Prosperity Through Road Construction
One of the constant themes of modern socialism (and Keynesianism) is the belief that we can create prosperity through government spending on roads. Mind you, roads can help an economy if they are located in places where they can aid commerce by making it possible for relatively cheap transportation that permits wider uses of division of labor.
However, that is not why people like Paul Krugman and other socialists champion tax-funded road building. Instead, they insist that the money spent in itself will revitalize the economy, and that is pure nonsense. Interestingly, this past year has seen a huge amount of government “public works” spending, but the effects have not been what the Krugmanites/Socialists have claimed.
A recent AP article notes that a number of economists have examined the results of this road building, and find them wanting:
Ten months into President Barack Obama’s first economic stimulus plan, a surge in spending on roads and bridges has had no effect on local unemployment and only barely helped the beleaguered construction industry, an Associated Press analysis has found.
Spend a lot or spend nothing at all, it didn’t matter, the AP analysis showed: Local unemployment rates rose and fell regardless of how much stimulus money Washington poured out for transportation, raising questions about Obama’s argument that more road money would address an “urgent need to accelerate job growth.”
This is not surprising, but no doubt the Krugmanites/Socialists will have an answer declaring that the real problem was that the government did not spend enough. Spend more, they tell us, and then you will see the positive results.
Why has this spending not had the desired effect? To answer that, one has to understand that an economy is not an amorphous blob into which one pours money in order to make the recipe complete. An economy has a very complex set of relationships in which all factors are valued relative to one another, and in the end the value of those factors of production is determined by the value that consumers place upon the final product that those factors create.
In other words, coal is valuable because it helps to make electricity, which we value. Electricity does not receive its value from coal; coal receives its value from electricity.
Furthermore, an economy that is functioning correctly is one in which the factors either are in balance or are not prevented from finding their proper relationships with one another. By piling on spending and forcing factors to be expended on pet government projects, the Obama administration (like the Bush administration before it) actually is diverting factors from the use that consumers prefer to uses that the political classes and their allies prefer.
This move actually makes economic activity more distorted and prevents the recovery from occurring. In fact, I can say confidently that this forced “massive public works” emphasis is making us poorer because it actually is a massive wealth transfer from the productive to the non-productive economic sectors.
To use a term from Peter Schiff, the government is destroying wealth, and that makes us poorer. Furthermore, as government continues to pound square pegs into round holes, the net effect will be to destroy more wealth and throw many more people into unemployment and poverty.
This is something the Austrian Economists understand instinctively. Keynesians and Krugmanites are clueless, and while they revel in their cluelessness and their ignorance is celebrated in the media as Great Wisdom, nonetheless, they are ignorant people, but (unfortunately) ignorant people who are influencing the government to destroy what is left of our economy.
Indeed, the “shovel-ready” projects are shoveling something, alright, but it is not dirt. I don’t think I need to emphasize that the nonsense they are shoveling at us comes from the back end of a bull.
Regards,
William J. Anderson
LewRockwell.com
February 4, 2010
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Good article, but I don’t know anyone that directly values electricity, just as no one directly values coal. People value the light, heat, motion and computational / entertainment value that electricity can be used to produce. The appliances that produce these things from the electricity are just as important to the value equation. As the author states, a system in balance (correct amount of fuel, generators, transmission lines, appliances, maintenance, etc) will achieve the most value.
Well done! Another way to look at electricity is as stored value; in a very real sense it is a different form of currency, pun unavoidable. In our world electricity is as vital as water and air.
I think this article fails to provide answers to the reasons why no jobs are being created from the massive influx of money into Road Building. While it is true that people as a whole do not necessarily value roads, unless theirs is a potholed mess, the Projects do create some value for the Local Economies where the projects are built.
The problem lies in that many of these “Shovel Ready” Projects are just that. They are typically projects which have already been designed, thus no Design Engineering Firms are needed. And the projects typically are big on using heavy equipment, and not much labor, other than that used to run the machines. Construction Companies are not going to rush out to hire anyone to run the machines, they probably bid low on a project, and cut their profit margins just to keep the staff they have busy, so that when things do turn around they do not have to train additional staff. The companies will pay the staff they have overtime, rather than hire extra staff that they will have to lay off after these “Shovel Ready” Projects are done.
Linda,
Great point – you’re right – electricity does function a bit like money in that it is a measurable, quantifiable means for the exchange of work. I hadn’t thought of it in that way. How much is a turn of a crank worth? It depends how hard it is turned and how fast. This would be very hard to measure (and charge properly for) without electricity as the intermediary. It allows the abstraction of work. Before, work had to be tied to the product – it didn’t matter how fast or how hard the crank was turned, just the amount of flour produced. Now work can be done (spinning the turbine) without a care for how the energy produced will be utilized.
However, I must note that electricity is not a store of value for us today, as all of the electricity that is used gets generated only milliseconds before. Our power grid has basically no storage capacity – it is one of the things to be addressed by the new “smart grid” under development. Right now, our storage capacity is in the coal piles, dammed water, and unused nuclear rods in storage.
By the way, I’m a big fan of your writing, Linda. It feels sophisticated and downright cosmopolitan.
Great posts, Sherb, and thank you for the elegant compliment. I your way of pointing out sloppy thnking, particularly when it is mine! Very true, storage of electricity is a great problem and one reason wind power will never be satisfactory (at least, until someone builds a very big battery.) Anyone who has driven by a vast wind “farm” has seen how many of those quarter of a billion dollar towers are standing idle because there is not sufficient demand. Chuckle. When I fuss at people for not turning out lights I always point out that nobody has any good memories when facing a large electric bill. We don’t say, “Wow, do you remember when we left the broiler on night? Gosh, that was fun!”
Yes, it is the capability that is prized, and our security when it is sufficient. That’s why the threat of HEMP is souch a concern. We could probably have hydroelectric back up pretty quickly, but trying to reconstruct the machines which ran off such power would be quite time-consuming–and all but impossible until we had transportation running again. I’m always fascinated by the idea of external combustion engines which are about as un-green as it is possible to getbut would get America moving again reasonably quickly if the grid is blown out. What’s your area of expertise? Other than straight-thinking and being precise in your speech, a quality I admire? Cordially, Linda
How humanity has failed itself. Where are those dreams of utopia and free electricity dreamed up in the 60′s, when we discovered how to manipulate the atom giving us free energy. Isaac Asimov in the foundation series wrote how a civilization collapsed and lost their nuclear ability, eventually going back to only coal and steam. With just the wealthy royalty having access to electicity. Middle class fell back to something resembling the dark ages. I fear humanity is speeding down that slippery slope. Becoming serfs to the politically connected.
Krugman gets it wrong only a part of the time. Mr. Jefferson gets it wrong all the time if this is what he wants to pass on as knowledge of how economies work. He sounds like the frustrated editors of the Financial Times and The Economist who have been predicting for 40 years that the socialist economies of Europe are going to “collapse tomorrow”. The world has become a bit too complex for simplist drivel, as illustrated in this little article, to be helpful in understanding divisions of labor, and how capital interacts with production in both its helpful and destructive ways.
And if you understnad that all forms of energy are completely fungible with each other and currency, you have a chance to imagine a model of economics in which the currency becomes the tail wagging the dog; if not, then you can continue to not understand much of anything. Von Mises is dead – get over it.
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