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A case for a new New Deal – October 20, 2012

The federal budget deficit is a serious economic concern for Americans, and it represents a significant long-term impediment to economic growth and success. It has been a major political topic for years, and as the debt rises, it only becomes increasingly pressing. Both major Presidential campaigns in this current election have spent a great deal of their time and effort discussing the debt. Mitt Romney has made it his biggest priority after tax cuts. However, an argument exists that the debt is being vastly overrated as an issue and is being used as a political weapon to encourage major cuts in the size of government and promote specific political and economic agendas.

Possibly the most basic economic principal is that in order for an individual, business, organization, or government to remain solvent in a market economy, they must spend less than they bring in. Very simple. People learn this when starting their first bank accounts and learning to balance a checkbook. Debt creates an impediment toward fiscal freedom and success. For many years, the federal government of the U.S. has spent more money than it has brought in.

While overall debt is rapidly increasing, thanks to yearly budget deficits and trade imbalances, debt as a percentage of the nation’s gross domestic product, adjusted for inflation, is still below peak levels incurred during the late 1940’s. There is still time, and the ship can still be righted. The question is, what path should be taken? I am advocating a patient approach. Federal spending is certainly high, and is currently more than the revenue coming in. This is not usually a sustainable long term policy, at least not on this scale. The United States needs to put a great deal of effort into figuring out how to balance the books and bring in more than is spent. However, are drastic and immediate cuts to programs and spending really the answer?

Keynesian economic theory suggests that spending during economic downturns, even in the face of deficits, can “prime the economic pump” and help to improve overall growth. This allows jobs to be created, money to be spent by citizens, taxes to be paid, and improves overall prosperity, helping to bring the budget back into balance. There is much historic precedence for these policies. Deficit spending during the Great Depression and through World War II helped to spur growth, slowly during the 30’s, then much faster during the war years of the 40’s. People were placed back to work, mostly by the federal government, or indirectly through government programs, and their spending power increased. This spurred the massive postwar boom which led to the highly successful era of Keynesian economic policy and relatively liberal government from 1933 until around 1973.

The New Deal of Franklin Roosevelt invested heavily in building up the nation’s infrastructure. Roads, bridges, dams, levees, and railroads were all constructed. Electrical power was delivered to rural America. Millions of people were put to work to make this happen. Even more people went to work when World War II broke out, both in combat situations, and in support roles. Industrial production exploded. The debt itself did not expand much during the early years of the New Deal. FDR was concerned with balancing the budget, and did not fully embrace Keynesian theory. Deficits didn’t exceed 3% until the war started. However, the greatly increased spending during the war also accelerated economic growth. The growth of the 30’s improved with the deficit spending, but the fact that it was anemic growth was largely due to the relatively cautious spending. The 40’s boom could be attributed in part to the massive explosion of spending and investment, obviously due mostly to the war. The historical record serves as a powerful rebuttal to conservatives who claim that economic spending hinders the economy.

In the late 40’s and early 50’s, the economy continued to expand, and debt gradually shrunk back down. It would not increase significantly until the Reagan administration of the 1980’s, an era that thoroughly rejected government investment in the economy, yet managed to spend far more than it brought in. Much of that was due to massive initial tax cuts, including cutting the top marginal income tax rate from 70% to 28%. Eventually Reagan was forced to raise various taxes – 11 times in 8 years – because of the shoddy nature of his fiscal policy. President Clinton raised taxes slightly on the top 2% of earners, and worked to streamline the budget, gradually bringing the annual federal budget into surplus. Then came the Bush administration, the terrorist attacks in 2001, and over a decade of subsequent tax cutting and military spending, including two major wars, one of which is still going on, 11 years after it started.

The national debt has been increasingly made into a political issue. However, it is a political issue pushed largely by economic novices. Many of the strongest deficit hawks understand the least about the way public debt works. The debt incurred by the US government does not actually have to be repaid, at least not entirely or immediately. The primary issue is that the tax base needs to grow faster than the debt in order to keep things stable. The massive debt incurred after the second World War was never repaid, but it mattered less and less as the economy boomed and the yearly budget became more balanced. Individuals need to pay their personal debt back because they owe it to others, yet most of America’s debt is owed back to ourselves.

Foreign debt is a real issue, and certainly not something to ignore. However, for every dollar of foreign debt held against America, 89 cents are held by Americans against other countries. This is not an enormous imbalance. Certainly a manageable one. Also, foreign investment in America tends to be in safer, lower-yield investments. That means that America actually earns more in foreign investments than it owes. There are many misconceptions about US foreign debt, but maybe the largest is that we are deeply and irrevocably indebted to outside interests, such as China. While there is definitely some imbalance, in the grand scheme of things, the US is actually doing fine.

Debt is important, and excessive debt can lead to increased taxes in order to pay off the interest. The debt also plays a role in dragging down confidence in the American government and the overall economy. However, the economy is largely dictated by emotional influences, just as much as numerical ones. And American conservatives are practiced at using the issue of national debt to scare their fellow citizens into voting for major reductions in government projects and investments. Conservative pet projects primarily involve running government as poorly as possible in an effort to prove how awful and unnecessary government is. It becomes self-fulfilling, and unfortunately too many people don’t pick up on this. Government is very much a tool. Certainly it can be used to destroy and cause misery. The historical record shows plenty of examples of this. However, operated with finesse and a sense of purpose, governments can be very good at enriching lives and helping administer essential services. As the country grows, it makes sense that certain services be provided by the public, for no or little profit. Private enterprise is a wonderful thing, but it doesn’t have a great track record on providing services in an equitable and fair manner for all people, rich and poor alike. A democratic government can do this, provided there is sufficient oversight. Who provides that oversight? An engaged and active citizenry keeps such institutions in line. With the gradual crumbling of labor unions, individuals can do less and less to curb the excesses of businesses, so we, at least in theory entrust the government to do so. Modern conservatives tend to disagree.

What I am looking back on, though, are the public works projects of the 1930’s. Unemployment had reached record levels, and putting people back to work was one of the most important steps to rescuing the economy. The federal government stepped in when private enterprise was in no position to do so, and started several large programs designed to build up the nation and employ its citizens.

Fast-forward to 2012. The economy is weak, though not at 1933 levels, thankfully. The infrastructure that was largely started in the 30’s is aging and in many cases, failing. The nation’s workforce is suffering from high unemployment, though, as of this writing in October 2012, it is gradually improving. A massive and almost desperate need exists for people to go to work, and an equally desperate need exists to repair and replace our nation’s roads and bridges. The solution is self-evident, yet there exists tremendous opposition toward it. Why is there such aggressive, and in many cases, vitriolic opposition? Some of it is philosophical. Many believe that the government should be as small as possible, spending little to no public money. Many believe in government spending, but primarily for military reasons. Some of the opposition, including by the former Governor of Massachusetts, seems to be for political reasons. Spending on infrastructure is what the President has suggested, so it must be the wrong course, logic and evidence be damned. Let’s go ahead and take a look at some of the evidence, then. Why should America spend it’s hard-earned tax dollars on rebuilding roads and bridges?

It’s pretty simple and straightforward, actually. Public works spending leads to jobs and growth. And, more importantly for our technologically-dependent nation, we need that spending, badly. The United States is currently suffering from a crumbling infrastructure. The state of our bridges, roads, dams, levees, inland waterways, railroads, energy generation, and parks is abhorrent. Many of these important public services are things that we use every day. But that continued use, and a lack of interest in maintenance and inspection has led to an infrastructure falling into shambles. Just to start, let’s look at bridges alone.

The American Society of Civil Engineers maintains a website, www.infrastructurereportcard.org. It grades the state of American infrastructure, dividing it up into sections; bridges, roads, etc. The page grading the state of America’s bridges has some disturbing numbers. Quoted directly from the site – “More than 26%, or one in four, of the nation’s bridges are either structurally deficient or functionally obsolete. While some progress has been made in recent years to reduce the number of deficient and obsolete bridges in rural areas, the number in urban areas is rising. A $17 billion annual investment is needed to substantially improve current bridge conditions. Currently, only $10.5 billion is spent annually on the construction and maintenance of bridges.”

The page goes on to explain that most bridges have an operational lifespan of 50 years, and the average age of these bridges is 43. Many have already exceeded that 50 year mark by a substantial margin. According to the U.S. Department of Transportation, of the 600,905 bridges across the country as of December 2008, 72,868 (12.1%) were categorized as structurally deficient and 89,024 (14.8%) were categorized as functionally obsolete. And the number is only growing. In recent years, a major disaster occurred which served to highlight risks inherent in letting these bridges sit and rot.

In 2007, a bridge along part of Interstate 35 collapsed in Minnesota, killing 13 people and injuring 145. The collapse was blamed on design flaws, and general stress from carrying 140,000 vehicles per day. The bridge was 40 years old at the time of the collapse, making it slightly younger than the average bridge in America. Certainly it was much more heavily traversed than most bridges, and it did receive annual inspections. The inspections revealed severe stress and weakness in the bridge’s trusses and girders, and the bridge had been declared “structurally deficient” since 1990 – 17 years before it collapsed. Yet, in 2005, the bridge was only scheduled for replacement by 2020. This tragically turned out to be 13 years too late.

Despite this horrific example, and the scary numbers, the state of America’s bridges is actually healthier than almost every other aspect of the infrastructure. Aviation, dams, drinking water, energy, hazardous waste, inland waterways, levees, public parks, rail, roads, schools, transit, and waste water all rate lower in terms of safety and modern efficiency. The American Society of Civil Engineers rates America’s overall roads grade as a D-. Levees are also a D-. Yeah, levees, the safety features that failed and wrecked New Orleans 7 years ago. Only a little over a billion dollars per year is allocated federally to maintain and build them, but the estimated cost to do it right is 50 billion. 4000 out of the 85,000 dams in this country are deemed to be deficient, and potentially dangerous. And these examples just scratch the surface of the issue.

What does that say for us? Sounds like we’re falling apart. However, all the machinery and equipment that was built to support America can be rebuilt. We just need to invest the time, money, and energy into doing so. So far, we have been failing in that task. Every time a political figure suggests that investments be made America’s infrastructure, they’re shot down as “tax and spenders,” “socialists,” or accused of building “bridges to nowhere.” Rest assured, we can find plenty of work to do on bridges without constructing unnecessary ones.

The American Society of Civil Engineers estimates that in order to bring America’s national infrastructure up to an acceptable and modern level, a total 5 year investment of 2.2 trillion dollars will be needed. An amount of federal funding that large is going to be politically unfeasible. Even a third of that amount would be incredibly hard to swing in the current legislature, now matter how aggressive and eloquent the campaign for it might be. Much of that 2.2 trillion would be spread out among the states, and not come from federal coffers. However, many states would be encouraged to join in on an ambitious public works plan if there was significant federal backing – say, at least 600-700 billion dollars total.

Realistically, the total potential investment would still be hundreds of billions of dollars. While another near-trillion dollar stimulus package will be something many Americans would balk at, the potential rewards are tremendous. This stimulus would be carefully focused and overseen to ensure that the areas that need worked on would be covered, but not overstepped or ignored. Literally hundreds of thousands of Americans could be put to work within months. Presumably, contractors would be used for a large percentage of the workforce. Many of the bridge, road, dam, levee, and other infrastructure projects would take months, and in many cases, years. This medium and long-term employment will positively impact the lives of the workers and their families. Their purchasing power will increase, and a great deal more money will be pumped into the economy in terms of spending. Housing may not increase tremendously, but the already rebounding housing market should receive at least a little boost from individuals feeling more confident in their ability to handle a home loan. In addition, tax revenue will increase sharply. Many of the “47%” will find themselves now paying income taxes, which will contribute to the government’s coffers, helping to reduce the deficit, as well as paying for the projects themselves.

Any big spending bill will, in the short term, increase the national debt. This is unavoidable. In order to prevent an economic plunge back into recession, some spending will be needed. The idea is to spend in areas that are needed, while working to trim the fat, and encourage increased revenue. This increased revenue can be had through closing loopholes and deductions, encouraging American companies to keep jobs onshore by cutting some or even all corporate taxes, some tax rate increases, (especially on the upper levels which can best handle such an increase), and most importantly, significant investment in American infrastructure in the form of a massive public works program which could put hundreds of thousands of people back to work.

As economic growth increases, revenues improve, and more flexibility will exist with budgets. Some cuts are likely to be necessary, including some painful ones. The entire healthcare system has serious flaws. Some have been addressed by the Affordable Care Act, though many of the provisions in the ACA are improvements in coverage for individuals rather than direct cost reduction. There is, currently, one glaring expenditure that should be addressed, and indeed, has been something of a campaign issue this year. The United States Armed Forces.

The US military spends as much as the next 14 highest spending countries in the world combined. The United States’ annual military budget is 41% of the entire worldwide military budget. Think of that for a moment. We as Americans have more than a third of the planet’s complete military budget and we can’t find a few dollars to cut here or there? The details of what can and should be cut would take up much more room than I have space here, but suffice to say, there’s room to reduce what we have. American military superiority can still be maintained with significant cuts. External force projection can be reduced while still maintaining a strong military presence throughout world trouble spots. Greater reliance on allies can help to improve diplomatic relations, as well as saving costs and resources. Cutting overall military spending by even just 10 or 15 percent can reap great benefits in debt reduction. 15% of the 2011 armed forces budget would be approximately 106 billion dollars. The remainder would still be more money spent on the military than the next 9 highest spending countries combined. I’m going to go ahead and say that’s plenty of weapons and soldiers. Maybe we should concentrate on taking care of our soldiers who have found themselves injured and traumatized. Spending money on helping them find work and getting proper healthcare should be a major focus of the military budget. Treating the war on terror as the police and intelligence operation that it truly is would make a difference in spending as well.

Mitt Romney has stated that he wants to actually increase the size of the armed forces. Naturally, increasing the number of active-duty personnel would increase the size of the overall military budget. Yet, he still believes he can cut taxes, grow the economy, and decrease the total budget deficit. He believes can do these things without giving any specifics on how the math would work.

Throughout his campaign against President Obama, Mitt Romney has decried the tepid economic growth rate, the size of the federal deficit, and overall tax policy. He has also publicly stated his opposition to infrastructure spending by the federal government. Mitt seems to believe that he can provide Americans an across-the-board 20% tax cut, drastically reduce federal spending, grow the economy at a faster rate, and lower the national debt all at once. Unfortunately for the country, should he get the opportunity to test his belief, the math doesn’t add up. Massive cuts to taxes and spending will likely bring about a new recession, shrinking the size of the American economy. Hey, at least another recession will probably help cut the cost of gas, Mitt. If he wants to increase growth, especially in the short term, certain investments will need to be made, and yes, that likely involves spending. This will almost certainly raise the deficit, at least in the short term. If Mr. Romney wishes to concentrate on only cutting the deficit, he will need to cut spending, reduce government jobs and benefits, and likely scale back his tax cut proposal, or eliminate it entirely. This will all but guarantee a recession. Well, which is it going to be?

The fiscal policies of the George W. Bush administration involved reducing taxes on the wealthy (decreasing revenue) and greatly increasing spending. Massive cuts to regulatory agencies and a general culture of laissez-faire toward corporate interests (when it suited them) combined with reckless fiscal policy to bring about the Great Recession, just in time for the new guy to take over. The collapse and prolonged weakness of the housing market ensured that any recovery would be sluggish and take a great deal of time.

The key to a stable and strong financial recovery is patience. Politicians, and the constituents who can rehire or fire them every 2 to 6 years have trouble with patience. People understandably want results, and they want them to be noticeable and fast. Any time spent setting up the structure of a long term and sustainable recovery is deemed to be time wasted. The current President has had to spend the last 4 years digging the nation out of the worst hole it has seen since the 1930’s. And he has had to do this in the face of an unfriendly House of Representatives, who actively opposed all efforts toward stimulating the economy. The House was willing to let the country bankrupt itself in the name of “fiscal conservatism.” The national debt is important, but keeping the nation running is quite a bit more important.

We have assessed the need for increased infrastructure spending. The larger campaign issues have also been discussed. Increasing economic growth, reducing the overall tax burden on as many Americans as possible, increasing revenue, reducing the debt, preventing another recession, and creating jobs are the major priorities of the current Presidential campaigns. They are all laudable goals. I am arguing that they can be tied into a new stimulus bill. A bill that would invest massively into rebuilding the very structure of this nation.

This route has been proposed by President Obama, albeit on a smaller scale. A new New Deal would employ hundreds of thousands, perhaps even millions of Americans. It would allow them to spend and invest, putting much needed cash into the economy. They would pay income taxes, boosting the nation’s (and many state’s) coffers. Houses would be purchased, as would cars. The economy would grow faster. Revenues would gradually improve, allowing the government the flexibility to make careful and nuanced cuts. Cuts that genuinely save money, and make the government more efficient. Cuts that help, not hinder. It may take several years, but balanced budgets would become closer to reality. It may not occur until after the 2020 election, but there is no reason we can’t return to Clinton-era budgets while also achieving Clinton-era prosperity.

The Congressional Budget Office has put together several studies which showed fairly conclusively that the stimulus bills of 2009 prevented a deeper recession, and possibly even a depression. A larger and more focused stimulus now, especially as recovery is starting to gain some steam in certain areas of the economy, can cause a much bigger boost, as well as serving to address major deficiencies in the very structure of our nation.

It would require political courage and skill. It would require tenacity in the face of what would surely be an enormous and vicious opposition. It would not be a project for the faint of heart. However, if the President can hold off his challenger and convince the American people that patience and thoughtful governing is the best course, he will have proven that he has the requisite tenacity. President Obama may not be FDR, but he can surely embrace one of the most important parts of FDR’s legacy. An Infrastructure Stimulus bill is just what America needs. The deficit can’t wait forever, but it doesn’t mean we can’t afford to take a measured approach to tackling it. Creating an economic boom in the meantime should help, as well.