Ask The Mineshaft
Bruce Bartlett has a very nice summary of Keynes’ thinking on liquidity traps and the need for stimulation:
What Keynes figured out is that when conditions such as these exist, the federal government must step in to raise spending in the economy and thereby increase velocity. This means running a budget deficit, but that is only part of the solution [...] Keynes argued that the only thing that will really work is if the federal government uses its resources to purchase goods and services. It must buy “stuff”–concrete, computers, paper, glass, steel–anything as long as it is tangible. In other words, the government must spend the way households do, by buying things. It must also employ labor, because much of what people spend money on today is in the form of services [...]
At this point, Federal Reserve policy will become effective again. As prices and interest rates rise, the liquidity trap disappears and money begins circulating more rapidly; i.e., velocity increases. This is what ends an economic crisis. Unfortunately, it was not until World War II that the federal government spent enough on real resources–because they were needed for the war effort–to make Keynes’ theory work in practice. [...]
For what it’s worth, Keynes didn’t know what to do in this situation, either. He suggested building pyramids and burying bank notes in deep mine shafts that had been filled in. As people tried to dig up the money, they would be forced to employ labor and purchase equipment that would raise spending and thereby growth. In the end, it took the greatest war in history to make Keynes’ theory work.
I think that mine idea is pretty clever. But obviously the better answer is SUPERTRAINS. In particular, whenever I start prattling on about high-speed rail, people point out that it would cost an ongodly sum of money. But in our current crisis, one of our main problems is a lack of non-ridiculous ideas about things to spend money on. For example, it turns out that the total cost of “ready to go” infrastructure projects in this country is valued at tens of billions of dollars rather than the necessary hundreds of billions. That’s because planning was done in the old “how will we find the money” world. At the moment, we’re in a weird “how will we find things to spend money on” world. Under the circumstances, one thing I’d be doing if I were president is dedicating a small slice of the 2009 stimulus making sure that we get a big and absurdly expensive list of high speed rail projects “ready to go” in some sense by 2010. Hopefully, by then the economy will be back on the path to recovery in which case interest rates will be back at a level where we don’t necessarily want to engage in huge gargantuan deficit spending. In that case, most of those plans will have to be shelved. But if not, some can roll forward.
54 Responses to “Ask The Mineshaft”
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December 5th, 2008 at 2:32 pm
Also high voltage direct current electric power lines.
December 5th, 2008 at 2:36 pm
So, if you were Obama, you would spend a bunch of money on middle / upper middle class engineers and consultants on pie in the sky ideas that by plan will never come to fruition.
As a middle/upper middle class engineer, works for me. Heck, the DoD has been doing it for decades, why not the DoT also?
December 5th, 2008 at 2:38 pm
Careful. I think we all know the inevitable path this logic will take us:
1. Invade all other countries that start with “I.”
2. Build more super awesome aircraft weaponry to compete with the 2009-extrapolated projection of a non-collapsed Soviet Union.
3. Prepare for the next Hitler. And the next one after that.
4. Construct a death star.
5. Invade Mars.
In any event, just speek quietly enough so that the Pentagon doesn’t catch word of this Keynes fella.
December 5th, 2008 at 2:40 pm
C’mon, Matt, it’s time to admit to yourself that this idea of building cool new infrastructure projects to get us out of the current slump is all a fantasy and a con job. Over the last 35 years, progressives have built so many ways to slow construction — environmentalism, historical preservation, affirmative action, etc etc — that you’ll be lucky to take your grandchildren on the initial run of any Obama Supertrain.
Look at the extension of the Metro subway from DC out to Dulles Airport. According to an article in yesterday’s Washington Post, it’s been in the planning stage for 40 years! With all the money being approved, it is hoped to get it built in seven years. And it would be likely to be delayed for years like the Big Dig in Boston.
December 5th, 2008 at 2:44 pm
But we dont know how to build supertrains. The French and Japanese do, but we don’t. We know how to make shitty cars and I think we should continue to play to our strengths.
December 5th, 2008 at 2:49 pm
Awesome title.
December 5th, 2008 at 2:54 pm
Here in California, the average time to complete a golf course (a different kind of infrastructure, but a good example of the time lag problem) is 8 to 17 years, with most of that time spent on the permitting process — e.g., will the development wipe out the only known habitat of the San Fernando Spineflower, a weed the size of a dime. (See the failed Ahmanson Ranch development).
The one exception in recent decades is the beautiful Barona Creek golf course outside of San Diego, which was open for business 18 months after being proposed. Why? Because it’s on the Barona Nation Indian reservation, and the Barona Nation, by treaty, doesn’t have to pay attention to all the environmentalist impedimentia.
So, will Obama call for the suspension of all the rules and regulations that progressives have spent 35 years imposing on America?
December 5th, 2008 at 3:01 pm
The Big Dig in Boston (a 3.5 mile freeway tunnel) was dreamed up in the 1970s, officially proposed in 1982, fully funded by Congress in 1987, construction began in 1991, was more or less functional by 2003, but then the roof fell in and killed a lady, so who know when it will ever be “finished.”
But, here’s another point: at its peak, the Big Dig employed only 5,000 construction workers. So, Obama’s plan for “creating or saving” 2.5 million jobs IN 24 months calls for getting 500 Big Digs going full blast in two years. Lots of luck with that!
December 5th, 2008 at 3:01 pm
FROM http://www.itulip.com/forums/showthread.php?p=62889#post62889
“Next year the fiction will be dispelled that governments can stop debt deflation by means that do not either produce mass unemployment or horrific inflation. As they try and repeatedly fail to meet expectations the Period of False Hope and Uncertainty will give way to the Era of Total Despair, and then we will see a bottom. Lost and wandering the ideological landscape with all of the old beliefs washed out, men go mad and grasp for any explanation but the truth — that the debt must be deflated before recovery can begin — and anything can happen. Watch Kudlow’s show and you’ll see what I mean”.
December 5th, 2008 at 3:16 pm
I thought I heard the interwebs implode.
December 5th, 2008 at 3:18 pm
Obama is a Chicago politician, and Chicago politicians know how to spend taxpayer money on “infrastructure” in a hurry without waiting years or decades to dot all all the I’s on the environmental permits. You just call up the road building companies who are your most fervent campaign contributors and tell them to hire more crews to fill potholes in the roads. Of course, they make sure to use crummy gunk that wears out four times as fast as the stuff used in Europe, so that they have to redo the roads again in the near future.
So, “Yes, We Can” blow a lot of money over the next 24 months filling in potholes on a national scale. But Matt’s solar powered magnetic levitation 300 mph train between DC and Boston ain’t going to happen in a Barack Obama Administration or in a Michelle Obama Administration. Maybe in a Malia Obama Administration …
December 5th, 2008 at 3:29 pm
“Watch Kudlow’s show and you’ll see what I mean”.
I assume you quoted that to show that the writer was a fool? I was completely agnostic until I got to that part.
December 5th, 2008 at 3:34 pm
Matt actually has a better idea than he realizes. Sooner or later we need to deal with our trade deficit, and there’s no better way to cut that deficit than to stop buying foreign oil. One way to do that is to increase the efficiency of our transportation.
I know, I know, cue the barking dogs with their endless whine about how that won’t solve all of our problems all at once etc etc etc, so we shouldn’t do anything. Because things have worked out so well already.
Still, it’s pretty much that simple- we can make energy at home without worrying about NAFTA or WAFTA or any of the other acronyms which make it hard to impossible to actually change the trade deficit figures.
In fact, some nations even use the construction of infrastructure as a means to nourish industries that develop products that can be sold to other countries. At one time the US did that and we manufactured items that were sold around the world.
I get pretty tired of people like Steve Sailor who hate America and tell us Americans aren’t smart enough to compete with Europeans or save our environment. As usual, he’s wrong, wrong, and wrong. Not only are golf courses environmental disasters, we already have way too many of them. Modern men prefer to spend time with their families and golf courses are going broke. Look it up.
December 5th, 2008 at 3:40 pm
In the end, it took the greatest war in history to make Keynes’ theory work.
Um, no. Keynes argued that a country can stimulate demand, in a self-sustaining way, by deficit-spending. The war brought massive demand from outside the borders of the US. It was that external demand for the US to become the “arsenal of democracy” that kick-started the economy.
December 5th, 2008 at 3:54 pm
the Big Dig employed only 5,000 construction workers
Plus the engineers, suppliers, planners, non-construction contractors, support personnel, the food cart guy, and so on. Citing construction hires misses the point. Infrastructure projects like building supertrains and the like are systemic cash injections. Its not just the construction guys and eventual consumers who benefit.
And I’m not quite sure what the Malia crack is about, Steve. Its not like this is futuristic technology or anything.
December 5th, 2008 at 4:13 pm
We cannot allow there to be a Mineshaft Gap!
December 5th, 2008 at 4:21 pm
The SUPERTRAIN needs to run in a straightish line to be superfast. That means a lot of houses will be torn down.
Hey look! There are a bunch of empty houses! Seriously, let’s do it. We’ve got idle labor and idle houses. The timing is perfect.
December 5th, 2008 at 4:22 pm
“Um, no. Keynes argued that a country can stimulate demand, in a self-sustaining way, by deficit-spending…”
This is true if (1) the marginal propensity to consume of the bondholders is identical to the rest of the populations and (2) the bondholders are U.S. nationals. (1) is usually not true, but is the lesser problem. (2) is now the real problem because the lack of a domestic pool of savings means the borrowed funds must increasingly come from abroad. As the ever growing interest payments are spent abroad by foreign lenders, there’s an ever growing subtraction from domestic aggregate demand.
December 5th, 2008 at 4:31 pm
There are tons of projects that have been discussed or even planned that are on the shelf due to lack of funding.
And things can move a lot faster than you think, if there is the impetus for a fast move. When we have a bridge disaster, like the Minnesota disaster last year or the I-40 collapse, the government got them designed and reconstructed much faster than normal. The I-35 bridge collapsed last year and has already been rebuilt and opened.
Projects plod through permit process because it is private actors working on indifferent (and overworked) burecratic agencies, who often subcontract design review to other firms. If there is a focused push from the Feds to get things rolling and move through permitting (including extra funding to make sure there is enough staff to handle the permitting and hiring more engineers to review the plans), it is easy to do. We know that, because the government does it fast all the time if they want to.
December 5th, 2008 at 4:34 pm
There are plenty of real infrastructure needs without retreating into the kind of fantasyland typical of comic books or the Beltway. Just in New York, we’re having a mass transit crisis, even as useful projects like the Second Avenue subway never advance. Isn’t liberalism supposed to be out of concern for human needs, especially the needs of those who aren’t rich?
December 5th, 2008 at 4:38 pm
just for the record, steve sailer, obviously you don’t know the slightest about the big dig: you have no frickin’ clue as to the tightness of the site, the engineering complexities, the mismanagement by the designate construction management firm, the workarounds required to stage and deliver to the site, the need to keep the city’s streetscape functional, and so many other factors that make extrapolating anything from the Big Dig to infrastructural projects in general the contemptible work of a propagandist.
we won’t even start on golf courses….
December 5th, 2008 at 5:25 pm
Two words:
Space elevator.
December 5th, 2008 at 5:34 pm
The one big infrastructure project that got done fast in recent decades was repairing the Santa Monica Freeway after the Northridge Earthquake of 1994. And that happened specifically because the GOP governor and GOP mayor suspended all the rules that progressives have imposed on big construction projects.
So, Matt, you can have your Supertrain in your lifetime or you can have 35 years of liberal impedimentia. Which do you choose?
December 5th, 2008 at 5:47 pm
Matt, I think that you are lowballing the “ready to go” projects number. Governor Schwartzenegger said that California alone had several billion dollars worth of projects just waiting for the money. I know that Illinois also has billions of dollars worth of projects ready to go. Heck, the CTA, as we discussed earlier, could probably absorb 5 billion dollars in capital that would start repairing and adding lines within a year.
December 5th, 2008 at 6:16 pm
I like trains and public mass transit just fine, but a big new infrastructure spending program sounds to me like “we bailed out the banks, we bailed out the auto companies, ok now let’s throw big $ at the construction industry.”
Does the “production” capacity even exist to carry out all this work? In short to medium term prices and wages in the sector will rise, over medium to longer tem lots of economic resources will get shifted into the sector that will, after the infrastructure boom is over, demand continuing infrastructure investment (aka know as “the 2015 construction industry bailout”)
And not to be forgotten, the Italian infrastructure building boom is where Silvio Berlusconi made his nut.
As for the spiffy title to the post, it’s regularly used over at Unfogged, though MY could have come up with it on his own from the Keynes’ quote.
December 5th, 2008 at 6:21 pm
let’s help steve sailer out a little more.
why did the big dig happen?
because I-93, back in those halcyon days sailer mourns, when there weren’t complex planning reviews and environmental regulations and all the rest, was shoved through in a disastrous way: it was undersized; it destroyed an urban neighborhood; it ruined sightlines; and in every way it was a really stupid idea.
but it got done fast all right.
now, speed is of the essence from a stimulative standpoint, which is why the focus first and foremost is on projects that are ready to go.
i don’t mind if stimulus is less than perfect in its outcomes as long as it gets the velocity of money up, but i do mind if stimulus is used for truly dumb projects like the I-93 fiasco that made the big dig necessary no matter how difficult to execute just because right-wing asswipes fetishize speed above any other consideration.
December 5th, 2008 at 6:28 pm
Matt,
Obama has been yanking your chain. You’ve been pranked by Obama. The Washington Post reported a couple of days ago:
“An Obama aide said money dedicated to infrastructure should be spent within 24 months, not devoted to projects just getting underway at the end of 2010.”
The Obama Administration wants to create or save 2.5 million public works jobs before the 2010 elections. So, they want to spend a half trillion or so dollars in 2009-2010. There is absolutely no way a lot of your kind of fantasy projects can get underway before the end of 2010. What the Obama Administration can do in 2009-2010 is what Mayor Daley does in Chicago (where do you think Obama learned the art of politics?): hire a lot of politically well-connected firms to hire guys to lean on their shovels and act like they are filling in potholes in the roads.
December 5th, 2008 at 6:36 pm
The National Park system is underfunded. There are several billion dollars worth of infrastructure projects waiting to happen. Matt you can have the SUPER TRAIN! but I want the National Parks projects. Money for everyone!
December 5th, 2008 at 7:29 pm
I have long thought that Sailer has a point about obstructions to big infrastructure projects– I’m witnessing it right now in LA, where the Expo Line (a very good idea) is getting held up over and over again over a grade-level crossing near a school, as if students can’t figure out that they aren’t supposed to run across the tracks to beat the train.
But the answer to Sailer is to simply write the exemptions to these laws into the stimulus bill. If Congress says no EIR is required, then no EIR is required. If Congress says no competitive bidding, then there will be no competitive bidding. If Congress bars all lawsuits, then there won’t be any (except on constitutional grounds, and those suits will lose).
December 5th, 2008 at 8:02 pm
OK, all these infrastructure projecrs will put some unemployed construction workers to work. What about everyone else? The retail workers, white collar workers, resturant workers, manufacturing workers, etc?
December 5th, 2008 at 8:07 pm
From the St. Louis Business Journal:
—– And all this could happen very quickly, [MoDOT Director] Rahn said.
“We know we can award $510 million worth of work or more within 180 days of the stimulus bill’s passage, with a considerable amount in less time,” he said. “The job creation will go beyond just those building the projects. Suppliers, retailers, restaurants, hotels and other businesses will benefit.
“We’re ready to deliver on Congress’s stated desire. —–
http://stlouis.bizjournals.com/stlouis/stories/2008/12/01/daily74.html
December 5th, 2008 at 8:47 pm
Dilan Esper writes:
“I have long thought that Sailer has a point about obstructions to big infrastructure projects– I’m witnessing it right now in LA, where the Expo Line (a very good idea) is getting held up over and over again over a grade-level crossing near a school, as if students can’t figure out that they aren’t supposed to run across the tracks to beat the train.”
Right. On the other hand, yes, kids are pretty dumb in general and likely one or two would get run over by a grade-level crossing near a school before they get the message not to play chicken with trains. Similarly, when commuter rail was started in LA after the 1994 earthquake, a couple of dozen pedestrians got hit by trains over the next X number of years, usually due to unfamiliarity with the idea that the Big Iron horse could kill you — kind of like the British cabinet minister who was killed by the first scheduled train trip in the history of England. Over time, people learn, usually the hard way …
Fifty or one hundred years ago, the government would have just put in an at-grade crossing and written off the likely deaths of one or two students as “the price of progress.” But the social, legal, and regulatory revolution of the 1960s put an end to that kind of callousness. Now, all big infrastructure projects go through endless hassles before dirt gets turned. There are advantages to the current system invented by progressives — it saves lives — and disadvantages — it hugely slows down construction.
Poor Matt is so young and so naive. His entire life since he entered college, he’s assumed that the reason big, cool transit projects aren’t getting done is because George Bush is President. He has no clue how many impediments there are.
December 5th, 2008 at 11:14 pm
I just think supertrains are cool. Also while we are at it they should build a giant supercollider. We could build one that was several times more powerful than the LHC. I don’t really know what physicists would be able to do with such a device, but if we ever want to really understand the universe we will have to build one eventually, so why not now?
December 5th, 2008 at 11:15 pm
So, now I take it the image of the Big Dig was that it was too heavily monitored and supervised? That maybe if it had been built a lot faster under fewer rules they would have managed to have falling ceiling structures kill more people?
December 5th, 2008 at 11:19 pm
Also just to show that I am not just for supercool stuff I think this would be an excellent time to invest in some massive foreign aid. It seems completely implausable to me that people in third world countries don’t need lots of stuff that governments could provide. Since this appears to be a global recession I would think that aid to the world’s poor would act as stimulus, plus it would be a really good thing to do.
December 5th, 2008 at 11:31 pm
Mars! In ten years!
December 6th, 2008 at 1:44 am
Try spending $100 billion a year on nanotech research.
Cut the time for the emergence of Transhumans from fifty years to maybe twenty.
So we can waste your ass that much sooner.
December 6th, 2008 at 2:17 am
OK, this is a sore point for me (I have relatives that go on about it) but this is an extreme example and I’m tired of the nonstop b**ching about how progressives have made it impossible to build anything, so now you’ll just have to sleep in the bed you made ha ha.
Obstacles to construction have to do with a lot more than just progressive prickliness about “building stuff”. All urban, suburban, and soon to be suburban areas have important vested interests that will oppose any given development, and the combination of messy democratic government and our tendency to turn everything into a lawsuit slows things down. I work for a utility, and anything larger than a replacement transformer requires a years worth of stakeholder meetings, but not for specifically environmental reasons.
Really, have people not been paying attention? Matt’s always going on about how stupid zoning laws are.
A lot of progressives are against a lot of stupid construction restrictions. The fact that, in a litigious society, people use environmental laws to hinder development they don’t like, is just a demonstration of the fact that, in a litigious society, people use laws to hinder development they don’t like.
Steve Sailer is right to be skeptical about the implementation time, but he should get off the “we’d have no power transmission issues except for those treehuggers” hobbyhorse. Be helpful. Tell us which laws, in your opinion, need to be changed for the mechanism to work better. Many of us will probably agree with you.
Or you could just shut up.
December 6th, 2008 at 2:21 am
I did not find Bruce Bartlett’s hatchet job a “nice summary.” The liquidity trap is a way of saying business will not invest without the prospect of profit, no matter how cheap the money. Government spending need not be on just anything, and when it puts it in, say, infrastructure, it begins to generate the conditions for infrastructure suppliers to invest.
Bartlett’s rendition of Keynes was confused by monetarist nonsense. Keynes correctly described the monetarist prescription as trying to get fat by “buying a bigger belt.” Too little liquidity may constrict, but too much does not inflate. That needs to be done by real economic activity.
December 6th, 2008 at 4:32 am
ask2 makes good points above about the fact that many of the people who use the laws and regulations that came out of the liberal ascendancy in the 1960s and 1970s like the Environmental Protection Act to block developments aren’t liberals motivated by liberal principles, they’re simply self-interested actors using whatever they can to get their way.
But the point remains that all these laws and regulations are very much on the books these days, so naive thinking like poor Matt’s about how Obama is going to use this downturn in the business cycle to fund his transit dreams projects is silly. Obama can’t act like FDR did when rapidly implementing the Tennessee Valley Authority during the New Deal, whose hydroelectric dams flooded 15,000 families out of their homes. (Think of the last scene in “O Brother Where Art Thou?”)
It was easy for FDR’s Administration to push a minority of uneducated hillbillies around back then in the interest of the majority. But we live in a much richer society now, which places a higher value on the protection of rights, so we have a huge number of protections in place to slow development. Is the sum total of impediments to construction the optimal amount? I don’t know. What I do know is that they exist, and that they will greatly impede construction of the more ambitious sorts of infrastructure. Thus, Matt’s idea of using the current economic downturn to justify blowing vast amounts of money on his pet projects is silly because it will be years before massive spending gets going.
http://en.wikipedia.org/wiki/Tennessee_Valley_Authority
December 6th, 2008 at 6:08 am
My pretty national electricity grid – already with the valuable endorsement of powerful liberal blogger Matthew Yglesias – can surely be started quickly!
December 6th, 2008 at 7:56 am
This answer to the question “what would Keynes do?” ignores an element that would clearly have been uppermost in Keynes’s mind – how to get international action to solve the crisis. Keynes would clearly have wanted international coordination of economic policies (monetary and fiscal) between the major economies, and would have wanted international economic institutions (the World Bank and the IMF, both of which he helped to found) to act in ways to free individual countries to take action (e.g. fiscal stiumulus) to overcome the crisis.
Anyone wanting background to this integral part of Keynes’ thinking should read Donald Markwell’s study of “John Maynard Keynes and International Relations, Economic Paths to War and Peace”, published in 2006 by Oxford University Press.
December 6th, 2008 at 9:13 pm
Mr. Yglesias,
I commend you on your idea of SUPERTRAINS, but I would prefer money be spent on SUPERCATAPULTS. The money spent on heat-shield technology alone would be a boost to the economy, as well raise the nation’s scientific aptitude.
I envision a series of funnel/catapult waystations dotting the country from coast to coast, thereby reviving our stagnant interior!
December 7th, 2008 at 5:53 pm
So, now we’re hearing the details of Obama’s spendathon and it’s predictably lacking in Matt Yglesias dream projects and instead is stuffed with changing lightbulbs and other filling potholes.
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