The Pitfalls of Obama's Plan

Posted by: Michael Mandel on November 22

Now it begins. This morning President-elect Obama took the first step towards asserting himself economically. He laid out not a detailed plan but a goal: To save or create 2.5 million jobs in the next two years. The jobs would come from spending on infrastructure, modernizing schools, and implementing green technologies.

I think this is a good move, but we are in unknown territory. Obviously there is going to be a lot more information coming, over the next few weeks. But here’s some things we know now.

—Suppose that it costs $100,000 to create a decent-paying jobs. Then 2.5 million jobs could cost anywhere between $250 billion and $500 billion, depending on how much leaks overseas in the form of imports. For example, if we start building new bridges, how much of the steel will come from the United States and how much from overseas? If government spending goes out the door for imports, it will create fewer jobs in the U.S.

—For that reason, Obama and the Democrats will be tempted to tie a “Buy American” policy on the spending. That will actually be a critical decision which will help determine which way the global economy goes. On the one hand, “Buy American” will give us more jobs. At the same time it will raise costs, and reduce the amount of actual investment that goes done.

On the other, letting more of the money leak out the door will cost jumps and be politically problematic. But it will also help stimulate overseas economies, which is pretty important as well. In addition, trade restrictions start smacking of Smooot-Hawley tariffs, and no one wants to go down the road again. I’d vote for no restrictions—but it will be close.


—We are now in a world where expectations are essential. Obama has to make it clear that he is committed to spending the money and creating the jobs, no matter what, in order to reassure consumers, businesses and investors.

—-There is no conclusive history about whether a government stimulus program of this magnitude creates a sustainable recovery. The Great Depression was inconclusive, and there has not been any good recent theoretical or empirical work on massive fiscal stimulus. But we’ll find out.

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Reader Comments

joe

November 22, 2008 05:39 PM

Sounds good? But where does money for these projects come from? The only way is from borrowing more. Did we get in this trouble because of too much debt? If we borrow more to support these project we are blowing a bigger bubble. Using a bigger bubble to cover the previous bubble can only give bigger pain later.

Dominic

November 22, 2008 06:27 PM

Joe

Yes, we still have to borrow the money (or print them out of thin air...but let's not digress...)
However, borrowing for productive investments is different than borrowing to buy cheap imported goods...

Dominic

November 22, 2008 07:42 PM

Mike

Making sure that we only "Buy Americans" from the suppliers for infrastructure construction and repair, green energy initiative, basic research, health care, etc...is unfeasible, anachronistic in the world we live in and it can be counterproductive in our trade relations..some "leakage" has to be assumed...I don't think we can have a perfect solution...but can try to make sure that the competition is on a somwhat level playing field.
I still prefer this plan compared with what we had so far...wars, dead-end retail jobs and the absurd attempt to reflate our overconsumption sending checks in people's mailboxes...

Bruce

November 23, 2008 12:06 AM

This all sounds good and the author is apparently a fan of this approach. But there's a lot that is left out.

First, most of these jobs will go to already well-paid union tradesmen. With the Democrats running the show, only union labor will see most of the spoils. And therefore the contracts to do the work will be especially pricey. Costs to get everything done will be higher than any intial estimates.

And it's hard to believe the work will be spread out in all areas of the US. More likely, the Northeast and Michigan/Ohio will see most of it since projects will favor the politically connected. (ie:Democrats)

As mentioned, the idea of only "buying American" will probably be advocated by some Dems and will only complicate the process unnecessarily.

For most workers this will not show itself to be a significant change. If you work in retail, it won't make any difference. If you work at a factory, won't make any difference.

Self-employed...you'll get nothing.

The trickle down/up, if any, will not be as large as many think. Historically these kinds of 'stimulus' don't work. ....BUT, they are a great way to pay back the political supporters.

Kevin

November 23, 2008 01:58 AM

Only 13% of the population make over $100,000 a year while 34% make $30,000 or less.

I'm going to "suppose" the jobs created are not making $100,000

Road workers making 100 k?
Road workers make 25 to 40 k.
Engineers designing roads make 70k

Mike,
Get a non-harvard economist that looks at average wages (particularly non-political government wages)instead of the average income of business week readers.

My favorite poll over the last eight years:
15% of the population think they are in the top 1% of income earners.

On the last point: What conclusive evidence is there on any effort that creates a sustainable recovery of an economy? WWII being the reason we came out of the Great Depression is inconclusive. Laissez-faire governement is inclusive in creating a sustainable recovery.
I guess we won't find out.

Aye

November 23, 2008 05:15 AM

or he could do nothing... that would be perfect for you guys right? u idiots..; why don(t u propose what u would do instead rather than just sitting in ur sofas and complaining?

Joe Cushing

November 23, 2008 09:51 AM

Aye,

Brilliance. I love your plan. It's the best one I have heard so far. Do nothing. It IS perfect. If government stays stable, the market will find a way to work around it. If it keeps changing the rules, people won't invest.

Ross Whitaker

November 23, 2008 11:35 AM

Kevin,

I agree that Michael's stated statistic of 100,000 dollars for a "decent" job is way off base. If we were to bring that number closer to reality, lets say 40,000, the investment would be approximately 100-200 billion for the 2.5 million jobs. A pretty large chunk of money, but when compared to the recent bailout numbers, not outside the realm of possibility.

I think an investment in jobs is much easier for average Americans to wrap their minds around. The situation with the bailout plan makes everybody wonder what the architects of the plan are really planning on doing. With unemployment on the rise, Obama's plan is a step in the right direction.

LAO

November 23, 2008 12:16 PM

I'm glad to hear you say that the Great Depression was inconclusive. It leaves the door open for my notion that the unrecognized catalyst for recovery was broadly accessible, ultra-cheap oil and gas. I think the injection of external energy into a society is tremendously under-rated as a driver of progress and innovation.

To pay for these proposals, if the current lower price of oil is any indicator, then given enough green energy, it would be easy to slip in a tax on fossil fuels, or maybe cap and trade can accomplish the same thing. Save the carbon for future generations to have their own chance to make the wrong decisions, or to keep themselves from freezing to death.

Laissez-faire purists tend to overlook the distortions that suit them, such as oil industry subsidies that indirectly perpetuate a backward automotive industry, government contracts to private enterprise that cost the taxpayer more than the former structure that was dismantled, and subsidizing the pharmaceutical industry through denial of the right to negotiate on behalf of citizens.

Exploitation of resources that apparently inflict a lot less collateral damage (war mongering, health and climate destruction, inordinate trade deficits) could turn out to be worth far more than price based comparisons at any given moment suggest. It could revitalize the war on current drain (which enabled the cell phone to really take off) and trigger new wars on friction, heat waste, and other contributors to inefficiency.

I think there is no point at which laissez-faire allows national security to enter into the calculation. I don't know if moral hazard and slippery slope are in the laissez-faire lexicon, but somebody needs to start representing national interests with as much vigor as the other parties on this globe. You would think that ought to be the President's job, and I see a hint of that here.

Ross Whitaker

November 23, 2008 12:32 PM

Dominic,

Your statement that a "Buy American" clause in an Obama plan would be unfeasible, is right on target. With the current state of the global economy a plan to skew towards American goods, may help the US in the very short term, but could very well do more damage in the long run. The interconnectedness of America's economy with the global economy cannot be overstated and the effects of such US-centric policy could very well have a net negative impact.

Obviously, any plan that is unveiled needs to put America's best interest in mind. All I'm saying is that we need to be aware that we are increasingly part of a global economy.

THomas

November 23, 2008 03:57 PM

This is exactly what Japan did in the early 1990s, which caused 18+ years of gloom.

Even today, Japan is dotted with hundreds of 'bridges to nowhere'. The US is about to do the same.

Ed

November 23, 2008 04:51 PM

In a normal economy, doesn't the U.S. create about 1.8 to 2 million new jobs per year? A two year time frame to create 2.5 million new jobs may be setting an easy bar to claim credit for what the economy might do on its own after the recession.

When we spend on infrastructure, doesn't new infrastructure (as compared to replacing existing infrastructure) provide a longer term benefit? Many proposals seem to be merely repaving highways, replacing old sewer systems, replacing old bridges (or in my state, rebuilding a college football stadium). Certainly they temporarily provide jobs but there is no new long term gain.

Should infrastructure be defined more broadly than just traditional "public works"? Would we have greater gain from say, government laying fiber optic cables instead of paving a highway? Or building university engineering buildings?

How do we avoid pork barrel infrastructure with "bridges to nowhere"?

I do like the idea of making targeted investments in infrastructure creation to boost the economy longer term, but I suspect this could become inefficient if it becomes pork barrel spending for replacing - rather than adding to - our infrastructure, and if the concept of infrastructure is limited to roads, bridges and sewers, etc. We can make investments that deliver value year over year and hope we do - but I'm not holding my breath waiting for Congress to make appropriate decisions.

CompEng

November 23, 2008 06:22 PM

Lao, I like you observation that lassez-faire purists ignore the distortions that suit them. It rings true to me.

"Buy American" on any one program may not be the right answer, but I thing that misaddressed problems like the current account deficit are serious. I suspect that stimulating consumption through gifts and loans without addressing national debts (consumer and government) will only worsen them. I suppose the free market would solve the problem if we let it work, but I'm not sure we'd like the way that played out.
I'd love to see a national plan (or better yet, an international plan) to bring trade closer into balance rather than to shove money into an imbalanced economy.
I suppose a "buy American" clause on infrastructure could be a part of that, but it feels too much like picking the economic winners to me.

Ross Whitaker

November 23, 2008 06:39 PM

Thomas,

I hardly think this plan will be exactly what Japan did. I'd also argue that infrastructure work is not what led to Japan's "gloom", but that is for another time and another blog. Obama's plan is not necessarily to create new bridges and roads (there will be some of that), but there is plenty of infrastructure maintenance that needs to be done. I'm sure you are familiar with recent bridge collapses due to less than ideal bridge upkeep. It is hard to compare the needs of the US to the needs of Japan. America encompasses a huge area compared to Japan, thus there is a much larger onus on keeping the infrastructure modern. As a final note, the plan also aims to modernize schools which is hard to argue with if you have seen many of the schools within our metropolitan areas.

Joe Cushing

November 23, 2008 09:32 PM

John Stossel agrees with my stability plan. See his thoughts here. He illustrates everything I was trying to say in my earlier posting. The government just needs to stop with the recovery efforts.

http://abcnews.go.com/2020/Stossel/story?id=6299213&page=1

Alex Field

November 23, 2008 11:13 PM

It's not the great Depression, it's World War II that shows the ability of massive fiscal (and monetary) stimulus to get a depressed economy to full employment in a very short time. The war doesn't demonstrate that war is necessarily good for an economy. But it does provide historical evidence on the impact of large scale fiscal stimulus.

Douglas Smith

November 24, 2008 12:33 AM

It all hinges upon whether the funny money gets distributed in a good faith effort to create actual products and meaningful jobs, or as just a way to enrich cronies and hand out minimum wage busywork to the masses.

The first possibility is pretty unlikely, as it will opposed by everyone who sees new production by new businesses as competition. They are right about that. It would be.

The second possibility is way more likely because it's politically safe. Borrowed and minted money will be showered upon the already overpaid politically influential elite who are presently so justifiably afraid of becoming poor.
The loans and inflation will be paid back by the working poor, by means of working harder in exchange for less buying power (due to weak currency that inflates faster than their wages rise.)

Not very exciting, but no worse than letting the whole mess just collapse all at once, so hey, give it a try.

slo

November 24, 2008 04:16 AM

The estimate of $100,000 is actually correct if you take in consideration businesses also have to pay income taxes, health insurance, pension, etc. The cost per employee for a business in CA is usually double what the employee actually receives. So if someone makes $50K, the cost to the company is close to $100K.

san

November 24, 2008 07:34 AM

How much productivity and competitiveness can the USA get out of road-building? Sure, it's a convenient way to get low-skilled people employed -- until the money runs out.
The USA doesn't need better quality school buildings, it needs better quality teachers, and students who push themselves harder.
This is just porkbarrel spending that won't provide any ROI. The US debt will just be larger, and at some point the world will drastically reduce its exposure to the US dollar.

sherry

November 24, 2008 07:34 AM

Any way you slice this, our economy is in very dark and disturbing times. We are standing on the edge of an abyss with one foot half way already down into it. It seems like as a nation we are running around like chickens with our heads cut off. Everyone knows we are in deep despair but no one seems to be able to agree on what to do about it. So much attention has been given to the mortgage crisis that little attention or credit for what the high cost of fuel this past year has played in our downward spiral. That one single factor caused families to break the budget at the pump alone. Consumer goods in every capacity from production to shipping passed the increased costs on to us. (and most products now cost more and come in smaller packages) Electric companies sought and were granted huge price increases. We cut back, quit going out to eat as much or at all, quit spending on frills and even necessities, that sadly resulted in even more jobs being lost. It has been a real catch-22 in the economy. Record jobs and homes are being lost still. Unemployment is climbing every day. While most of the public seem to be doing the happy dance around the pumps, and reporters are reporting the happy dance, little is being reported about OPEC's plans to keep cutting production and they will until they get prices back up where they want them to be. The average family is so far behind they will never get caught up. Jeff Wilson has an interesting book just out called The Manhattan Project of 2009. I heard him on a radio talk show interview and he blew me out of the water. I got his book on Amazon. I think we are going about this whole thing wrong. WE keep spending billions on bailouts and stimulus checks. Why not invest in creating improved grids, infrastructures, and creating millions of badly needed new green collar jobs? The last stimulus package cost us 168 BILLION and did NOTHING to stimulate our economy. That would have gone a long way toward starting up alternative energy projects and creating new jobs. www.themanhattanprojectof2009.com Check out what they are doing in California.Check out this link to read the news. This is so exciting for those who realize the importance of seeing out country transfrom away from fossil fuels and to cleaner, cheaper electric cars. I read about this in Jeff Wilson's book The Manhattan Project of 2009. I am thrilled and surpriesed to see it taking place so soon. Go The Manhattan Project of 2009, Go Jeff Wilson for writing this enlightening book, Go California, Go Arnold, and GO BETTER PLACE...IT IS ENCOURAGING TO SEE THERE ARE THOSE OUT THERE WHO ACTUALLY GET IT. HOPEFULLY WASHINGTON WILL FOLLOW SUITE SOON! Link to news story below or simply type electric car infrastructure california or Better Place into search engine. http://www.freep.com/article/2... http://www.dailygalaxy.com/my_ weblog/2008/11/better-place-gl.html

Edd

November 24, 2008 07:51 AM

I hope "building road and bridges" is just a loose general term. These could probably mean things such as: nationwide electric grid, small portable nuclear power plant, solar-wind products,environmentally friendly extraction of natural gas, strict regulation and enforcement of making buildings energy efficient and of course repairing roads and especially bridges.
These should be considered INVESTMENTS instead of just deficit spending. Those guys who are howling about taxes, how many of you are actually earning $250,000 year? And if you are, you are probably smart enough to have an account in Cayman Island like these corporations who keep their money offshore.

Tom E.

November 24, 2008 08:35 AM

Change the corporate tax code to make it less profitable for US corporations to offshore work and crack down on currency manipulation.

sam

November 24, 2008 09:45 AM

With infrastructure projects, jobs are a side effect of the investment.

Since this will be done with borrowed taxpayer dollars, it should be a "Buy American" program.

It's not quite correct to say that buying American will increase costs.

Every dollar spent in America will have a multiplier effect, which is what we really need.

Any dollar spent on imports will only prolong the bleeding.

tilly

November 24, 2008 09:57 AM

We can't worry too much about the global economy. We are broke, and we need to pull back to defensible borders. This is a good time to find out whether India and China can progress on their own. The world has had a global economy for thousands of years. It is about to change shape again.

Tom H.

November 24, 2008 10:51 AM

I can see from the blogs we need several nationwide debates on different areas of the economy and how best to get out of the upcoming dep..or rec...which we may already be in. Lets get on with it.

Hugo van Randwyck

November 24, 2008 10:53 AM

Sherry, this is the way - green collar jobs. Polticians could change their minds about bailing out the financial industry, using $600 billion for energy independence. Bigger rebates for people buying solar thermal , solar voltaic, wind power, also rebates for buying fuel efficient buses for public transport, including new public transport. Rebates for 'green collar' jobs will lead to manufacturing and construction jobs. If you google: ASES, green collar jobs, there is a report showing how to increase RE jobs from 446,000 to 7.9 million.

amos

November 24, 2008 11:04 AM

The census summaries do not represent reality very well.

$250K is not rich anymore. More like upper middle class.

It would make more sense politically and economically to talk about raising taxes on those over $500k or even $1 mil.

Mahagwa

November 24, 2008 12:34 PM

For this to work, it has to be quasi-governmental.
The government should not manage the money, they will mess it up. They should set up an INfrastructure Investment Committee (or something like that) and through such invest not only in INfrastructure but also in companies that perform in that sector.
Modernizing schools (especially if they target those in very low income areas) will have a wide range of positive effects (present and future)..it will make american students competitive again.
Rather than waste money and time on GREEN TECHNOLOGY (I personally believe all this ENVIRONMENTAL talk is just a bunch of BS) they should place those funds in the SBA and have the SBA act as angel investor for start-ups as well as provide bridge funding (VC activities).
To those whining about this...consider that the invested billions (if invested appropriately) will have significant long range benefits. As for 'exporting' this investment, why? Why should America support other economies when America's economy is hurting.

LAO

November 24, 2008 05:22 PM

Mahagwa,

Rather an interesting mix of thoughts you have expressed, many of which I agree with, but singling out green technology as something you're against is kind of surprising, considering that every domestic kilowatt or BTU will reduce imported oil and/or liquified natural gas and the corresponding raging trade deficit. Why is that not a good thing? Increasing the demand for renewable energy should tend to reduce its price, and reducing the demand for fossil fuels will lower those prices. It should be a win-win for the economy. It seems to me that only those with a vested interest in high-priced oil, gas and coal to justify increasingly difficult, expensive and damaging methods would reject green technology. That is without even exploring credible evidence of peak oil and Russia holding most of the natural gas.

Brandon W

December 1, 2008 04:22 PM

There will be a massive change in our economy and the way we live in the next 5 years. We can choose to build out public transit and renewable energy resources or we can pretend we'll be able to rescue the status quo. In 5 years I'd like to think we've spent our last trillion dollars of "goodwill" debt on something that might make the future more livable. My suspicion is we will waste it on lots of shiny, useless crap for the wreckage.

Kaleberg

December 1, 2008 05:01 PM

The reason it costs $100K to create a $30K job is management and corporate overhead. (Companies only pay taxes on profits, so at most they'll pay taxes on $70K of that $100K). The trick is to get the corporations out of the loop. We've seen how well they can handle things like Katrina with contractors and subcontractors and the government spending big bucks on minimum wage workers who get to do all the work. It's sort of a free enterprise deflator, as opposed to a multiplier effect.

This means that the government should hire managers directly, and have them hire the actual workers. Thousands of screaming Republicans will keep these people from being overpaid since they are in the public sector, rather than the private sector. We can probably create two $30K jobs for $100K this way.

The best areas of spending are for things that have to be local. The goal is to create new industries. We should consider urban and rural solar and wind power farms, power storage schemes, fiber optics to every home, heritage breed agriculture, rebuilding schools, new model clinics for delivering salaried health care. The trick is to keep the money out of the hands of the usual contractors who will just lend it back to the government.

Mike Reardon

December 1, 2008 09:12 PM

The first two comments above asked where the money is going to come from to get this in place.

Well Treasury and the Fed are passing $5.6 trillion committed into the markets and both Bernake and Paulson said today they could add more to still other financial vehicles. So it can go out to $8 trillion or even more to restore the financial markets.

So if its needed as a Federal stimulus or by States to fill in any revenue shortfalls, the banks now can get that kind of money for structural investments.

It will feel like a hedge fund arrangement where we pay them for the money we borrow on the money they borrowed from us and still must repay someday. Like a Enron special debt instrument that can give profit at two points and at the same time put in place structural investments.

More open market supply side economics.

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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