We all know the republican talking heads are spewing the BS as hard and as fast as they can that "the new deal didn't work". We also know that its wrong. But why exactly? Well, I'm not an economist, but here are some points I use when talking about it.
(Full disclosure: I'm an engineer, and I talk to engineers, so there is a little math built in here, but that makes the analysis more rigorous). Here is as thorough a breakdown, with raw numbers and sources, why FoxSpews and the Repugnantcrats are dead wrong about their adopted meme that the New Deal didn't help the economy.
This is bunk. An analysis of why is below the fold:
This is a continuation of my previous diary, here. I'll add more discussions as I have time to do the research.
First, the dysphemism of 'pork'. We all hear the attacks on pork and the argument 'one man's pork is another man's necessary infrastructure improvement'.
When is pork a good thing?
I say it is when the constituents benefitted directly will also indirectly benefit the regional and national economies as a whole. I'll illustrate by example:
- Consider the MDA. This could easily be viewed as a pork barrel project on a massive scale. The primary beneficiaries are technical developers and the main contractors; the profits are localized to those companies, and their staff are main people who see the benefit.
- Consider a massive overhaul of the nation's railway systems, or a massive overhaul of the nation's electrical grids, or a massive overhaul of the nation's water system, all three of which we badly need. This is also 'pork' in the sense that federal dollars will be spend primarily where
In my opinion, pork barrel spending becomes a good thing when, after some amount of time, the overall benefit to a local economy creates a measurable economic improvement in the area that it is applied. Economic improvement leads to higher tax revenues and quality of life, and eventually 'pays for itself' to the federal government. This is not necessarily a 5 or 10 year calculation, but may be a more qualitiative measure. Even if the benefits are highly localized, say, to a particular congressperson's district, if the effect is deep-seated economic improvement, it isn't necessarily a bad thing.
Secondly, I'll add a definition of the middle class: The middle class is the economic point at which a citizen's tax revenue is greater than the cost of the government services that they need.
So here is why spending programs where the government semi-directly creates jobs (rather than farming out work to big corporations who don't create as many jobs) benefits the economy:
Update: What we want to avoid with governmental job creation is an endless chain of middle men that suck money out of contracts without doing any useful job creation, such as what happened with much of the post-Katrina cleanup money. This is done by limiting the amount of subcontracting allowed, forcing corporations to hire people and do the work themselves.
- Middle class jobs create disposable income. Disposable income gets spent. This benefits local and national economies. Just as importantly, this injects a large percentage of the money directly into the economy; as middle class workers spend 70-80% of their incomes. Even banks feel a boost as workers now need banking services to manage their new incomes. Banks will see an increase in deposits.
- Middle class jobs creation creates upward pressure on wages across the entire economy. With a high unemployment rate, workers are in greater supply than demand for their services. This creates all kinds of downward pressure on wages as businesses struggle to slash expenses and save money. The problem with lowering wages is that it cuts the amount of money available to move through the economy. By soaking up these excess workers, this issue is mitigated to a large extent. This creates 'ripple benefits' for workers outside the programs.
- Even though major and well thought out projects will not begin work immediately, as soon as those projects are announced, economic benefits will begin to occur. Raw materials producers will begin increasing production in anticipation of new project sand providers of enabling technologies will likewise increase activitiy.
Other benefits of making middle class jobs include:
- Middle class workers who do not need to deplete their savings are less likely to need financial assistance from the government later in life.
Here is why the government creating jobs directly or semi-directly (through only 1 or 2 layers of contracting, if that) costs less than any other way of doing things:
- The fewer middle men in the game means that more of the money spent by the government goes directly into the pockets of workers.
- When a large number of jobs are created in a limited area, new jobs are created almost immediately to support those workers and projects. The raw materials consumed by construction projects. Workers need to buy goods and services, which creates some number of jobs (the exact effect is too location and context dependent for me to explain the model here) for every job the government creates. This effectively creates a gain factor, where the government actually creates more wages than it pays; possibly as much as 2$ or $3 of wages paid for every dollar spent by the government.
- For every middle class job created, the cost of that job is directly (if incompletely) offset by an amount equal to the cost of the government assistance no longer needed by those families who are now employed. This reduces the effective cost of those jobs.
If this is any kind of a guide to go by, ignoring any effects of 'ripple effect' job creation and correcting for errors in land aquisition with a 20% allowance, public transportation development costs the government a mere $30000 per job created. At this spending rate, then 210 Billion dollars would rapidly absorb 7 million workers from the unemployed to the employed.
A commitment to spend 210 Billion plus 150 billion in middle class tax cuts (based on my previous post) makes a stimulus package suggests that we need a stimulus of about 360 billion a year. If we take into account a 4 year recession and a cost of 11% for pork and politics, 1.6 trillion as a slow expenditure should make up the core of the stimulus. With 7 million more workers with steady jobs for at least the next 4 years, the 'bottom up' effects of market economics should stimulate the economy.
As the economy recovers, program jobs become less and less desirable for unemployed workers, since they would be necessarily pegged to the bottom of the middle-class continuum. As the number of workers in the jobs programs dwindles (perhaps we should keep it at a low level permanently to create a working-welfare system) we simply reduce the amount of money we spend on it and phase out projects one by one. This might cost 105 billion over a year over another 4 years to prevent economic shock waves, but the 'exit strategy' doesn't ruin the math.
Screw bailing out banks; if banks are going to fail, we should put them under conservatorship like fannie and freddie, and throw out all of the top management. We should draft a law to make corporations put golden parachutes into escrow for 5 or 10 years, and if a bank goes into federal conservatorship during that time, they lose that parachute. That creates a counter incentive to the excessively risky activities that caused part of this mess. That, however, will probably be the subject of another post.
Now as homework, go and see how much good the 2 trillion in buying assets from banks has done so far at stopping the recession.