Friday, September 16, 2016

Explaining Government Infrastructure Spending So Even Donald Trump and Paul Krugman Can Understand It

In a new twist, the presidential nominees from both major political parties have fallen for (or hope that the voters have fallen for) a time-worn fallacy, and have proposed government spending on infrastructure “to grow the economy and create jobs.” As David Stockman has shown, infrastructure in the United States is not “crumbling,” nor is spending on infrastructure disappearing.
What is equally important to our analysis, though, is the fallacy that government spending, on infrastructure or anything else, creates jobs or economic growth in the aggregate. This fallacy and related myths need to be dispensed with before anyone begins to take them seriously. Murray Rothbard addressed the issue in great detail in his article “The Fallacy of the Public Sector.’” Below I seek to summarize, in simple terms that even Donald Trump and Paul Krugman can understand: there is no such thing as the Infrastructure Fairy that takes government spending and magically turns it into economic growth. 

Government Spending: A Zero-Sum Game

The money to be spent on infrastructure would have to be borrowed, taxed, or printed (a tax not called a tax) out of the non-government economy. One minus one equals zero. That’s not conservative economics or liberal economics. It’s not Democrat economics or Republican economics. It’s just economics.
Once upon a time, politicians used to promise to “bring home the bacon.” Voters upset at the system would bemoan the fact that the system took funds from the whole country so that politicians from different districts could fight over how much of that money they could bring back to their districts to spend on things that the voters probably would not have bought with the money had they been allowed to keep it. But, given the realities of taxation, it seemed that the only choice available was to hold one’s nose, play the game, and try to vote your representative or senator back to Washington to bring back more “bacon” than was being taxed from your state to begin with. 
But, the political class is now telling us that our money, taken from us and then spent by them, will actually grow the economy. We’ve come to expect this sort of thing from politicians, but many economists inside and outside of DC are more than happy to give the political class intellectual respectability under the new version of alchemy that is the “multiplier effect.” 
If we dig deeper into the realities behind government spending, however, we can see that an “infrastructure stimulus program” would probably make matters worse than they are. After all, private investment is done at least with the goal of producing something that consumers want to buy, at a price that will generate a profit. These activities, if successful, would enable continued reinvestment in the same enterprise, and continued employment of the individuals therein.
The government, via taxation, produces something that the consumers have not already chosen to buy. If they were already producing and buying such things, no government intervention would be “necessary.” Thus, whenever the government spending program — on infrastructure or anything else — ends, we end up with workers who took the “stimulus” jobs instead of the jobs that would have been created by the private economy’s spending or investing the same money. Those workers will have invested their time and energy in the development of skills not actually in demand by the consumers. This is a form of malinvestment, and it impacts employees of these firms in a manner similar to the workers who were misled by Fed-created malinvestment booms into the home construction fields in the 2000s or the oil drilling fields in the 2010s. Of course, workers need not worry about other employment if interest groups can convince politicians to keep pouring billions into these industries indefinitely, even though the taxpayers couldn’t be bothered withvoluntarily investing in those industries to the same degree. 

The Myth of Stimulus

Nevertheless, old lies about stimulus spending never quite seem to go away. It is telling that there is only one example of “fiscal stimulus” that is popularly believed to have been successful — the myth that “World War Two brought us out of the Depression.” This sole empirical example held up to justify taking and spending more of your money on politicians’ donors’ priorities is also a fallacy. During World War Two, the government not only spent more money, it conscripted half the male population into the army and navy, sending them halfway around the world to kill people — and to be killed. Obviously, you no longer count as unemployed if you’re dead. Even among the living, a command economy cannot be maintained perpetually, whether for war or any other purpose. War simply does not add value, but rather subtracts value. Centralized war planning cannot be considered an improvement over a free economy, at least if the goal is meeting consumer demand. “GDP” includes all economic activity, though, whether consumer needs are being met or not. Thus, war-related “GDP growth" cannot be considered “economic stimulus.”
Moreover, the post-war growth in GDP often cited by stimulus proponents wasn’t a refutation of Bastiat’s Broken Window Fallacy, as is commonly thought. To continue Bastiat’s analogy: we had simply spent the 1940s breaking everyone else’s windows, which created a temporary advantage for American glaziers. This advantage peaked in the 1960s and in all probability came at the expense of other potential avenues of growth more closely aligned with meeting consumers’ actual demand. After all, if Europeans were spending their money on new windows, they couldn’t spend that money to buy other things the Americans produced. Remember that we also eliminated, in the late 1940s, some of the war-time rations and price controls, and paid down government debt — undoing things that the government had been doing for years to stifle private sector growth.
The “World War Two” case is often argued in conjunction with the related myth that the war-related expenditure was “needed” to combat a “liquidity trap,” which, the infrastructure fairy advocates contend, exists again today.
But, there is no “liquidity trap” and never has been one. In the 1930s, after the leveraging up of the 1920s, the most popular phrase was “brother can you spare a dime.” Now, after the leveraging up of the 2000s, 40 percent of Americans don’t have enough put aside to cover a surprise $500 expense. An extremely high percentage ofmillennials live with their parents and those parents are working to a later age to make up for low retirement savings and the meager return on what savings they have. The “liquidity” problem is and was that everyone found himself to be illiquid after a credit-expansion-driven boom-bust cycle. Even the “liquidity” now held by the banks is just central bank “Quantitative-Easing” money, printed after 2008. The “stress tests” are passed only because the central banks believe that enough of their funny money remains on reserve to cover the losses that will ensue when the central banks’ latest bubbles burst. And the supposed $3 trillion of non-financial-corporation “cash on the sidelines” adds up to one sixth of the federal debt. This is a low cash position relative to the rest of the economy’s balance sheet, even without considering unfunded federal obligations, state and city debt and unfunded obligations, and corporate and household debt. The idea that we are so flush as to be too flush is just not true.
Ultimately, spending on infrastructure no more “creates wealth” than any other kind of government spending. Like all other government spending, it’s a matter of taking money from some people to give to others. The money taken from the taxpayers must be subtracted from the money spent, and we’re left with no net gain. Of course, after the politicians and the government contractors take their cut, they’ll do pretty well. The rest of us won’t be so lucky..
Patrick Trombly is a Senior Vice President with a commercial bank in New York City.
The above originally appeared at


  1. This article unfortunately does not appear to be based on research. Infrastructure spending was what turned America from a bankrupt colony into the strongest economy on earth under Abraham Lincoln. This transition occurred in just four years . It is also what turned a bankrupt Germany into Europe's strongest economy in the 1930s, also in four years. The problem is not the spending but how it is financed. In both the examples the projects were funded by public banking. The state creating the money it needed to finance the projects without debt. This approach is what the bankers of today are desperate to keep secret as if it becomes known their tyranny will end. Keynes acknowledged this approach was not inflationary when he said that if manpower and raw materials are available adding money does not cause inflation-it is caused when the money supply exceeds the available supply of goods.

    1. I'm unpersuaded and would like to see more detail on Lincoln's spending that you claim boosted the economy. I do recall reading that in the early 1860's upon advice from bankers Lincoln killed the Greenback and invented a brand new currency when it was pointed out to him that much of the wealth held by the south was in the form of Greenback currency. In one fell stroke he looted southerners and skimmed mightily from northerners when they turned in their old Greenbacks for the new currency at an exchange rate chosen by his advisors who also employed the bank tellers. Incidentally this also went on in the south as they created a new currency to replace the Greenback, so if logic holds then would not the south also have enjoyed an infrastructure spending boom? Both sides were clearly not better off by 1865, nor was Germany in 1945. Pre-war Germany is easier to figure out, that was all printed money and that government ended 1945 deeply in debt. In true socialist fashion from the first year of his administration Time Magazine's Man of the Year 1938 never once balanced a budget and instead racked up huge deficits. There was a shell-game conducted to camouflage this from the general population using two currencies, the reichmark was used by individuals while the mefoweschel was used by businesses which traded these among themselves. The mefoweschel was nothing more sophisticated than an IOU backed by nothing more than promises from bureaucrats, incidentally just like the US Dollar today. The shell-game was revealed as such whenever a business needed to exchange outside of the Germany as in the case of trading locomotives made by German engineers for beef from Argentina. Argentinians deemed the reichmark worthless so parties reverted to barter to successfully conclude the deal. As gently as I can I must point out that your comment is an illustration of the Broken Window Fallacy, you are seeing what is seen, in this case bridges, roads, runways, glittering classrooms bristling with technological wonders, tanks, battleships, and whatever else induces voters to cast their ballot for an incumbent. What is not seen is what would have come into being had not government meddlers put their thumbs on the scale to favor special interests.

    2. An expansion of the money supply is, by definition, inflationary. So-called research is not required. History provides countless examples of governments debasing currency to finance their spending with horrible consequences. Lincoln and Hitler were both tyrants who used inflation to finance war. Railroads and technology improved the American standard of living, not government.

      Of course Keynesians do not seem to care much about war, history, or logic. "[inflation] is caused when the money supply exceeds the available supply of goods" ignores the fact that a greater number of dollars chasing an any number of goods means that each dollar is WORTH LESS. And because the Keynesian school of economics is mainstream, we are living with the consequences of this criminal nonsense.

  2. 1. The statists cannot point to that moment in history which demonstrates that laissez faire requires an external source of "stimulus". When you press them on it repeatedly, they react like the Indian IRS scammers Tom Woods exposed. Mr. Trombly's article fails to make that point. Austrians always fail to make that point. If there is a need for stimulus, Austrians should just retire. If there is no need for stimulus and it only serves to facilitate theft and to create an unsustainable price structure, it must always be condemned as a hoax.

    Keynesians always lie.

    2. Adam Tooze in "Wages of Destruction" claims that Hitler had Germany on an unsustainable boom and feared the population would turn on him if the economy went south in the late 1930s. So he started a war.

  3. I think the "Lincoln infrastructure spending" was a reference to post-war, Greenback-infused railroad bubbles that bankrupted Jay Cooke.