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Louis Uchitelle: A Trap in Obama’s Spending Plan

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.

As a measure of the current disaster, the Federal Reserve last week lowered interest rates to an unheard-of near-zero percent and offered in effect to give away money if a fearful nation would only spend it. But panicked by investment losses or fearful for their jobs, people tend to hold back. In such circumstances, a new road could be lined not by shopping malls, but by empty, overgrown land.

That is the risk facing Mr. Obama’s plan. 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.

“If that spending can’t get the private sector going, then it is just a make-work maintenance operation,” said Stanley Moses, an economist at Hunter College in New York.

History illustrates how tricky it can be to make public spending work as intended. The many dams Franklin D. Roosevelt’s administration built generated an abundance of electricity, lowering its cost so that families could afford to operate the appliances then becoming available. The construction itself put money into workers’ pockets. But the appliances were too costly for most families during the Depression, and the manufacturers wouldn’t extend credit. For all the money spent by the Roosevelt administration, public investment was failing to jump-start a key private-sector industry....
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