Thursday, February 05, 2009

The Myth of Shovel-Ready and the Fallacy of Tax Credits

Thanks to Congress, the economic stimulus package is turning into a soup of bad projects, gifts to lobbyists, and irresponsible tax cuts.

The conditions that create such a sludge is why I am so skeptical about the long-term health of the economy.

The more I examine the package, the more problems I see. I want to focus on two in this post.

First is the idea of shovel-ready projects. This sounds good and all--construction projects that will put people back to work immediately. As any resident of Minneapolis could tell you, the nation has some severe infrastructure problems. But who will work these jobs? To what extent will these jobs deal with unemployment? I'm flagging this as a problem because of the enormous changes in the workforce over the last 30 years. Construction is down and those people need work. They'll move into these jobs. But what about the hundreds of thousands of people laid off from the service sector? Is the laid-off manager of a Circuit City going to work a tractor? Is she going to dig ditches? Lay pipe? Maybe so since she needs the work. But I'm not so sure. We have sent such a huge percentage of our manufacturing jobs abroad that we lack people willing and able to do hard manual labor.

This change is a huge reason why immigration has spiked. Native-born Americans won't do these jobs. So immigrants will. Now they need jobs too. And it's entirely possible this could have a trickle-up effect that will cause immigrants and low-wage laborers to spend and more jobs to be created in the service and financial sectors. So it's not a bad thing, but I don't think it is a cure-all either. I do think that the focus on shovel-ready jobs not at all deals with the shifting nature of American work.

Everyone wants a public of spending consumers. Most of the people able to spend like crazy in 2006 were working white-collar or service jobs. Unless they decide to do hard physical labor that pays reasonably well, I don't see how these jobs re-create that credit-based economy. But maybe that's not such a bad thing. At the core of the problems facing the American economy is that people were spending beyond their means. This came back to haunt them. Until assets are properly valued and people pay off their debt, recovery is going to be difficult.

This is why I have such a huge problem with the tax credits being placed into the bill for home and car buyers. These are just props to hold up a collapsing American economic house of cards. How is giving people a $15,000 tax break to buy a home going to help the economy? First of all, it's going to take yet more money out of the Treasury Department, making it even harder to keep the nation solvent. Second, these provisions exacerbate the already existing fundamental problems of the economy. The banks are much more rational about this issue than Congress, which is why this tax credit probably won't do much. $15K tax credit or not, they aren't giving out credit. They are probably overreacting, but at least they understand something about why we got into this mess. The desire to put every American in a home they owned led to horrendous mortgages and people getting in over their heads. Giving them a tax credit to do the same thing all over again just puts off inevitable suffering down the road.