“Hey, your light isn’t working”, Daily Reckoning editor Dan Denning pointed out to the security guy checking passports at San Francisco International Airport (SFO).
“Yeah, well, that’s your tax dollars not at work,” he replied. “There’s supposed to be a light fixed to the desk here, instead they’ve given me this hand light which wasn’t designed to be used like this. I go through four sets of batteries a day.”
There was no stopping the guy now…
“I was trained by the best – your countrymen”, he said, nodding towards your editor, “I know what to look for anyway…”
With that Dan and I sidled through as a lady named Sultana, who may have been from Pakistan or India or Bangladesh or Sri Lanka underwent a full body patdown by another security guard.
Your editor has a confession to make – we love visiting America.
Yet there’s a weird mixture of the realisation that things ain’t what they used to be, contrasted by others who still believe that America is just as great as it’s always been.
As we sat eating cheeseburgers at the Firewood Grill restaurant at SFO, waiting for our connecting flight to Baltimore, we watched the TV from across the bar.
It was the opening weekend of the NFL American Football season and the local team, the Oakland Raiders were being thrashed.
But that’s not what interested us the most. More interesting was the commercial for 0% finance for 72 months car deal being offered by Government Motors (GM).
And after being in the country for less than 24 hours, we’ve seen more auto financing commercials than we can shake a stick at.
Apart from Government Motors spruiking their wares, we’ve had Jerry Springer telling us about the great 0% financing at Liberty Ford where you can “Buy with no money down” and where there are “special discounts for State and Federal workers.”
Woohoo! More favours for the unproductive public servants!
But our favourite commercial so far is the Crazy 88 offer. It may be crazy, but boy is it great if you’re a consumer.
The folks at Crazy 88 tell the audience “Everyone will be approved – Guaranteed.” Even if you’ve got bad credit. Even if you’re bankrupt. Don’t worry about it, because the guys at Crazy 88 don’t. They’ll approve you for an auto loan on the spot.
As I say, it’s great if you’re a consumer.
And all the customer has to do is hand over an USD$88 down payment and pay USD$88 a month and a new car is yours.
But get this, it gets even better. If you’ve got a car that’s valued at say $20,000 but you’ve got a $30,000 loan against it (negative equity), they’ll let you trade in the car and they’ll also pay out the existing loan in full!
Forget the subprime housing bubble, the subprime auto financing bubble is alive and well.
And all of it backed and guaranteed by the US taxpayer. Are we glad we’re not one of those.
It makes a mockery of the claims we hear on CNBC of the idea that the US economy is back on track and on the road to recovery.
It’s clear that the US auto industry is still as much of a dog as it was before the government bailouts. Perhaps even more so.
It’s an industry that can afford to almost give away its product for free because it knows it’s getting paid for it by the government – courtesy of the taxpayer – to stay in business.
But again, that makes it great for the consumer.
Why wouldn’t you take them up on the offer to buy yourself a new SUV or a pick-up truck when you’re paying 0% interest for seven years?
But it’s not so good for the economy when you’ve got so much public and private money pouring in to prop up a bankrupt industry.
Money being given to people to buy a new car they don’t really need when they can’t even afford to pay off the old one doesn’t strike me as an economy in recovery.
That’s typical of the wasteful spending of the public sector.
But that’s not all the US government is spending taxpayer dollars on.
Some may have cheered when President Obama announced that $50 billion would be spent on infrastructure spending – “At least it’s being spent on something useful”, the argument went. It’s an argument we see and hear all the time in Australia – “Spend on roads, spend on ports to reduce bottlenecks, spend on schools,” and so on.
Well, if you want to see the longer term impact of infrastructure spending and how it isn’t the golden egg laying goose, just take a look at America today.
On the front page of the weekend edition of the Wall Street Journal was the headline, “Gas Blast Obliterates a California Neighborhood.”
The story states that, “the explosion in San Bruno, Calif.,… killed at least four and leveled 38 houses.”
Looking at the pictures of what looks like downtown Baghdad you can see why they’re unsure about how many have been killed.
But the most interesting part of the story was an accompanying graphic that showed the number of “Significant Gas Pipeline Incidents, Onshore”.
I can’t reproduce it here, but it shows the number of incidents rising strongly over the last twenty years. From an average of around thirty per year in the 1990s to an average of around fifty per year over the last ten years.
Then you look at some of the other recent infrastructure stories in the US.
A few weeks ago a dam collapsed in the American west causing widespread flooding. A dam that – from memory – was only about fifty years old.
Then last week we saw the news that the famous arch in St Louis, Missouri is being threatened by rust. And that it’ll need extensive, and doubtless, expensive repairs.
What has this got to do with anything?
Simply this, infrastructure is not only expensive to build but it’s expensive to maintain.
The idea that just spending on infrastructure will lead to long term prosperity is false.
Infrastructure isn’t the cause of wealth and prosperity. In most cases it’s either the result of wealth and prosperity, or an aid to wealth and prosperity.
By itself it doesn’t actually create wealth.
For instance, a railway line isn’t what creates the wealth, it merely aids it.
What creates the wealth are the goods that are made and transported using the rail infrastructure.
Without the production of goods the infrastructure is either useless or just a major expense.
It would be like saying having a car makes you wealthy. It doesn’t. A car is an expense. It costs you money. Yet it helps you get to work therefore the expense is worth it. But if you don’t have a job, the car isn’t going to suddenly start earning money for you. It’s the same with infrastructure spending.
Don’t forget, these big American infrastructure projects – the dam and arch – were built during America’s glory days.
Yet the spending on them didn’t end there. The spending on them continues today.
That’s the thing with infrastructure spending, it’s ongoing. You build it then you’ve got to maintain it.
When the economy is booming it’s affordable. The infrastructure serves its purpose.
But as soon as the economy stops being productive then the infrastructure becomes and albatross around the economy’s neck.
It strikes us that that’s the situation the US is in right now. It has forgotten how to be productive and is now paying for the largesse of the past fifty years. Only it can’t afford it.
And if Australia isn’t careful, it’s something we’ll also suffer from in the future.
The mining boom won’t last forever, yet the call for infrastructure spending assumes it will.
If Australia isn’t able to create a productive side to the economy aside from the mining sector, then before long you’ll find Australia is left with the maintenance bill for a whole lot of infrastructure that is no longer useful and which the country can no longer afford.
We can only hope that sense prevails and it doesn’t come to that.
for The Daily Reckoning Australia