A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Wednesday, September 8, 2010

Transcript: 403 Obama Plan: More infrastructure, more recovery juice needed

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The failure of economic policy in America and in Iraq. We look at liberal analysis of what went wrong and what to do about it from Robert Reich and Paul Krugman with regard to the U.S. On Iraq, we cast back to George Marshall and the Marshall plan, with a nod to George McGovern and the McGovern plan. And we’ll throw in an idiot of the week.

We begin with an anticipation of the president’s announcement today, borrowed from Eric Tymoigne at New Perspectives from Kansas City..

The White House released the following statement regarding its new recovery plan: "The President today laid out a bold vision for renewing and expanding our transportation infrastructure – in a plan that combines a long-term vision for the future with new investments. A significant portion of the new investments would be front-loaded in the first year."

This front load is worth $50 billion…a lot of money…but an insignificant amount compared to the size of what is needed. It is not a bold vision it is a very timid vision. Don't believe me? Ask the American Society of Civil Engineers. In its 2009 Infrastructure Report Card, it gave a D average to US infrastructures and recommended $2.2 trillion of dollars of spending over the next 5 years. And that is just to bring current infrastructures back to good condition; trillions more are needed to respond to growing needs.

Money is not a problem for the federal government, all this could be started tomorrow like we have done to finance wars, bail outs the financial sector and other wasteful items. We did it before, when the country had a truly bold vision and was much less wealthy, and we could do it again. Besides current infrastructures, we need to start to use our underused resources (especially labor) to address the future needs of our aging population and our environmental problems: education, infrastructure, social networks, technology, energy, food production, and many others sectors need help.

That from Eric Tymoigne

We reported more than two years ago on the blue ribbon commission on surface transportation suggesting a $250 billion per year program for twenty years to be financed by a gradually increasing tax on gasoline. This is not only the scope of the infrastructure need, it is exactly the kind of investment -- yes the “I’ word -- that would regenerate real employment.  Financing it with taxes on gasoline was particularly apt.  There is no better toll booth for the nation's transportation infrastructure than the gas pump.  This would give an immediately apparent means for repaying the investment, and so could be financed off the operating budget -- on a capital budget -- with bonds whose service would come directly from these dedicated tax revenues.  This is real investment.

For conventional liberal perspective on this, we turn to the opinion pages of the New York Times. September 3 you had pillars on each side of page A19 -- one column from Paul Krugman and the other from Robert Reich.

Reich begins on point under the head “How to End the Great Recession.”

This promises to be the worst Labor Day in the memory of most Americans....
The national economy isn’t escaping the gravitational pull of the Great Recession. None of hte standard booster rockets are working: near-zero short-term interest rates from the Fed, almost record-low borrowing costs in the bond market, a giant stimulus package and tax credits for small businesses that hire the long-term unemployed have all failed to do enough.

Thyt’s because the real problem has to do with the structure of the economy, not the business cycle. No booster rocket can work unless consumers are able, at some point, to keep the economy moving on their own. But consumers no longer have the purchasing power to buy the goods and services they produce as workers; for some time now, their means haven’t kept upwith what the growing economy could and should have been able to provide them.

Riech then continues with various proposals and programs to improve the spending power of the consumer. Notably absent is reducing the mortgage debt by writedowns, which should be the first step.

Krugman’s column is entitled “The Real Story.”

... President Obama is scheduled to propose new measures to boost the economy. I hope they’re bold and substantive, since the Republicans will oppose him regardless -- if he came out for motherhood, the GOP would declare motherhood un-American. So he should put them on the spot for standing in the way of real action.

But let’s put politics aside and talk about what we’ve actually learned about economic policy over the past 20 months. When Mr. Obama first proposed $800 billiion in fiscal stimulus, there were two groups of critics. Both argued that unemployment would stay high -- but for very different reasons.

One group -- the group that got almost all the attention -- declared that the stimulus was much too large, and would lead to disaster. If you were, say, reading the Wall Street Journal’s opinion pages in early 2009, you would have repeatedly been informed that the Obama plan would lead to skyrocketing interest rates and soaring inflation.

The other group, which included [Krugman] warned that the plan was much too small given the economic forecasts then available. As he pointed out in February 2009, the CBO was predicting a $2.9 trillion hole in the economy over the next two years; an $8oo billion program, partly consisting of tax cuts that would have happened anyway, just wasn’t up to the task of filling that hole.

Krugman then goes on to correctly define who was right and why.

The Demand Side objection to both these points of view is that it assumes that the consumer will someday come back as the engine of the economy. We will learn to produce things for the people of China or our own consumers will rebound.

We believe the consumer is not the engine of recovery, except as he or she consumes public goods.

To expect big new investment in consumer goods industries is an expectation that the consumer will climb out from under his debt with such strength and vitality that he will fill the existing and dormant industrial capacity and come back for more. Not a likely outcome.

What else went wrong? Monetary policy is being treated as if it works, in spite of no new private sector investment.  And the Fed is treated as if it knows what it is doing. They are serving the banking interests they are supposed to be regulating. As far as effectiveness, in particular, looking forward to QE II, we offer the following exchange between Kathleen Hayes of Bloomberg and Allen Sinai of Decision Economics.


If that is the mechanism quantitative easing is going to use, it is no wonder it is not working. 

The end of the combat mission in Iraq was announced last week in what is already one of the least-remembered addresses from the Oval Office by any U.S. president. It completed a pledge made in the campaign by Barack Obama and consummated the agreed withdrawal negotiated by former president George W. Bush. But the situation in Iraq is far from settled.

Much has been made of the nearly fifty thousand American service personnel still in Iraq and the context of corruption and instability of the domestic political situation in which they operate. Probably as important to the average Iraqi on the ground is the stone age condition of the country’s infrastructure.

In 1990, Iraq boasted infrastructure and living conditions among the best in the Middle East. After the devastation of the first Gulf War and the damage inflicted by the subsequent invasion by the U.S. to oust Saddam Hussein, the conditions are radically worse. This in spite of more than fifty billion in reconstruction aid provided by the U.S. and allies specifically to rebuild the country.

Demand Side views the rebuilding effort as an object lesson in how not to win a peace. We have the example of how to do it right in the Marshall Plan instituted to rebuild Europe after the Second World War. In spite of protestations to the contrary by historical revisionists -- including Alan Greenspan -- the Marshall Plan effectively won the war by winning the political peace.

Officially titled the European Recovery Program, the ERP was conducted between 1947 and 1951. Its purpose was to rebuild and create the economic foundation for the countries of Europe. Named for Secretary of State George Marshall, three times TIME’s Man of the Year, the plan modernized European industrial and business practices, reduced artificial trade barriers and instilled a sense of hope and self-reliance. It relied on the political and business leaders of the countries themselves to come up with the plans, mandated integration and coordination of plans, and insisted on strict standards. In executing the Marshall Plan the nations of Europe experienced the fastest growth in their history and at the same time wove the fabric of a working peacetime economy from the devastation of war.

We could have done something broadly similar in Iraq by empowering the Kurds, Sunni’s and Shia factions to develop their own plans and programs and requiring them to come up with legitimate rebuilding activities. We could have evaluated those plans and reconciled them with reality, funded them, and mandated strict performance standards.

Instead the U.S. embarked on one of the most corrupt and incompetent operations in living memory. More than ten billion in Defense Department support is unaccounted for. Reports of truckloads of hundred dollar bills being offloaded into trucks were too numerous to be false. Big U.S. industrial corporations like Halliburton got massive no-bid contracts and produced these many years later nothing workable. Rolling brownouts are the rule. Sewer and water systems are inadeuquate to even minimum standards.

An Iraq program which required integration and cooperation by the disparate factions, targeted to modernizing and preparing the economy for the future -- as was the Marshall Plan -- and utilizing the indigenous intellectual, business and political capacity would have woven the fabric of a working society. Instead, to the barbaric American, political stability still means a government in control of an effective military and police apparatus. That definition of political stability has not been met, but even if it were, it would not produce political stability. A functioning society is composed of interdependent working parts. Business, utilities, civil service and political functions working together. The idea that we could somehow build projects FOR them while enriching our domestic corporations and an army of mercenary civil engineers and heavy equipment operators is just nonsense.

That said, it is highly likely that the inputs for rebuilding would have been purchased from the U.S., from established companies and would have resulted in long-term relationships. The Marshall Plan was beneficial in this way. Failure has been a boon to nobody.

Instead, seven years later, the Special Inspector General for Iraq said, in part

Special Inspector General for Iraq Reconstruction
Stuart Bowen

The seven-year Iraq stabilization and reconstruction program — the largest ever undertaken by the United States — began without a sufficiently established management structure capable of executing the unprecedented effort. In mid-2003, the U.S. government undertook a massive reconstruction mission—much larger than planned and now exceeding $53 billion—with an ad hoc management system. Some projects met contract specifications, but the many unacceptable outcomes stemmed chiefly from the lack of a clear, continuing, and coherent management structure (as opposed to a paucity of resources or poor leadership).

Hard experience has shown that the United States did not have the financial, personnel, information technology, or contracting systems in place necessary to execute what became the most extensive and most expensive SRO in history. It is thus not surprising that the Iraq program failed to achieve its goals.

At the outset, there was no established plan and no existing and well-resourced office to manage the effort. Eventually, the Iraq reconstruction program devolved along with the security situation. Decisions were driven by circumstances, and the unstable security environment impeded progress on all fronts, preventing success. Notwithstanding these painful realities, some of which were perhaps unavoidable, a well-developed SRO plan and a sufficiently robust interagency management office could have implemented program adjustments that might have averted the waste of hundreds of millions of taxpayer dollars.

Thus, the inspector general admits failure, but casts it as an inadequacy of central command and control. It was, rather, an inadequacy of approach.

Is this all hindsight? No. The McGovern Plan produced shortly after victory proposed just such a way of going about it. Had that plan been implemented, the Iraqi society would not have collapsed. The health care system would not have lost its human capital. The United States would not be leaving in disgrace, even as Republicans and Democrats vie for credit.

We at Demand Side wrote pretty much what we are talking about now.

Somebody will fill the void -- the Chinese, the Iranians -- we don’t know. The peace can still be won. Perhaps it can be us who wins it.

1 comment:

  1. I have serious doubt that the US has the leadership to rebuild Iraq. The whole administration of Iraq by the US was nothing short of inept. Though coming from a party that does not like government they created one of their dreams in Iraq.