One of the most alarming things I’ve read in a springtime of relentlessly bad fiscal news is that federal Infrastructure Minister Catherine McKenna has been “reading up on former U.S. President Franklin Delano Roosevelt’s New Deal, which included major infrastructure spending as part of the U.S. response to the Great Depression in the 1930s.” Now we’re in trouble!
If you’ve got a hammer, every problem looks like a nail. If you’re head of an infrastructure department, every season looks like the Great Depression. And it is true that over the next couple of months unemployment rates are all but certain to reach numbers not seen since the 1930s — though in fact there was no national labour force survey then. But this is not the 1930s. It’s nothing like the 1930s. It only risks becoming like the 1930s if governments try to stage-manage the recovery.
FDR was inaugurated in March 1933. The U.S. was four and a half years into a classic credit contraction that had been severely deepened and lengthened, all students of the period agree, by exactly the wrong monetary policy applied aggressively and persistently. As with all credit contractions, exactly why it started is open to debate. Why it lasted so long is pretty much agreed on. Restrictive monetary policy made it much worse than it had to be. One of the great scholars of the economic policy of that time, intriguingly, is Ben Bernanke of Princeton, who as Fed chairman was asked to deal with the 2008 crash and did so by applying many of the lessons macroeconomists had learned from the 1930s.
It only risks becoming like the 1930s if governments try to stage-manage the recovery
Our current problem is completely different. Until six weeks ago we had an economy that was running — “perfectly” would be too strong: nothing is ever perfect in a world with constraints — but, by our usual standards, extraordinarily well. There were obvious difficulties in sectors, such as oil and gas, that had been buffeted both by international price developments and by regulation, including some imposed by McKenna’s previous ministry, environment. But growth rates were at least satisfactory. Fiscal positions, though inexplicably loose, were manageable. And unemployment rates were at or near record lows. Think about that for a moment: at or near record lows. Many of us who have been watching these things for years never thought we would again see unemployment rates like those of the 1960s. But there we were.
Then the government essentially shut down the economy. I think that was the prudent thing to do, given the lethal properties and apparent aggressiveness of COVID-19. Whether it was or not seems likely to be debated for a very long time — maybe as long as scholars have been studying and debating the Great Depression. But there is no mystery at all as to what happened to the economy or why the stock market and other economic indicators have fallen off a cliff. It’s because they were ordered to jump.
So why assume the economy will need a big infrastructure push to get it going again? After several weeks of enforced isolation and reduced incomes, most of us are more than eager to get back to some semblance of normal. Many of us are getting antsy to do so. What’s stopping us is not any absence of aggregate demand. The Bank of Canada and Department of Finance have in tandem been pumping Niagaras of money into the economy. So have governments and central banks everywhere. What seems like all the money in the world and then some is being spent propping up people’s ability to spend.
What might make people reluctant to dive back in as soon as the lockdowns are lifted is not deficient demand but anxiety about getting sick. Infrastructure does nothing about that. If anything, it makes things worse by taking resources and attention away from areas where they could be applied helpfully, such as on testing, drugs, vaccines, personal protective equipment, ventilators, hospital beds, medical staff and so on. What will get people back to the labour market is not the building of yet another new wave of arenas across the country but reassurance that if they do go to work, they’re less likely to get sick, and if they do get sick, they’re less likely to end up in intensive care. Or a morgue.
Infrastructure financed by borrowing, as it invariably is, won’t just crowd out health-care spending. It will crowd out private investment, too. With governments already borrowing at wartime rates, capital is going to be hard to come by. Borrowing even more for infrastructure will only make the squeeze on the private sector worse.
It will crowd out private investment, too
As it’s being built, infrastructure also very likely crowds out other economic activity. Here in Montreal over the past decade we’ve lived through several infrastructure projects that have made it very hard to get around the city and have thus reduced other economic activity. A couple of those infrastructure projects were necessary, by the way, because existing infrastructure — overpasses and bridges, notably — weren’t maintained and became dangerous to use. I hope the minister of infrastructure understands the importance of spending on depreciation.
In the end, an infrastructure minister has to do something. Ms. McKenna could profitably add to her reading list about the Great Depression Amity Shlaes’ 2014 book, The Forgotten Man, which describes how what was in fact Roosevelt’s most important anti-depression policy, the National Recovery Administration, added to American economic distress. It tried to avoid deflation by imposing price controls essentially across the entire economy — controls mainly designed to keep prices from falling. Eventually, they were struck down by the Supreme Court, which led Roosevelt to try to increase the size of the court and pack it with supporters, an attack on the constitutional separation of powers far worse than anything Donald Trump has tried.
Roosevelt’s infrastructure projects may or may not have helped bring recovery. His detailed regulation of the U.S. economy certainly made things worse. If in McKenna’s time of isolation she learns that lesson and then Zooms it along to her cabinet colleagues, that will help recovery no end.