In rural America years ago, a home’s water supply required a well and a hand pump. And placed on or near each well, usually, would be a can or jar of water. It was not there for thirsty people to drink; it was for the pump. A dry pump generally would not draw water from the well. To create the vacuum or lowered pressure needed to make it work, the pump had to be “primed” by pouring water into it.
It was such a familiar processes to everyone in America that “priming the pump” became the term used in Congress to describe spending programs aimed at energizing an economy or an industry that seemed to need a boost.
Now, of course, we call the process an economic stimulus — the principal difference being that an economic stimulus is a lot more expensive.
When John Maynard Keynes wrote his “General Theory of Employment, Interest and Money” in 1936, he provided the theoretical framework behind using government spending to increase aggregate demand, providing an economic stimulus. In practical terms, it meant using government’s resources, and its good credit, to put money into people’s hands so that they would spend it and get the economy moving again.
The implications of Keynes’ theory were very promising. It appeared that we could finally prevent the kind of deep recessions that had plagued capitalism throughout its history. On the basis of that promise, Keynesian economic theory ruled economics for several decades.
Over time, some of the limitations of Keynes’ theory became clearer. One of the main difficulties is that government spending, and therefore fiscal policy, is in the hands of Congress, which does not always use its power wisely. For this and other reasons, monetary policy, controlled by the Federal Reserve, gradually replaced Keynesian economics and for a time appeared more effective. Even Congress came to like monetary theory because it could spend what it liked and the Federal Reserve would clean up any messy side effects.
As Keynes understood, though, monetary policy has some limitations, too. Within the bandwidth of normal operations, changing the money supply and short-term interest rates exerts a powerful, virtually irresistible force on the economy. But if the economy moves outside that bandwidth, especially on the downside, monetary policy may not have the horsepower to bring it back.
And so it seems in our current economic situation. Monetary policy has pushed the short-term interest rate close to zero and created money like crazy … to no visible effect. That is why we have come back to fiscal policy, pump priming and economic stimulus programs.
We have already enjoyed one economic stimulus program. Earlier this year, the government mailed checks to taxpayers in amounts ranging from $300 to $1,200.
The bailout program being engineered for General Motors and Chrysler is not, strictly speaking, an economic stimulus program. It is more of an economic preventive medicine program. No new jobs will result, for example, but some job losses will be delayed or prevented. Taken in its entirety, the automobile industry bailout is not really intended to revive the economy but to forestall a further, worsening slowdown.
The plan being proposed by President-elect Barack Obama is a genuine economic stimulus program. In fact, it is a classic public works project that would pour funds into the nation’s road and rail transportation systems and also finance such things as energy conservation programs.
Whether that would be more effective than a rerun of the earlier mail-out-the-checks program is far from certain, though. While the “jobs value” of infrastructure investment cannot be denied, it is also true that today’s construction projects do not involve as many jobs as they did in the 1950s, when the Interstate Highway System was begun.
The most attractive aspect of Obama’s plan is that spending money on roads and bridges makes sense and can have a lasting positive effect on our economy. (The passenger rail projects and the think tank-designed happiness schemes in his plan are another matter, but Congress can redline that stuff when the time comes.)
One of the limitations of Keynesian economic theory is that it doesn’t distinguish between useful government spending and wasteful, boneheaded schemes. Government spending equals government spending, period. In his economic model, there is no afterlife for taxpayer-funded investments.
But as we evaluate various economic stimulus programs, we should remember that the reason we treasure the Interstate Highway program is not for its economic stimulus effects in the 1950s but for its economic efficiency effects in the decades that followed.
We and Congress may have to face the uncomfortable reality of an economy where it is not a matter of choosing between an infrastructure program and a check-based direct stimulus. We may need both.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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