Barack Obama Unveils $1 Trillion Economic Stimulus Package
By - December 10, 2008

On Friday the US announced a net loss of more than half a million jobs in November, the largest drop in a single month for 34 years and bringing unemployment to 6.7 per cent. The following day, Mr Obama announced the biggest infrastructure investment since President Dwight Eisenhower created the US highway system in the 1950s. He proposed government programs for bridges, roads, broadband internet and schools as well as plans for greater energy efficiency and health spending. The National Bureau of Economic Research has said that America has now been in recession for a year. Although he played down expectation for a quick economic recovery, Mr Obama said his plan was "equal to the task" that the US faced. Stronger financial regulations would make banks, credit ratings agencies, mortgage brokers and others "much more accountable and behave much more responsibly". He emphasized that the survival of the domestic car industry was crucial but any bailout must be "conditioned on an auto industry emerging at the end of the process that actually works". The president-elect criticized Detroit's Big Three car manufacturers for "repeated strategic mistakes" and a "failure to adapt to changing times – building small cars and energy-efficient cars". – UK Telegraph

Dominant Social Theme: Barack Obama is a man with a plan.

Free-Market Analysis: We've written about it recently, but we wanted to return to the upcoming plan of America's President-Elect Barack Obama to provide government programs for bridges, roads, broadband Internet and schools as well as plans for greater energy efficiency and health spending. We pointed out several issues ago that much of what any Western government builds these days would not necessarily have been created by the market. Much of this sort of infrastructure, especially America's school system, suffers from a kind of gigantism, a form of mal-investment in which the result does not directly address the need. To recreate or upgrade what is clearly not market-driven will usually end up wasting further resources.

Still, it did not occur to us at the time that these programs might not just reinforce or upgrade what was not viable in the first place – but could also provide cover for further unpopular infrastructure development that the American federal government values but that many others do not. One of these areas some have speculated may involve the so-called NAFTA superhighway that has proven unpopular in Texas and elsewhere in America and Canada, certainly with vocal interest groups.

Plans for the superhighway, once fairly public but now seemingly denied by those involved, call for a major roadway and railway that would cut through the United States and up to Canada from Mexico. The resultant shipping lane would tend to balkanize the regions through which it traveled in the United States, while creating much wealth at either end. It would also make the borders of all three countries much more fluid. If indeed the infrastructure needs of which Obama speaks involve the creation of a superhighway, then the programs will likely be counterproductive for certain regions in a number of aspects and continually controversial as well.

There are yet other issues that will bear watching. The idea that stronger financial regulations would make banks, credit ratings agencies, mortgage brokers and others "much more accountable and behave much more responsibly" is also a fairly surprising statement. The United States has at least a 100 year-old regulatory history in such arenas and each time that there is a significant financial downturn, more regulations are loaded onto the financial markets. In a normal market environment, the growing economic difficulties might cause a rethink of regulatory interference, but the political economy is not a free-market economy. The political economy runs according to the needs of the politicians that create it and its principles have little or nothing to do with efficacy and much to do with expediency. Thus it is likely that Obama may have in mind adding to the nation's regulatory apparatus through the creation of yet more bureaucracy, laying the groundwork for yet more inefficiency and bloat.

After Thoughts

To use public works programs as a cover for the creation of political unpopular infrastructure and bureaucratic expansion will likely prove unpopular in certain areas and with certain interest groups that have already mustered considerable resistance. If it turns out that this is what Obama has in mind, the result will not be a smooth implementation of make-work programs but the troubled expansion of programs that already have a difficult history. The result may be more economic dislocation, more controversy and ultimately more social, political and economic unrest.

Agenda-driven public works programs are not likely to prove to be an economic panacea on any level. The boondoggle-like attributes of their implementation would likely be further exacerbated by controversy and discontent. Additional economic dislocation will only drive investment imbalances, sinking certain financial instruments such as the dollar and providing fuel for alternative investments including precious metals.

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