The American Way …

This is the third in our series of what it will take to look at our solutions to our economic woes with new eyes, and consequently, new thinking. We began this series with New Minds, New Solutions and the second post, How Bad Is Our Economic Hangover.

Good old American ingenuity. That’s how this country was built. If we needed something, we went out and invented it and then found a way to make it widely available. Why aren’t we doing that now? Why is funding to do that only available to a select group and not to everyone? The economic slump we’re in today started a long time ago and we’ve been building our economy on shifting sands at the expense of taxpayers since the Great Depression.

How It All Began …

History tells us that we can often build our way out of an economic slump. One of the ways in which the US was able to do this following the Great Depression was through the Works Progress Administration (WPA), also referred to as Job Works Programs. You’ve probably seen a bridge, road marker, public recreation facility or other public building somewhere along the way that says, “Built by the WPA.” President Franklin D. Roosevelt enacted the WPA in 1935 to put Americans back to work and you can read more about it here: WPA

Millions of people who were jobless and often unskilled were put to work rebuilding America’s infrastructure. As author and sociologist Robert D. Leighninger, Jr. says in his book, Long Range Public Investment: The Forgotten Legacy of the New Deal:

The stated goal of public building programs was to end the depression or, at least, alleviate its worst effects. Millions of people needed subsistence incomes. Work relief was preferred over public assistance (the dole) because it maintained self-respect, reinforced the work ethic, and kept skills sharp.

But, how viable was this as an economic stimulus and job creation strategy?

As a job creation strategy, it seemed to work. At its peak in 1938, the WPA provided jobs for more than 3 million men and women. Other WPA-related programs put young people, artists, writers and other creative professionals to work aiding in the economic and sociological recovery.

With America entering WWII in 1942, the problems of unemployment and job creation were theoretically ended – men were drafted and women went to work in factories and offices nationwide. But, as an economic stimulus strategy, it fell short. As a testament to the economic value of war, the WPA was disbanded in 1943 for lack of laborers. WWII became the economic stimulus strategy that the country needed.

The Modern Day WPA

As early as 2002, proposals have been on the table to return to this same strategy as a way of stabilizing and growing the US economy and creating jobs. A well-researched memorandum entitled: “An Investment Strategy for Economic Recovery” was put forth by then Ambassador Felix Rohatyn, California State Treasurer Philip Angelides, and New York Comptroller H. Carl McCall. This document essentially outlines the reasons why infrastructure and economic development investment by federal, state and local governments is needed to shore up a fragile economy. It also puts forth several proposals for finding the funds to invest at all levels of government.  Read it here: Investment Strategy

Our current President has touted a public-private sector collaboration to invest in the rebuilding of Americas infrastructure – the Build America Investment Initiative (BAII). Just a few weeks ago on July 17^th, President Obama launched the first part of this initiative, the Build America Transportation Investment Center (BATIC) to help cities and states find innovative ways to invest in and rebuild/strengthen their transportation infrastructure. Read an opposing view on the BATIC.

The strategy of government-funded infrastructure investment seemed to work in the short-term to help pull the country out of the Great Depression. How viable is this strategy for our current economic situation?

Investment as Government Spending Run Amok

This is a fairly complex issue and there are several approaches to infrastructure investment, as well as different outcomes and impacts with each approach. Factors that deal with environmental issues, new-build versus maintenance of infrastructure, productivity issues, labor force characteristics/demographics, private sector involvement, and deficit-neutral funding are just some of the items that must be taken into consideration in any discussion of whether infrastructure investments are good economic policy.

It’s important to understand that even though infrastructure projects are seen as “investments” – we at NPCG feel this is just another way for governments to legitimize ‘tax and spend’ policies. We do not agree with this as an economic stimulus or job creation strategy even though we acknowledge the need to keep the country’s infrastructure functioning.

The Economic Policy Institute (EPI) published in-depth research on July 1, 2014 exploring three different scenarios and how each scenario would impact employment, productivity and the over all economy. Their report, “The Short- and Long-Term Impact of Infrastructure Investments on Employment and Economic Activity in the U.S. Economy” sums up all the factors that must be considered in making decisions on an infrastructure investment economic revitalization strategy.

Theory vs Reality

In looking at the above-cited reports, infrastructure investment projects used to stimulate job creation and economic recovery appear to be a viable option – at least on paper.  In theory, they get the wheels of the economy moving. What’s the reality about past efforts? Here are some conclusions, drawn by non-Keynesian economists and consultants:

• Choosing which projects to work on are more often about political clout, influence and money. Corruption is rife.
• They are rarely on time and on budget. The lag time between approval and when the actual work begins leads to huge cost overruns – inflation sets in and suddenly the project is shelved because it is now cost-prohibitive to complete.
• History shows that whether a federal, state or local project – the management of these projects is often inept. There are hundreds of examples of roads, bridges and railroad lines to nowhere, buildings mothballed before completion, and many more bungled public projects.
• Politicians tend to want to promote ‘shiny new toys’ instead of fixing, modernizing or using technology to rehab the ‘old toys’ – often better built, even though badly in need of repair.

There are dozens of economists, consultants, politicos and others who have their own thoughts about why public infrastructure investment may be bad economic strategy and you can read some of their perspectives: COYOTEBLOG, AEI, ADAMSMITH, WSJ

The Bottom Line: What does this mean to you?

Infrastructure investment may or may not be a good economic strategy. There are as many arguments for as there are against. History seems to be on the side against such investments.  But, that perspective begs the question: Are we looking in the rearview mirror in order to drive toward the future? Some will say that those who ignore the lessons of history are doomed to make the same mistakes.

Besides the so-called expert planning and executing of these often-gargantuan projects, the need to choose the right mechanism for funding is critical. As the EPI report points out, there is an upside and a downside to deficit-neutral funding.

The upside is the proposed project is set up to pay for itself over some budget period; the downside is that the deficit created by the project is paid by tax increases that fully offset the proposed project expenditure increases. The bottom-line is that to undertake any large-scale public infrastructure rebuilding program – your taxes are going up.

Even with President Obama’s big announcement on July 17^th, not much is going to happen any time soon. The President is counting on the private sector to collaborate with the public sector to begin moving infrastructure investment forward. We don’t see this happening in the near future, if ever, which means the dollars already spent to bring the President’s idea this far were again wasted.

In truth, there’s no way to know how a large program of infrastructure investment will actually affect each of us – it’s all just theory and modeling for now.

But, what we do know is that taxpayers are unwilling to give more of their hard-earned paychecks to the federal, state or local governments in the form of taxes.

However, as taxpayers, we are never going to escape having some portion of our tax dollars go to infrastructure investment – whether it is under President Obama’s BAII program or the regular maintenance that goes on daily. No matter what, our tax dollars are the only way these programs are funded.

As well, a portion of our discretionary funds also goes to government funding for infrastructure in the form of tolls and service fees, of which we are all familiar. Some of these we can escape, some we cannot.

We know from our clients’ experience that privatized banking is one way to reduce the amount of taxes you pay by investing in building your own wealth. While it can’t eliminate all of your taxes, it helps to keep you from throwing a portion of your hard-earned dollar down the government’s black hole to nowhere.

Public vs Private?

The real benefit, if any, of a public infrastructure investment program is that it is likely that the private sector will actually implement the programs. Federal, state and local tax dollars might be paying for them, but private companies will be contracted to do the work. Those companies will be hiring the workers needed to complete these infrastructure projects. In turn, this spreads the wealth around to people who may or may not be working right now. These new jobs mean new money into the economy and new taxes in the public coffers.

As well, in a public infrastructure investment program, the direct jobs that may be created are manufacturing or construction-related – not service jobs. Indirectly, a certain number of service jobs will also be created. But, as we know from Austrian economist Dr. Robert Murphy – the hard-line is that direct jobs in manufacturing and construction are what really help to fuel the economy more sustainably. In turn, this creates more demand, which results in greater productivity and job creation to supply that demand.

We totally agree with Dr. Murphy and believe that shoring up and expanding the private manufacturing sector is really where we ought to be focusing the economic recovery progress. When you look at it from that perspective, then perhaps public infrastructure investment is not the answer. Dr. Antony Davies, an associate professor of Economics at Duquesne University in Pittsburgh, makes a good case against government spending for creating economic growth in his video: Does Government Spending Create Economic Growth?

As well, according to history professors, Larry Schweikhardt, Jr. and Burton Fulsom, Jr. who penned the Wall Street Journal opinion article cited above, “Obama’s False History of Public Investment” – entrepreneurs should be at the forefront of choosing how to fuel an economic recovery – just as history as proven they can.  The artificial economic environment that has been created with fluctuating interest rates, quantitative easing, etc. has made it more difficult for entrepreneurs.

There is a lesson here for President Obama: Government “investment” in infrastructure is often wasteful and tends to support decaying or stagnant technologies. Let the entrepreneurs decide what infrastructure the country needs, and most of the time they will build it themselves.

 –  Schweikhardt and Fulsom, Wall Street Journal, August 5, 2013, Copyright by the authors

This, and other evidence, suggests that direct investment from the private sector is a better economic strategy. We must invest in bringing innovation and technology to a wide variety of industrial sectors, marrying the modern mind with good ole’ American know-how – now that is really The American Way!

What Can You Do?

Here are three things you can do to make your personal economic world more secure:

• Start a business if you don’t already have one. Even if you have a fulltime job – take that hobby or passion that you enjoy and turn it into a business. It’s one of the best ways to lower your tax burden and jump-start the economy. We can help if you would like.
• Be in the know – all the time. We’ve gotten pretty apathetic in this country thinking that it’s somebody else’s job. Stay aware and voice your opinion to whoever will listen. There are more places to express your point of view than ever before – and that includes using social media, and sending letters to your government officials through their website. Start here by sharing your thoughts. If you agree or disagree – get into the conversation – tweet it.
• Take more control over your money and start your own privatized banking system today. Whoever controls your debt, controls you. We wrote a Building Wealth e-news on this a while back, but here’s the clip from the movie, The International that says it all.

Questions to ask:

• What are three things that can be done now to help rebuild traditional manufacturing in this country?
• How can we, as a country, take advantage of the trend toward ‘advanced manufacturing,’ which capitalizes on the process of manufacturing new technologies?  Learn a bit about advanced manufacturing. [LINK: http://youtu.be/3KCgnPov_5w]
• What is the upside/downside of either traditional or advanced manufacturing as a long-term strategy for stabilizing our economy now and in the future?
• How realistic is it for us, as citizens, to think that the powers that be will even consider these alternative strategies as better drivers of a new economy?

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For more information on this topic, on privatized banking, and the many ways in which we can help you take more control over your dollars to build real wealth, please contact Julie Ann Hepburn. Follow us on Twitter @NationalPrivate