derryl

A Different $700 Billion

the Hand is right. My son's father in law, Jeff, is in the planning, engineering and development department of the small city where I live. A few years ago our city received $5 million from the federal gov't for "more infrastructure". Jeff laughed. Our economy was already overheated. All that happened is that contract prices rose to absorb the additional money and no "more" projects were done. It's a great scheme if you're in the institutional construction or road building business!

On some of the projects the city put out to tender they got only 1 bid and the price was "I really don't want this job but if you pay this scandalous price I'll fit it in". Other regional projects have seen contract prices triple in the past 5 years. There are only so many contractors and men and machines available to do the jobs. I don't think too many of the laid off sales girls of Linens 'n Things are going to become carpenters, pavers and heavy equipment operators any time soon.

Good old economics still applies. If you pump too much money too fast all that happens is price inflation. I'm not saying stimulus via infrastructure and R&D spending is wrong. It will be a boon to anyone who is currently underemployed or is otherwise positioned to scale up their operation with the new spending. That money will circulate through the economy as the front line beneficiaries spend their new incomes.

My point is only that there will be significant price inflation in whatever sectors are targeted by the new money, unless you target depressed sectors and regions. So the taxpayers who eventually have to repay the deficit spending may not get great value for their money, unless something like a marvelous new battery technology is invented that makes electric cars cheap and viable.

I don't think we should overly discount this latter possibility. GM claims it is almost there now. Pumping money into a depressed industry will not inflate that sector's prices. It will just sustain the industry rather than see it decline. The trick will be to target the stimulus spending for maximum value, but trying to do this "fast" is probably counterproductive.