Does the government need to spend more on construction?

Market Realist

November construction activity: Must-know takeaways (Part 2 of 5)

(Continued from Part 1)

Do we need a new New Deal?

Construction spending doesn’t have to be simply residential (or private construction). Public construction also matters (however, it is less than half of private construction dollars). The use of federal construction dollars to increase demand in the economy has been an issue of tremendous debate, with one side believing that a Keynesian pump-priming exercise would not only alleviate suffering but would also help the economy, while those on the other side argue that Keynesian spending’s track record has been mixed at best. They cite the Japanese example, where Japan took its debt-to-GDP ratio to 2.2x and has had little to no economic growth to show for it.

The stimulus plan from early in Obama’s term has been credited with turning around the economy from its adherents, and has been characterized as a waste of money from its detractors. The economy was certainly in a tailspin before the ARRA was enacted, but what turned around the economy? Many would say that TARP, which rescued the banks, was what did it. Unfortunately, in economics, isolating a single variable and examining it while not changing the other variables is difficult.

There has been a tug-of-war between the left-wing prescription of using the government to cushion the blows of a difficult economy and the right’s version of “let the markets clear.” During the first two years of the Obama administration, we pursued the left-wing route. Since 2010, when Republicans took over the House of Representatives, we’ve had little further government tinkering with the economy.

Ultimately, we needed the real estate market to bottom out before we could recover. That has happened for the most part, and in some areas of the country, prices are rising rapidly. The chart above is of the Case-Shiller index, which shows prices have begun to rise again. In others, particularly the Northeast, prices are still stagnating (or rising very slowly). This has to do with the foreclosure laws in these localities and the fact that they are very creditor-unfriendly.

Continue to Part 3

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