The Internet, Obama's Stimulus, and When Government Spending Works

When ideology trumps rigor government spending runs off the rails.

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In this Nov. 21, 2007 file photo, Shell Oil Company's Deer Park refinery and petrochemical facility is shown in the background as vehicles travel along Highway 225 in Deer Park, Texas. The Gulf oil spill may have people ready to quit petroleum cold turkey, but it's not that easy. Oil is everywhere. It permeates our daily lives in ways we never think about. It's in carpeting, furniture, computers and clothing. It's in the most personal of products like toothpaste, shaving cream, lipstick and vitamin capsules. Petrochemicals are the glue of our modern lives and even in glue, too.

James Rickards is a hedge fund manager in New York City and the author of Currency Wars: The Making of the Next Global Crisis from Portfolio/Penguin. Follow him on Twitter at @JamesGRickards.

Is government spending good or bad? The question cannot be answered intelligently without asking how the money is spent. There is good and bad government spending and the distinction can be made rigorously. Yet, when ideology trumps rigor government spending runs off the rails.

Government spending is good when two conditions are met. The first is that the benefits are greater than the costs. The second is that private spending cannot do a better job. Even if government spending can be shown to produce net benefits, it cannot be justified if private activity can do the job better. When government spending produces net costs it destroys the stock of wealth in society and can never be justified.

Difficulties begin when costs and benefits are not clearly defined and when ideology substitutes for analysis in the decision making process. Two cases make this point—the Internet and the 2009 Obama stimulus.

[See a collection of political cartoons on the budget and deficit.]

Advocates of government spending like to point out that government financed the early development of the Internet. In fact, the government sponsored something called ARPANET as a robust message traffic system among large-scale university computers to facilitate collaboration during the Cold War. The development of ARPANET into today's Internet and World Wide Web was advanced by the private sector. This history does not prove that government spending is always beneficial. What it proves is that certain government spending can be highly beneficial when it jump starts private sector innovation.

An example of government spending of the destructive kind is the 2009 Obama stimulus. Assumed benefits were based on false assumptions about Keynesian multipliers, a branch of the pseudo-science of neo-Keynesian economics. In fact, the Obama stimulus was directed largely at meeting state and local payrolls for union jobs in government and teaching, many of which are redundant, nonproductive, and wealth destroying. Much of the rest went to money losing, non-scalable technologies such as solar panels, wind turbines, and electric cars. Not only did this spending not produce the magic multiplier, it did not even produce nominal growth equal to nominal spending. It destroyed wealth and prolonged the depression of 2007.

[Read the U.S. News debate: Does Stimulus Spending Work?]

Of course, politicians are nothing if not opportunistic. They understand that in proposing programs for favored interests it is helpful to dress them up in the language of long-term benefits. This is why there's a lot of talk about ARPANET these days. Politicians want to dress up their bad spending in the clothes of good spending using popular examples of the latter.

It may be true that the current business climate is so hostile to entrepreneurship that there is little hope the private sector will do more than sit on cash and wait on the sidelines until the depression has run its course. The neo-Keynesian solution of government spending dressed up as investment is a thin veil for enriching the school administrators, union leaders, and government workers who skim proceeds intended to help children, the poor, and the infirm. Private sector inertia and government venality have combined to drive the U.S. economy into the ground.

[See a collection of political cartoons on the economy.]

What is to be done?

In 1956, President Eisenhower championed and Congress authorized the interstate highway system, which cost about $450 billion in today's dollars. The benefits of that system greatly exceed $450 billion and only government could have completed the project on a nationwide scale. The interstate highway system passes the two-pronged test of good government spending.

Long-term interest rates are near all-time lows. The United States could easily borrow $150 billion for 10 years at 1.5 percent interest. With that money, the government could construct a natural gas pipeline adjacent to the existing highway system and place natural gas pumping stations at existing facilities. This interstate pipeline could be connected to large natural gas trunk pipelines at key nodes. The government could then require a 10-year conversion of all interstate trucking above a certain size from diesel to natural gas or diesel-natural gas hybrids.

[See a collection of political cartoons on energy policy.]

With this pipeline and fueling station network in place, the private sector could take over, as was the case after ARPANET. This would facilitate the growth of natural gas powered automobiles. The demand for natural gas would also boost exploration and production and related technologies in which the United States excels. New technologies and wealth creation opportunities would not be far behind.

As with the interstate highway system, the results of the interstate pipeline system would be transformative. The boost to the economy would be immediate—not from magical multipliers but from straight up productive spending. Hundreds of thousands of jobs would be created in the actual construction of the pipeline as well as the conversion of vehicles to natural gas. Dependence on foreign oil would be eliminated and the U.S. trade deficit would evaporate boosting growth. The environmental benefits would be tangible since natural gas burns cleaner than diesel or gasoline.

Will something like this happen? It's doubtful. Republican presidential candidate Mitt Romney lacks the vision to do something this big and President Barack Obama is ideologically opposed to all carbon-based energy sources including natural gas. The Tea Party opposes all spending without distinguishing between the productive and nonproductive kinds. The political stars are aligned against this kind of out-of-the-box, transformative solution to the current depression.

The U.S. economy has been in a depression since 2007. It will remain so indefinitely unless there are changes in policy of the kind described above using good government spending as a catalyst. It's not that there are no solutions. It's just that there are none that politicians have the courage to try.

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