Public Works Done Right

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In November of 1929, in reaction to the breakdown of the stock market, Herbert Hoover immediately called for a raft of economy-supporting programs including substantial spending on public works projects. This round of public spending resulted in San Francisco’s Bay Bridge, the Los Angeles Aqueduct, Hoover Dam on the Colorado River, and many other such projects.

Hoover Dam is perhaps the most iconic of all of these efforts. Although environmentalists might argue, in terms of its benefits such as electricity generation and water supply for agriculture and eventually urban use, it is about as useful and worthwhile a public work as anyone could ever hope for. When it was completed, it was the world’s largest electric-power generation facility and the world’s largest concrete structure.

Planning for Hoover Dam began in 1922, and was overseen by Herbert Hoover himself. Construction on the project was approved by Congress in December 1928 – long before the economic problems emerged. It was, in contemporary terms, as close to a “shovel-ready” project as you’d find. The initial appropriation for construction was made in July 1930.

The project officially began in September 1930. The contract for construction was awarded to a joint venture of six private companies in March, 1931. The first thing they had to do was to make a small city for the workers who would be working on the project. Boulder City was occupied in the spring of 1932. Roughly 16,000 workers were part of the construction, and many brought their families to live in Boulder City.

Initial construction on the dam project itself began with the upper cofferdam in September 1932. Construction was completed in March 1936. It was considered a great accomplishment to complete such an ambitious project so quickly.

As a result of these spending programs, the Federal budget ballooned enormously. In 1929, the government had $3.862 billion of tax revenue, and spent $3.127 billion, enjoying a surplus of $734 million. In 1932, the government spent $4.659 billion, a 49% increase despite the “deflationary” environment.

In 1931, the government had its first deficit in eleven years, of $462 million. Perhaps this, and the spending commitments upcoming, is why Hoover pushed through an enormous tax hike in April 1932, which was enacted in June of that year. The top income tax rate in the U.S. rose to 63%, from 25% previously. Inheritance taxes were doubled, corporate tax rates rose, and a long list of excise taxes were imposed. It was predicted to raise $1.1 billion in new revenue, in an effort to close the budget deficit.

The tax didn’t help the economy much, however, and revenues remained weak. In 1932, revenue had collapsed to $1.924 billion, and were only $1.997 billion in 1933. The budget deficit exploded to $2.735 billion in 1932 and $2.602 billion in 1933.

John Maynard Keynes once argued that, in a depression, it would be worthwhile to pay workers to dig holes, and to pay other workers to fill them up. But how is this different than paying workers to do absolutely nothing? The main advantages appear to be psychological. “Workers” maintain a better morality and work ethic, and are less likely to revolt, than “welfare recipients.” And, they can be counted as “employed,” while a welfare recipient might remain “unemployed” until they actually found something productive to do in the economy.

We can see that it is not so easy to just “push money into an economy” via public works projects. The more useful they are, the more likely it is that they will take years of planning and construction. If the goal is to supposedly avoid some sort of downward spiral over the next six months, it is more likely that the funds will end up directed into something more like Keynes’ hole-digging exercise.

Thus, we can see that, when short-term “stimulus” becomes the focus, the effect is more likely to be short-term welfare. There is nothing particularly wrong with welfare in a depression. Better than having people dying in the streets. But, increased welfare spending isn’t much of an economic program in itself.

In retrospect, Hoover Dam was probably a worthwhile project. It produced something of value, and kept 16,000 workers busy over the 1931-1935 period, the worst part of the Depression. However, one effect of this aggressive deficit spending was an eventual rise in tax rates, which did additional economic harm. Roosevelt continued along the same path: spending soared up to $9.468 billion in 1940, and tax rates soared higher as well, with the top rate hitting 81% in 1940 (and 94% in 1945).

Politicians always like to spend other peoples’ money, so it is no surprise that they – always and everywhere – flock around those economic advisors that tell them that enormous spending projects are the key to resolving economic difficulties. Nor is it a surprise that economists are quick to tell people what they want to hear. If you’re going to be wrong all the time, you might as well be popular, well-paid, and wrong. Economics being what it is, you can always argue later that you were wrong because “people didn’t do enough.”

These ideas were solidified in a book written by John Maynard Keynes and published in 1936. Since governments had already been hard at work at “stimulus” for a half-decade or more already by that point, you could say that the book was a how-to guide for economists to justify policies that were already popular.

When you get past the cloud of nonsense surrounding “stimulus spending,” with its output gaps, multipliers and so forth, it seems to me that government spending during a recession accomplishes roughly what it does during any other time. Mostly, it is a big waste of money, but it might keep some people employed and maybe you’ll even be left with something useful afterwards. I would suggest a decent rail system, at least as good as that of France. Since we’re spending trillions anyway, how about as good as the U.S. had in 1910? That would be, I argue, the least bad of all possible boondoggles.

Regards,

Nathan Lewis
for The Daily Reckoning Australia

Nathan Lewis
Nathan Lewis is the author of Gold: the Once and Future Money, published by Agora Publishing and J. Wiley. He runs an investment fund in Westport, Connecticut.
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7 Comments on "Public Works Done Right"

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Pete
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It will be interesting to see if any bright new economists arise out of the gloom of this depression (like Keynes), with newer even more crazy theories (like Bernanke?) that become popular and lead to the downfall of some future economy in 50 years time.

Then we get the “I would have…” factor spewing from their well written (toilet) papers.

A deluded leadership being advised by deluded economists equals deluded hopes of a healthy future.

Greg Atkinson
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Pete I think there needs to be a long hard look at the whole field of economics and also how economists are trained. Seems to me many economists have not moved on a lot since the 19th century and this is one of the reasons we seems to end up in boom/bust cycles all the time. Thank god they do not design aircraft, otherwise every few years all the planes would fall out of the sky :)

Allan Cox
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An excellent article for which I can only hope is read and understood by our dimwits in ‘Canbra’. Being an old, retired, and now grumpy (because of the GFC) engineer I am continually amazed by the lack of ‘shovel-ready’ projects in Oz, particularly, for the inevitable lows in every economic cycle, some of which are deeper than others. It’s so bleeding obvious that once private-enterprise demand reduces dramatically, disappears almost as currently projected by some pundits, then the ‘guvmen’ need to step in and take up the slack, such as: build highways, railroads, ports – air and water, bridges, and… Read more »
Ross
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One of the best bio’s I have ever read was one on Willem de Kooning that describes well the make work art projects around NY in the 30’s and that group appears to have morphed into a camouflage painting crew in WWII.

Greg Atkinson
Guest

Yes Allan…this is the time to get those dams, roads and bridges built. Time also to get a decent broadband network rolled out and position Australian for the eventual recovery. I am not a fan though of pink bats and new school libraries etc. though. They might be worthy ventures but I would prefer the government was focusing on higher priority/better investment return projects myself. (return in the sense of what is good for the nation, not in some short term number crunching metrics or KPI’s)

Allan Cox
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Greg, your point regarding a national broadband is very valid. I have blogged elsewhere on this matter and, suffice to say, only Telstra have the capacity, capability, and financial clout to make IT happen NOW. Whatever it costs, get IT done now. Forget about who owns the network because the real money is in the use of IT by all the content providers waiting to deliver zillions of bytes at warp speed: books, movies, meetings, to name just a few features, on demand. All that can be regulated. Like the original PC, like the modern telephone system, the ubiquity of… Read more »
Greg Atkinson
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Allan what I found amusing was Rudd talking about 21st century building for schools (good move in the 21st century) when in fact these new facilities will be riding the information highway from the last century. I put a lot of the blame on Sentaor Conroy for the current broadband mess as I wrote in this ramble. The national broadband debacle I would like to read your blog on the subject, can you point me to where it is please?

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