Priming the Pump

Last night, President Obama gave his first press conference to make his case for the spending package. He did a pretty good job of demonizing the opposition, and painted a pretty bleak economic picture. First of all, I agreed with him on two points: 1) Republicans, specifically Bush, got us into this mess. 2) Alex Rodriguez using steroids is a black eye on Major League Baseball.

For his main point though, Obama's defense of using massive government spending for stimulus is based on junk science. I don't remember him using the analogy, but the typical one used for this kind of stimulus package is "priming the pump". His idea is that the government can spend a lot of money on projects for a while, and that will create confidence, spark consumption, and at some point, spark private investment will create more long-term jobs. It's an idea right out of Lord Keynes' General Theory. The problem is that the theory has never been supported by evidence in the real world. During the New Deal, despite 5% of the workforce being employed by the CCC and WPA, unemployment remained relatively constant. The jobs created by government were almost completely offset by jobs destroyed in the private sector. We got some nice National Parks' buildings from the CCC, and nice paintings on Post Offices from the WPA, but no economic growth. Over the past 15 years or so, Japan has had a similar experience.

We will get some good infrastructure projects out of the spending bill and some wasteful ones. Some people who have lost their finance job that won't come back will get to stay in their house a little longer than they would earlier. Some state and local governments won't have to cut as many programs. What we won't get is stimulus.