Is Pump-Priming Enough?

Maybe it can't: A trap in Obama's spending plan By Louis Uchitelle, December 21, 2008

As the recession deepens, President-elect Barack Obama is gearing up to spend hundreds of billions of dollars on public investment projects, counting on them to lift the economy, as they have in the past.

But this time that may not happen. Public spending, American style, has worked best in good times, when people have jobs and executives are eager to invest. A new public highway is soon lined — in good times — with stores and malls filled with consumers. A dollar spent by government generates three or four from the private sector.

That symbiosis makes a humming economy hum more, as it did in the 1950s and '60s. But it may not work that way when the American economy is in full retreat, as it was in the 1930s and seems to be today.

.... By January, Congress will probably be asked to approve an outlay of more than $700 billion. Spent in one year on construction, research or equipment, it might well offset the contraction at first. But unless it also revived general confidence, the economy could collapse again, once the money was gone.....

"It is not in the nature of a market system to have adequate private investment all of the time," said Robert Pollin, co-director of the Political Economy Research Institute at the University of Massachusetts at Amherst. "So we used public investment to smooth things over and improve the climate for private investment."

That changed. In the 1970s, the public reacted against high taxes and growing budget deficits, and conservatives argued that putting money in private hands would lift the economy more effectively. Public investment tapered off, and was used less as a tool of economic policy as the economy experienced the increasingly sharp ups and downs of the 1980s, 1990s and the new century.

Now, in the opening months of the worst bust since the Great Depression, Obama is expected to seek sustained outlays over at least two years to repair roads, bridges and waterways; to build and repair public schools; to expand the broadband network; to digitize medical information; to advance green technology. An economic adviser says his goal is "to encourage private investment, particularly in areas where we have too little investment today, for example, solar systems and wind power."....

Like Roosevelt's dams, Obama's expenditures will no doubt generate jobs and wages in the construction phase. But in 1937, Roosevelt, thinking that the private sector could sustain itself, pulled back on public spending. Some historians say this was a big reason the economy sank again. .

Obama faces a similar danger. Green-technology spending might spawn a far more efficient solar panel, but investors still might shrink at manufacturing it. What if consumers — having lost equity in their homes and scrimping on cars, vacations, even college tuition — were reluctant to buy and install the panels? "There are so many problems today and no good news, and that is enough to stop the impact of what Mr. Obama does," said Moses of Hunter College.....

Whatever the obstacles, Obama's plan would mean giving up the view — widely held since the 1970s by economists, policy makers and business executives — that the private sector, by itself, is the key source of prosperity and full employment, and government spending is inefficient.

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