Monday, December 01, 2008

Spend, spend, spending our way out of recession

We have a consensus among politicians in this country that we must spend our way out of this recession.  Of course, there are many things to spend money on:
  • For the last six years, the neocons within the Bush Administration have spent around 700 billion dollars of our money on wars, and committed another trillion or so to the aftermath of those wars (caring for the permanently maimed American soldiers).
  • This March, the idea that everyone jumped at was spending money on consumer goods, so every American got a check for $400 from the government, and was exhorted to spend it on consumables.  Pfft!  Just like that, $80 billion gone.
  • In just the last month, the Federal Reserve has spent hundreds of billions by buying stock in badly run banks whose value is justly plummeting as people realize how stupid their management was.
All of these have been colossal failures from an economic point of view.  And I do mean colossal.  The U.S. economy is about $13 trillion a year, and has a historic growth rate of about 3% per year.  It is the most awesome generator of wealth ever.  The economy usually generates about $400 billion a year in growth.  And our government is now throwing away money at a rate which entirely negates the economy's ability to grow at all.  The current trends guarantee that our children will be worse off than we are.  We are within a single order of magnitude of blowing away the entire output of the U.S. economy, which would reduce us to hunter-gatherers amid fancy energy-starved infrastructure within a year or two.  Lest you think that an order of magnitude increase in government spending is preposterous, consider that one department, the Fed, is now spending more than 1% of the U.S. GDP per month propping up just one industry.  The auto industry is lining up at the trough, and others aren't far behind.

Although the things the government spends money on now are crippling the economy, this is actually a good time for government spending to grow, so long as we spend money on the right things.  Private sector returns on investment are low, so the cost of borrowing has dropped, which means investments have longer to make a return.  This is a great time for the government to spend money on things that will cause the economy to grow in the long term:
  • Domestic power infrastructure, like wind farms and nuclear powerplants.  These will make the cost of future energy more predictable.  Predictability means less risk, so that the cost of capital for energy-intensive manufacturing, like fertilizers and aluminum and steel and plastic, will be lower in the U.S. than in other countries without the same infrastructure.  That will give our descendants decades of competitive advantage, which is enough time for not just businesses but industries to grow.
  • Health care efficiency.  I'm not suggesting we spend more on health care itself -- we're spending too much on health care.  I suspect that a huge amount of operational expense can be slashed from health care through radical restructuring without large amounts of investment.  The restructuring will be radical though.  Imagine the number of people put out of work if drug advertising stopped.
  • Electrified transportation.  Hydrocarbon-based transport will always rely on imported fuels subject to ever-more volatile price swings.  The value of real estate depends in part on the cost of transportation (if you drive 40 miles to work at 20 mpg and $4/gallon and 3% discount, that's $100k present value), and so volatility in energy prices causes volatility in housing prices which caps the house value that people can afford.  Worse still, we get situations like the current housing bubble, caused by just 2 million people simulaneously finding out they bought way too much house.  (That's just 1.7% of the 116 million homes in the U.S.!)
At least the president-elect seems to have the right idea.  I heard him refer to investment spending as a "two-fer".  I was disappointed at his notion that half the good idea of a "two-fer" is just spending the money at all.  But at least he's looking for the right kind of thing to spend on.