A couple of news items, in case you missed them:
A single-minded Congress is nearing . . . a pact covering next year’s spending for schools, the military and other programs . . . the unanimous vote underlined how the Sept. 11 terrorist attacks have drained away any taste . . . for a budget battle this fall. . . . Meanwhile, White House officials and legislators were close to agreement to start next year’s spending bills at a total of about $686 billion . . . about an 8 percent increase. It excludes the $40 billion in emergency money Congress approved three days after the attacks, plus additional billions of dollars lawmakers are likely to approve in coming months for defense, intelligence, economic aid and other items. . .
––Washington Post, September 25, 2001
Senate Democrats are considering infusing as much as $37 billion into passenger-rail services, said Senator Harry Reid, the majority whip. The investment could be part of bipartisan economic stimulus package. . . . Reid wants to expand Amtrak service, improve security and establish high-speed rail corridors between cities. In the House, Rep. Don Young will introduce legislation to provide for $71 billion in tax-exempt bonds, loans and loan guarantees and direct funding to develop a high-speed rail network. . .
––Wall Street Journal, September 25, 2001
And here we were thinking we’d elected another George Bush to the White House, when in fact we’ve just given the ghost of FDR a fifth shot at socializing America.
From frantic monetary pumping, to bailouts of private-sector companies—you know, those risk-bearing enterprises in which adult shareholders voluntarily put their funds at hazard in the hope of economic reward—to exhortations to consume. From war-bond drives (war-equities in this case), to extra spending on irredeemably failed public-sector entities such as education, defense, intelligence, and—for heaven’s sakes!—infrastructure spending on railways to boost the economy. Railways!?! Why not rebuild America’s fleet of clipper ships, or subsidize the Pony Express while we’re at it?
While not quite Keynesian pyramids or payments to farmers to plow up their surplus crops, this is still, sadly, yet another New Deal in the making.
Never mind, Larry Ellison will no doubt volunteer the software to run it, when he’s not too busy using what remains of his shareholders’ company (market cap off $190 billion from the peak) helping the State keep track of all us hoi polloi via our shiny new Big Brother ID cards.
We won’t dwell on the final bitter parallel of a war arriving to provide the excuse to conscript people into working for the State so as to avert Depression and avoid widespread pain to the financial sector: the wounds are still too fresh for that. But we would point out that war by financial and diplomatic means, as well as greater bottlenecks at all points of exit and entry to the country, by impeding the international flow of goods and lessening the fruitful division of labor, could be thought of as economically equivalent to a Smoot-Hawley tariff.
In all this, just bear one thing in mind: when you hear the word “bipartisan” being bandied about, both the Ins and the Outs (as Jefferson so aptly termed them) are reaching into your pocket to pay for new saddles for their favorite hobbyhorses.
As all this spending picks up—assuming, as we must, that there is not a forced deflation amid financial collapse and that consumer time preferences change only slowly, if at all—nominal GDP will climb, and even real GDP will probably improve. Here and there, the lucky industries, which do not see extra monetary revenue swallowed up in higher costs, will do well, but this may be swamped by those still working off the excesses of the Boom and those disrupted by the WTC.
However, aside from the problems occasioned by lumping all manner of goods and services into one big bucket—rather like attempting to gauge the viability of a department store simply by adding up how much money it spent on the stock, and then by trying to collapse all the near-infinite matrices of price and volume changes into one number—real GDP is, by definition, a gross measure. It only measures what I spend, not what I achieve with that expenditure.
If I buy herd of feeder cattle for my ranch, but my malicious neighbor, who holds the mortgage on my property and who is itching to foreclose, sneaks in and poisons the drinking hole, I may well go out the next morning and buy more cows than I otherwise would, so boosting GDP, but I am not wealthier for it.
Moreover, if I sell assets, borrow someone else’s prior savings, or forego other discretionary outlays myself to pay for the replacement animals, funds that could have been used for different purposes are now forcibly to be spent in the stockyard.
That may be to the benefit of the people fortuitously working there, but it can be of no overall benefit to the economy, since the money will simply not now be spent on something else instead by me, or by my assets’ purchaser, or lent or spent by my new creditors. So, to the extent that compulsion, not free will, entered into the exchange, there was a degree of psychological, if not monetary, impoverishment. This is Bastiat’s “broken window” by another name
The only way a net consumption can seem to result from this is if I borrow bank credit, created from nothing, to pay the stockman. Sadly, the fact is that this is merely more money chasing the same goods—i.e., inflation—and eventually somebody down the chain will get just sufficiently less of what he then wants with his now-depreciated dollars to make up for my purchase.
Furthermore, I had already hocked my farm to my covetous neighbor, and by borrowing afresh, while I may stave off immediate liquidation, I may only be postponing my bankruptcy, and then I will do more damage to the credit system than I would have. Even if I do survive, I may well be using my physical capital much less productively in that it is now encumbered by extra debt payments and so is not providing as well for its regeneration and maintenance.
Taking the macroeconomists’ own numbers to illustrate this, buried within the GDP tables is a series of items purporting to measure “consumption of fixed capital.” Setting aside any cavil about how this is derived, let us simply subtract these from the entry detailing “gross private fixed investment” to arrive at some crude, overall net figure.
This makes salutary reading. Net private investment had already fallen 28.5 percent in QII from its peak a year ago, to a dollar level first achieved four years ago, marking its severest decline since the depths of 1991.
What is perhaps worse is the discovery that, for all the supposed capital spending boom and New Era productivity revolution of the past decade, net investment as a proportion of GDP had simply returned from 1991–92’s postwar depths to its fifty-year average—barely surpassing this mean even at the peak of the Bubble, in the period 1998–2000.
Accelerated writeoffs of the malinvestments of the last six years were already taking place before the strike on NYC, and the damage from the WTC has been guesstimated at another $100 billion or so to add to that, so this net figure will be much lower ahead, whatever the gross numbers suggest.
Add to this the fact that much of whatever will be booked as new private investment in coming quarters will actually be the unproductive provision of security measures and backup facilities. The situation now looks bleaker still.
Returning to our ranching analogy, should I decide to build an overengineered metal corral in place of my existing wooden one, and if I fit a multitude of locks on the windows of the hacienda to soothe my fitful slumbers, my “investment” will do little to enhance my return on the capital employed in the primary business of raising cattle for a profit.
Finally, we have now awoken that voracious great hog of the State, and he is busy nosing us aside from the public trough, while Farmer Greenspan is busily watering down the swill so that what little portion we can snatch is even less nutritious than it was.
Net—productive—investment will thus shrink further in relation to overall activity, and this will hollow out the structure of the market economy even more, sapping its vitality. But, cheer up! GDP will rise, and inflation may even boost stock prices—what do you mean we won’t be wealthier for it?
