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Obama's New Stimulus: Will it Work?

By       (Page 1 of 2 pages)   3 comments
Message Joshua Sanders

There is a lot of debate regarding the President's recent $50 billion plan to invest in America's infrastructure. The main question on everyone's mind is: "Will it work?" The following from The Economist summarizes the arguments in favor of the $50 billion stimulus.

"Infrastructure spending is capital-intensive, but it also has a relatively high multiplier; a dollar spent on infrastructure will be fairly successful at triggering other spending and investment. The lead-time issue is, in my view, overplayed...there are many opportunities for near-term infrastructure stimulus going unexploited. Meanwhile, the time horizon for full recovery stretches on. Full employment may be five years away, and the American economy might not return to its trend level of output...ever. The biggest economic advantage of infrastructure spending is that it represents investments that are probably needed in any case. There would be positive returns to such investments whether or not the economy was weak. That there are ample underused resources at present merely sweetens the deal. Projects can be done cheaply and effectively now, without the risk of crowding out private investment and while providing desperatly needed support for aggregate demand."

The moment you hear the term "aggregate demand" thrown around, you know you're dealing with Keynesian economics. Infrastructure spending itself does not help the economy. The only time it does help is when it ultimately makes us more productive, if it allows us to produce more consumer goods in the future. This would mean the investment in infrastructure is worth the cost, but simply making the expenditure does not help the economy.

The economy has to suffer the cost, either now or in the future. Without the proper production facilities in place, what benefit will it add? The roads may be a little less bumpy, but if no extra consumer goods are moving across them, what good does it do? The argument is that the resources are not currently being used, so this is better than nothing. Why? There is a reason these resources are being underutilized. If they were cost-effective, they would already be in use.

Simply forcing the resources into action does nothing to help in the long-term. You've invested in something that costs more than it adds and any short-term gains in employment are negligible and in the end harmful. Think about it: wouldn't we be better off if we didn't need infrastructure spending at all? Of course we would. So why at a time when our economy is crumbling are we investing in what is essentially a luxury item? Improved infrastructure makes a functioning economy better; it does not stimulate a poor one.

For places that actually do need new infrastructure, it should not be a national priority. The spending should be funded by the states so the money is best allocated. The problem is, when the government makes infrastructure spending, a lot of the funds exist solely to serve political purposes and not economic ones. So, not only is the intended investment not cost-effective, but the funds do not even get allocated to the regions that might benefit; if they do, they make up a small portion of the total expense.

Those who hold the idea that unneeded government stimulus is better than nothing at all share the same line of thinking with those who think WWII actually helped the U.S. economy. The only benefit we received following WWII was a relative one. Considering the rest of the world was blown to pieces, it's no surprise that we outperformed everyone. But that people argue the wasted resources used in fighting Hitler and Imperialist Japan were necessary for America and the world economy boggles the mind. It would have been better if Hitler never existed, if the resources never had to be wasted. Are we really saying that we should sacrifice the rest of the world and put them in the position they were following WWII just to get the U.S. economy back on track? We would be the imperialist country in that scenario.

They see that people got jobs building bombs for the war effort and think "Hey, why don't we stimulate the economy without the negative effects of war?" But they fail to see the job that would have been made if the worker didn't have to build bombs. American citizens had to sacrifice immensely during WWII. The reason? Everyone was making bombs and not consumer products. These people don't just think that guns and butter can be had at the same time, they think that guns can actually turn into butter.

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Writes for Attends school at The Ohio State University, part-time, earning a BS in Business Finance.
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