Saturday, November 22, 2008

Obama Channels Hoover

Obama economic plan aims for 2.5M new jobs by 2011

From an AP story

President-elect Barack Obama promoted an economic plan Saturday he said would create 2.5 million jobs by rebuilding roads and bridges and modernizing schools while developing alternative energy sources and more efficient cars.
The president-elect said he has asked his economic advisers to flesh out the recovery plan -- one "big enough to meet the challenges we face.
Obama is joining the chorus of left wing econ wonks suggesting that the only mistake in a stimulus package is not making it big enough. Thus we see the quoted number for a new stimulus rise from $150 B -> "at least...$600 Billion" Yes, and if only had the Titanic been much bigger it could have just plowed right through those silly icebergs.

I have mentioned this topic before here, but now that the idea has moved from the wonkosphere to lips of the next President, it's worth mentioning again.

Here are the problems with this plan:

1. To create these new jobs that government is going to have to borrow money. To borrow money they will have to outbid other people wanting to borrow capital. The means that some who wanted to borrow money to consume or to expand a business won't be able to because the government is going to take that money. Less consumption, fewer retail jobs. Less investment, fewer new privately supported jobs.

Caveat A: It is possible that public job gains will be greater than private jobs lost. This is the assumption of the Keynesians I have read, and have no evidence to support otherwise.

Caveat B: Total Output may rise because of these programs, but only at the expense of future growth. Many, but not all, of these programs will effectively take capital from the market and flush it down a whole. Less capital, less growth.

2. Not everyone out of work right now knows how to run a cement truck and lay rebar. If you just got laid off of from Citibank, too bad, no jobs for you. We are increasingly a knowledge based society where the overwhelming percentage of jobs are service type, not manual labor.

3. What happens after the money is gone? The government slathers money on projects and industries that are not economically viable. The people who invest part of their lives developing skills in industries that aren't needed outside of government subsidies. It would be like paying high schoolers to get degrees in Classical Languages. What the hell do you do with it? All this does is exacerbate the day of reckoning for many people who need to develop the skills that the real economy wants to pay them for.

As the NYT's Paul Krugman and America's cheerleader-in-chief for Keynesianism admits at his blog: "But eventually the economy will have to come off life support. What will take the place of the stimulus? I don’t really know the answer..."

My Fear

As the government goes down this road of Keynesianism I fear that the economy will not recover. Deficits will continue to rage in the $1 Trillion rage, but there simply won't be the political will to end these "temporary" programs, because of continued economic malaise. The pressure will be to dramatically raise taxes to reduce the deficit.

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