Wednesday, July 1, 2015

Building A False Economy On Infrastructure Or War

Building New Bridges Creates Jobs But Is Not Free
One way a country can kick their gross domestic product forward is to build a false economy based on infrastructure or war. When a country gorges at the trough of deficit spending it can easily manipulate a big temporary boost in its GDP. One of the best examples of building an economy on a foundation of military might or a massive move to militarization was demonstrated by how Germany was turned into a war machine during the 1930s. Unfortunately, such spending quickly creates a wall of debt.

China Boost Its Economy By Building Machines For War
While history clouds much of past events, Hitler is often seen as force guiding Germany's economy, how much he contributed is a matter of debate. Hitler's views on the economy were mixed and of secondary importance to his more overriding goals. In a speech he proclaimed "we are socialists", but he made it clear that his meaning "has nothing to do with Marxian Socialism". It is reported that in private he also said "I  absolutely insist on protecting private property... we must encourage private initiative". Of course history shows that he had no problem with the government regulating the use of that "private property" for the good of the state.

Remember Hitler rose to power following the hardships of World War I and Germany's historic bout of hyperinflation in the mid-1920s. The crash in 1929 and the Great Depression that spread across the world created an environment where Hitler was able to become Chancellor of Germany in 1933. Under his leadership the Minister of Economics introduced the Mefo bills (Government IOUs) that existed alongside the Reichmark, industries were allowed to trade these bills among themselves. This was a scheme that allowed Germany to rearm by creating a huge off the book deficit and massive national debt.  As a result employment soared and wages rose. The part of this story many people forget is the prosperity was false and temporary. The fast growth only masked real problems within the economy and resulted in rationing and shortages in things like poultry, fruit, and even clothing for many of the people.

A major problem of a war based economy is the issue of sustainability. It is expensive to maintain an army and war is a destructive force. Long gone are the days of conquering your enemy then raping and plundering your way to glory and riches. At least so in seems and we can only pray that part of mankind's history is fading into the rear-view mirror. In many ways this lessens the appeal and lowers the risk reward ratio of war. When after winning a war if you have to pay and invest money to rebuild the enemy you defeated, war becomes rapidly unappealing. The only real winners are those manufacturing the weapons and signing massive contracts to rebuild what has been damaged. Another problem is if society takes the position the lives of their soldiers have value, the cost of lives lost and the money spent  to care for the wounded and other programs for those who have served quickly adds up.

Infrastructure also has the potential to become a boondoggle with huge cost overruns and is just a waste of money if allowed to be driven by political motivations rather than necessity. The real test comes when questions are asked about the need for a certain project and the quality of the vision on which it is based. We must also take a deep look into how we set priorities and the payback or savings that will take place over time as a result of our investment. When looked at closely this is where large public or government building projects often fall short of our goals. It is not uncommon to find poor decision making and corruption has created a project that is overbuilt, expensive to maintain, or has a lifespan far too short to afford a reasonable payback on the funds spent.

The reason infrastructure spending can sometimes be considered part of a false economy is the number of jobs we claim are created from such spending are often only temporary and can be easy to overstate. While infrastructure spending brings the illusion of solid growth it is generally a long-term investment financed by creating debt, this debt often last for decades and long after the project is completed. Often the jobs such projects create quickly fade away. This makes it important the money is well spent or the bill will come back to haunt society and the economy over time. Sadly, many people and politicians who devise such projects are more interested in a quick fix today or spurring growth rather than focused on building a better future.

1 comment:

  1. Yes. Still waiting for the shovel ready jobs to materialize. At least they didn't pretend they c had anything like an actual useful project. What we got instead was freebies to insiders like Solyndra who went bankrupt and pocketed the cash. It would have been nice if that money was spent instead to strengthen and harden the grid and used to systemically upgrade utilities and communities to solar systems. Instead we got individual tax credits to encourage people to install solar units, something that most couldn't afford even with the credits. Obama's throw money at the problem approach never works. And ACA is a complete joke. As for war, I don't think we will start one, at least not un-covertly but I'm not ruling out Russia and China since the start of the new cold war our geniuses in Washington have created.