Today on the podcast, idiots of the week, with returning all-star, Allan Meltzer of Carnegie Mellon University, Jeffrey Sachs of Columbia, and Patrick Sims of Hamilton Place Strategies.
First, we're sorry we didn't get our post up on ReMacroBaseline.com this week. It was investment/infrastructure/transportation/housing week. Our ambition is to devise a metric that takes account of the value of public infrastructure in the same manner as private capital, and hence registers the loss in real terms when that infrastructure is allowed to go to rot. We got a little bit down the road conceptually this week, but nothing to write up.
Where did they come from? In 1933 Franklin D. Roosevelt ordered the construction of the Bonneville and Grand Coulee dams. In 1944 and early 1945 FDR signed authorizations for the Hungry Horse and McNary dams and four dams on the lower Snake River. The 80th Congress reacted, slashed appropriations, reduced staffs and actually halted projects already under construction.
Then in May and June of 1948, the Columbia River's third greatest flood caused an enormous amount in damages. Truman visited the area. Six months later, the flow of the Columbia dropped sharply; the region was short of power and had to curtail Christmas lighting.
This was election year, Truman running against the Do-Nothing Congress and Thomas Dewey.
It was clear from speeches made by prominent Republicans that a Dewey victory would mean decimation of the federal power program and the elimination of the sales preference to public bodies and rural electric cooperatives. The election of Truman allowed the continuation of the program. In 1950 a record number of dams was authorized.
Eisenhower was of two minds. On a visit to the Hoover Dam shortly before becoming a candidate for president, Ike was complimentary. Two months later he made a campaign speech in Boise, Idaho, charging that construction of federal dams reflected "left-wing government." After he was elected, Eisenhower did complete those dams in process, but only because the Democratic Congress initiated and passed the authorizations.
Fast forward. Cheap hydropower still drives the industrial advantage of the Columbia Basin, that area between the Cascades and Rockies through which the Columbia flows is now full of farms and cities that are deep in the red state column, seriously conservative, The floods have passed; immense irrigation is present.
Washington is composed, like many states, of regional economies quite divergent from each other. Eastern Washington is away from shipping and big cities and Boeing and Microsoft. it is more like Idaho than Western Washington. Politically as well. Deeply anti-government folks sit there and feel entitled to their hydropower and immense irrigation. Entitlements. Who's got them?
reference C. Girard Davidson, Assistant Secretary of the Interior under Truman, in Economics and the Truman Administration, Francis Heller.
We should say a few words about the forecast. Maybe we did already. Not that we follow the emerging numbers all that closely. Advance, preliminary, final. They change. It has been remarkable to us that nobody else picked up on the political business cycle, the practice of sitting presidents to rev up federal spending prior to elections. It happened again this time.
The dip into negative territory in Q4 came with these words in the BEA's press release.
The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.
Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent.
That defense number, from an increase of 12.9 percent in Q3 to a decrease of 22.2 in Q4 was historically unmatched. Not noticed by the pundit class, however.
but we noticed it, even before it happened. It was a good part of the reason we looked for a post-election slump back in September, and then called another recession beginning in December. Not that we're out of the last one, but in conventional terms, we wanted to get back into the fray. We'll see.
And productivity collapsed into a negative number. BLS preliminary numbers equal minus 2 percent. Our rule? Eight minus the unemployment rate equals productivity growth. Eight minus eight is zero, adjust for previous quarters of positive numbers. Not surprising.
But why would GDP not go down. From the demand side, there is no good reason.
Steve Keen has a good chart out showing the growth in credit now back to its previous slope. We love Steve Keen, check out hte SteveKeenInSeattle.com website. But he's got no public goods, no government investments, no multipliers. His is a financial economy. We have a real economy, as in an actual goods and services economy. Overbuilt on the private side. Starving on the public side. government has the biggest multipliers. Investment there yields enormous returns. We are blind and stupid not to be doing them.
We cannot just give people money. We need to pay them for doing useful work. Give the banks money? They're holding on to it or playing in the casinos.
Individuals? Tax breaks. Pay down debt or buying necessities.
Businesses? Hold on to it. Why invest? We've already got too much capacity.
Government? A few roads, some rail, a DC transmission grid, some retrofitting programs, universal health care, good education. Those are high return activities. Maybe replace fossil fuels with clean energy, including human energy.
IDIOTS OF THE WEEK
Allan Meltzer Carnegie Mellon
Let's see, 1923-28, 1985-2003, what would those be? Ah, the Great Moderations leading up to the worst financial catastrophes of the past 100 years. Yeah, let's do that.
Jeffrey Sachs Columbia University
Now I'm with Sachs on the need for big long-term public investments and strategy. He earns the idiot award, however, for using "Keynesian" to describe short-term and shovel-ready. That is Paul Krugman Keynesian, true, but that should be clearly labeled New Keynesian or Neo-classical. Keynesian is not confined to the short term. In my view.
Patrick Sims director of research at Hamilton Place Strategies, a policy and communications firm
Great. Too big to fail. Too big to jail. Big backdoor subsidies. Now in Europe we have a slow-motion version of our train wreck with banks three and four times the size in comparison to the economies. There are no economies of scale in banking. Capture of the government is not an economy.
Enough of that.
Today's podcast also brought to you by two of the faithful thirty-nine listeners to the podcast. These two notables:
Jonas Feit, whose blog Conscience Warrior is very well worth your visit. Likewise the Conscience Warrior News Feed. That's consciencewarrior.com and news.consciencewarrior.com.
And by Eric Brewer -- Ick, by name -- whose exchange of letters I am putting up in a special post on Sunday, if I get my act together. As somebody who reads a bit of academese, I am completely delighted to hear vigorous prose. I am wading now through a tome which has every verb turned into a noun. Ick is not like that. I will respond to him in good order, but I found our exchange -- on the subject of whether or not the aging population could be a power base for change -- Ick says no, everybody is completely self-absorbed -- anyway I found it extremely cool.