STAFF NEWS & ANALYSIS
Maybe It Can't: A Trap in Obama's Spending Plan?
By - December 22, 2008

As the recession deepens, President-elect Barack Obama is gearing up to spend hundreds of billions of dollars on public investment projects, counting on them to lift the economy, as they have in the past. But this time that may not happen. Public spending, American style, has worked best in good times, when people have jobs and executives are eager to invest. A new public highway is soon lined – in good times – with stores and malls filled with consumers. A dollar spent by government generates three or four from the private sector. That symbiosis makes a humming economy hum more, as it did in the 1950s and '60s. But it may not work that way when the American economy is in full retreat, as it was in the 1930s and seems to be today. – Herald Tribune

Dominant Social Theme: The mainstream press asks the hard questions.

Free-Market Analysis: Part of the seductive call of the mainstream press is the toughness with which it seems to approach news gathering and reporting. This article, excerpted above, is a good example of that because it seems to question the spending that Obama is about to make to stimulate the economy. But in offering up such questions, even in a tough way, the article actually reaffirms a lot of economic claptrap. The chief misunderstanding put forth by the article is that the current monetary environment is normal and not to be questioned.

Because the article does not question the Western economy's underlying money supply, it ends up being a strange article indeed – though it would not seem so unless you know about such things. It spends the bulk of its ink explaining that public works may not stimulate an economy that is in very bad shape, but by the end of the article, the author is praising the European system of public and private synergies as outpacing the American exception.

The space program stands out; so does military spending, which spurred computer development and created the Internet. And Medicare, born in the 1960s, became intertwined with private medicine. Such symbiotic successes prompted a French journalist, Jean-Jacques Servan-Schreiber, to issue a warning to Europe in 1968. In "The American Challenge," a best seller, he wrote that "the government official, the industrial manager, the economics professor, the engineer and the scientist have joined forces" to support American economic growth, and that the juggernaut would soon reduce Europe to an American colony. What the article maintains however, is that such stimulation can work – and work well in the long run, once the mix of private and public investment is properly balanced.

This is just bizarre, the idea that public spending is responsible for private innovation – or that the European Union has out-stripped the American economy because of the efficiencies of its public-private partnerships. In fact, public spending and governmental arrogance has been responsible for repressing numerous utile and practical inventions for decades if not centuries at a time. As far as efficiencies go, NASA's space shuttle, for instance, which has proven so deadly to so many astronauts, still runs on the kind of floppy discs that were popular in the 1980s and engineers apparently have spent an inordinate amount tracking down such discs on eBay.

The article is of two minds about public spending during a bad economic downturn in other ways as well, pointing out that Franklin Delano Roosevelt's spending during the Depression was not immediately effective, but then reversing course to add that eventually Roosevelt got it right.

History illustrates how tricky it can be to make public spending work as intended. The many dams Franklin D. Roosevelt's administration built generated an abundance of electricity, lowering its cost so that families could afford to operate the appliances then becoming available. The construction itself put money into workers' pockets. But the appliances were too costly for most families during the Depression, and the manufacturers wouldn't extend credit. For all the money spent by the Roosevelt administration, public investment was failing to jump-start a key private-sector industry. His administration was inventive, however, and found a way around the problem by subsidizing installment purchases. That was when appliance production finally rose. In time, installment plans evolved into consumer loans and charge cards, and that helped make the American consumer economy the envy of the world. These symbiotic relationships between the public and private sectors – playing off each other in ways hard to anticipate and hard to channel – became an essential ingredient of American prosperity from World War II until the mid-1970s.

There is much that is questionable about the above excerpt. It makes the case that the Roosevelt administration, having built dams to generate electricity, then created a credit mechanism that allowed private enterprise to offer consumers appliances. The article calls such public/private relationships symbiotic and approvingly quotes an economist who says that public investment can smooth over the bad times. (Tell that to people whose houses are being foreclosed.)

In fact, the whole public/private argument is built on a perception that consumer demand is what is failing in the current funk. But that is a misleading analysis. What has failed is fiat-money and what is needed is the circulation of honest money, gold and silver. Over time, fiat money fails – and has always failed throughout the history of humankind. Gold and silver hold their value while fiat money does not. Today's crisis is one of fiat money value, something the article doesn't even touch upon. In fact, this article's underlying assumptions are the same as so many others – and thus inevitably it comes to a series of conclusions, one after another, that seem to contradict each other.

After Thoughts

According to the above excerpted article, Obama's stimulus may not work because the economy is in such bad shape. However, if he sticks to it long enough, as Roosevelt did, he may figure out a way to make the stimulus work. In any event, the rejuvenation of public/private partnerships is necessary because the European Union has overtaken America by using them.

One can get whiplash taking all of this in and when we are finished with the article we know little more than when we began – except that public/private partnerships are the cause of Western prosperity and that America should never have abandoned them. What then caused the great pre-Civil War industrial revolution in America – and gave the United States such a dominant position in trade and commerce? Were public-private partnerships an integral part of the English industrial revolution – or the efflorescence of Greek scientific theory. In fact, it is the private market that provides the engine of commerce; there is no magic "balance" between public policy and private enterprise that can outdo it.

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