Road Runner

Seven Companies Profiting From Obama's 'New' New Deal

David, You are. I would like to add some important points that some of the previous posters seem to miss.

First, this is not going to be anything like the Great Depression. The Great Depression was caused by a contraction of the money supply, when the money supply should have been expanded (you can blame that on the lack of understanding of economic theory, and the Republican dogma of the Hoover administration, not Roosevelt). Today, the central banks of the world are pumping trillions of dollars into the world economy. The US central bank, the Federal Reserve, has injected more than 1.2 trillion into the US economy since September. That’s a massive amount of money. But, it will take about 12 months to affect the general economy. Injections by the Federal Reserve always have a delayed effect. Note that this 1.2 trillion is totally separate from the $700 billion Federal bailout package. I am looking for a recovery starting in the second half of 2009, with it kicking in strong in 2010 because of this massive money supply increase.

Second. There will be low consumer spending for years. It will take years for the consumer to feel good again (and greedy – remember that “greed is good” from the movie Wall Street). Since consumer spending is most of the US economy, someone or something needs to pick up the slack to get the economy back to full speed and full employment in the next few years.

That is where federal infrastructure spending needs to come in. The reason the federal government can go on this borrow and spend spree is because of low inflation that allows the Federal Reserve to inject large amounts of money into the economy by buying US federal debt securities (see explanation below). I think the national debt fear mongers are wrong now, though they will eventually be right.

Third, as you said, public works projects often lead to large economic booms years later. That is because they can have a huge productivity gain for the economy. There are only 2 ways to grow an economy: increase population and increase productivity. You have a great example in your article with the TVA. But, my favorite is the Hoover Damn, also built in the Depression. The Hoover damn basically launched the economic boom of the southwest US. It cost $49 million but has given back billions in economic growth. I believe that alternate energy and the electric grid are the “Hoover Dam” projects of the present age. It looks like a huge up-front cost today, but in the following decades will give a many fold return to the economy.

This is a point often missed by people that stick with the Republican, conservative dogma that the private sector is ALWAYS the best place for capital expenditures that increase productivity. On the flip side, a huge amount of the private sector investment in the last 5 years went into building luxury homes and condos, and the overhead of the financial system. Both add little to general productivity. The founder of the Vanguard investment group estimated that $600 billion a year was spent on the overhead of the financial system in the last few years. He was shocked by how wasteful that was.

Explaining the Federal Reserve. The Federal Reserve’s main concern is inflation. It raises inter-bank lending rates, thus contracting the money supply when inflation is too high. And, does the opposite when inflation is low. The Federal Reserve also buys US Government Bonds to manage the money supply. The Federal Reserve gives the interest it makes on the inter-bank loans and US bonds back to the US government. I know that sounds circular and strange, but that is the nature of the Federal Reserve. Right now there is little inflation and in some areas deflation (how about those low gas prices!). This allows the Federal Reserve to inject massive amounts of money into the economy by buying US government debt, thus allowing the US government to borrow large amounts of money for infrastructure projects, basically interest free.