Obama proposes a new New Deal – like Japan, will we burn money to keep warm?

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Summary:   In his first speech about solutions to the crisis, President-elect Obama gave the usual jumble of ideas, as if produced by taking notes from the sophomore’s conversations at any college town pub.

We are in this fix because we have followed Japan’s path of slow, incoherent response to debt deflation.  This speech is a tentative sign that we are following Japan’s phase two plan:  burn money on poorly concieved  projects.  Not all spending provides equal (or any ) stimulus to the economy.  Nor is a recession Christmas, an opportunity to fund every special interest groups’ wish list.

From what little we see in this first speech, Obama’s program offers…

  • Too little short-term benefit (these seem far too small in scale).
  • Too little long-term benefit (in cash or improved productivity) to help repay the debt.
  • If we spend the money on consumption 9not true investment), afterwards only the debt will remain.

Let’s hope they use the next two months for clearer thought about ways to wisely spend our money on the necessary large fiscal surplus.  It’s still early days for the Obama Administration, and for this struggle against debt deflation and recession.

The following is an excerpt from the transcript of President-elect Obama’s weekly radio address on 6 December 2008 (source).  My comments are in bold italic.

… we need action – and action now. That is why I have asked my economic team to develop an economic recovery plan for both Wall Street and Main Street that will help save or create at least two and a half million jobs, while rebuilding our infrastructure, improving our schools, reducing our dependence on oil, and saving billions of dollars.

We wont do it the old Washington way. We wont just throw money at the problem. Well measure progress by the reforms we make and the results we achieve — by the jobs we create, by the energy we save, by whether America is more competitive in the world.

Today, I am announcing a few key parts of my plan.

First, we will launch a massive effort to make public buildings more energy-efficient.

Good idea, if done right it might even generate a positive return on investment.

Second, we will create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s. Well invest your precious tax dollars in new and smarter ways …

This could mean almost anything.  A consensus is forming that transportation should be the focus — offering productivity gains, improved energy efficiency, and perhaps even revenue to help repay the debt.

Third, my economic recovery plan will launch the most sweeping effort to modernize and upgrade school buildings that this country has ever seen.

  • We will repair broken schools, {could mean anything, useful or just pork}
  • make them energy-efficient, and (as with #2 above, sensible if done right}
  • put new computers in our classrooms. {probably wasted money; perhaps a stimulus to Taiwan’s industry than our economy; certainly will generate few US jobs}

As we renew our schools and highways, well also renew our information superhighway. It is unacceptable that the United States ranks 15th in the world in broadband adoption. Here, in the country that invented the Internet, every child should have the chance to get online, and they’ll get that chance when I’m President – because that’s how well strengthen Americas competitiveness in the world.

This could mean almost anything, from a give-away to the big telecom companies to a self-financing investment in useful infrastructure.  But buying high-tech equipment generates few jobs.

In addition to connecting our libraries and schools to the Internet, we must also ensure that our hospitals are connected to each other through the Internet. That is why the economic recovery plan Im proposing will help modernize our health care system – and that wont just save jobs, it will save lives. We will make sure that every doctors office and hospital in this country is using cutting edge technology and electronic medical records so that we can cut red tape, prevent medical mistakes, and help save billions of dollars each year.

No matter how useful — the “saving lives” goal is absurdly exaggerated – this probably will not generate many jobs. 

How large should this plan be?

From economist David Rosenberg, 8 December 2008:

Just to offset the withdrawal in private sector spending we expect to see in 2009, the government needs to come up with at least a $600 billion stimulus package, and in one year, not two. To just prevent the unemployment rate from rising any more than it already has – to nearly a 15-year high of 6.7% – then we would need to see a plan closer to $1 trillion in size for next year. Since prior commitments, the automatic stabilizers and the recession’s impact on tax revenues meant the deficit was already set to rise to a record $1.5 trillion in the coming year, the stimulus plan that would be big enough to stop the recession in its tracks would approximate 14% of GDP.

By way of comparison, the highest the deficit-to-GDP ratio ever got to in the 1930s was 6% (but there were no automatic stabilizers back then such as jobless benefits or welfare), in WWII it reached 30%, and in Japan it topped 10% by the mid-1990s.

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

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For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Forecasts on the FM site about solutions to the crisis:

  1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  2. How should we respond to the crisis?, 24 September 2008
  3. A solution to our financial crisis, 25 September 2008
  4. The last opportunity for effective action before disaster strikes, 3 October 2008
  5. Prof Roubini prescribes first aid for America’s economy, 4 October 2008
  6. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  7. Dr. Bush, stabilize the economy – stat!, 7 October 2008
  8. The new President will need new solutions for the economic crisis, 9 October 2008
  9. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
  10. A look ahead to the end of this financial crisis, 30 October 2008
  11. Expect little or nothing from meetings like the G20 – or the Obama Administration, 18 November 2008

Originally published at Fabius Maximus and reproduced here with the author’s permission.