The question of "Keynesian" economic stimulus today, part 3 - Politics Forum.org | PoFo

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By Adrien.

In the last two entries of this small series, we have seen the very beneficial effects and discussed the possible side-effects of stimulus plans in today’s economic situation, knowing that the general approach is the same whether you are in North America, in Europe, or elsewhere. Only the value or extent of such a plan depends on the situation of each and every country’s economic and budgetary specifications ; also, if we assume that there economic activity is a cycle that goes from the workers to the workers, you can also target every step of the process more specfically to impulse dynamism in the most endangered link of the chain.

That being said, no matter what I have explained, governments who have adopted such an approach are few and far between. Instead, they have chosen a very conservative approach when they designed their plans to jump-start their economies. So, in today's entry and the next and final one, we will analyse the choices they have made instead and their shortcomings.

Investment in infrastructures, and the famed « public works » policy :

In many countries, money spend as « investment » in private and public construction works represents either the totality or a large share of the plans supposed to respond to the crisis at hand. First, one can question whether it really is an investment or not, as this kind of spending is very much anchored in the short term. It actually amounts to the State placing an order for goods, instead of letting a Keynesian stimulus plan spread out in time and space the way the extra influx of money is turned into actual stimulation of demand. When they order the renovation of public buildings, construction of roads, they are going to stimulate the economy for six months, a year, and then it will all suddenly die out, leaving construction companies in dismay, after they probably concentrated their ressources and efforts on this order instead of looking around for contracts. Precisely because the State directly placed the order, instead of spreading the money around for different people and institutions to then place orders of different kinds, at different times and places too.

It also a plan that is, obviously, specific to one and only one sector, construction. Indeed unlike stimulus plans, these plans will die out leaving new roads and clean buildings maybe, but will also leave the global production apparatus outdated : R&D will be lagging behind, new products will lack, and it is likely that workforce will be atrophied too, for the reasons we saw before, linked to deflation and unstimulated sales. And while construction remains it is true an important sector of activity within the lower-income classes, it is far from representing the bulk of our activity. These « public works policies » were famous in the first third of the XXth century, but are far from that relevant nowadays given our reliance on the tertiary sector, as well as the fact that factory workers are the probably most hurt in this crisis, not construction workers, that usually encounter cyclic ups and downs due to demand in housing. Let’s point out here that a stimulus plan is more likely to jump-start demand in new houses in the middle- and long-term, while infrastructure spending is directed towards roads, public buildings, etc. not housing.

It is also taking a lot of risk for the future. Once the orders are placed and contracts signed, you can consider the whole plan has been spent, unlike stimulus plans that are diluted in time, in months and years. If the crisis was to get worse, were raw materials’ prices to go through the roof, all the other sectors of activity would be devastated, and construction would stop or be heavily compromised, or would cost much more. Meaning the investment plan would turn out to be dragging the State down to the ground.

Finally, it is an open door to corruption as big contractors close to the national and local governments (regardless of their political label actually) very often get contracts at an advantageous price for them, not for the State. Same with the lobbying of some members of parliament to get a share of the deal in their own district, more often than not for the prestige of some pharaonic yet useless endeavour rather than for the betterment of quality of life in the said district. It is globally some administrative waste that is difficult to deny and that often makes the headlines with great sums wasted in roads going to nowhere, brand new buildings already being refurbished, new office towers that will stay empty for months or years, etc.

I believe it is consequently safe to say that these policies represent a very conservative and limited approach to solve the crisis. While the « public works » plans might have been relevant to face the dismal employment crisis of the 1920s and 1930s in the context of an economy largely based on agriculture and construction and where the infrastructures were in fact unadapted to the days to come, in an advanced and tertiarised economy like the ones of the West today, it just isn't the right remedy.

In the next and last entry to be posted in this series, and that was actually split from this one, we will adress another choice made by conservative governments, that is also the mirror images of stimulus plans in a way, namely tax cuts. We'll see that it is a pipe dream of conservatism to make stopping to redistribute wealth equal adressing precise economic needs.

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