a strong national defense or a power grid.

However, the Democrats are apparently looking at things from a supply-side perspective: they see the falling wages as endemic to the Bush administration era, which encompasses a rather long economic expansion as well as two "recessions." Hence, they don't view their investment program as a simple means to readjust the economy in the aftermath of the credit crunch. Rather, they see this infrastructure investment as a viable solution to an endemic problem (growing economic inequality).

But how much sense does that really make?

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