Wednesday, February 24, 2010

"Shovel-Ready" = "Marginal Returns"

"Shovel-Ready" means "wish list" projects chosen at the top of a credit bubble. Such projects offer marginal returns.

Have you seen any lists of "shovel-ready" projects being funded by the Federal stimulus package? You know, the $787 billion extravaganza which is supposedly reigniting the fading U.S. economy?

Perhaps there are some fundamentally worthy projects being funded in your area, but here in Northern California what little I've seen seem like projects dreamed up at the very peak of an unprecedented credit/asset bubble, when money flowed easily and "prosperity" (and rising tax revenues) seemed endless.

Wish lists drawn up at the peak of prosperity provide exceedingly marginal returns. Investments with reasonable returns have already been funded, but all that rising tax revenue and "free Federal money" must be spent, so how about we replace an efficient bus transfer from the BART subway station to Oakland Airport (a 5-7 minute ride) with a billion-dollar underground spur line?

The return on this stupendous investment is worse than marginal. It's precisely the kind of essentially worthless make-work project dreamed up by government agencies when "free money" is pouring in/available to be squandered.

Or how about funding an academic research project to study the choices made by young people in bars after they've been drinking?

I am not making this up. That was one local example of a "shovel-ready" project funded by Federal stimulus money.

Are wish lists drawn up at the top of credit/asset/tax revenue bubbles the best way to allocate scarce resources in a time when private GDP is contracting rapidly?

Clearly, the answer is no. The "shovel-ready" projects are a continuation of the malinvestments made during the housing boom--the equivalent of adding granite benches to the pool cabana BBQ area.

(Please go to Imperial Economics for some charts which show private GDP--what's left if you subtract massive Federal spending--is plummeting by 15+% annually.)

It's like we're Easter island residents just before the last slide to oblivion, and we're blowing our last wad of borrowed money on building a few more stone statues, in the hopes that the "magic" thus created will restore the prosperity we've squandered.

How about refurbishing the national rail lines? How about that "national smart grid" electrical infrastructure everybody agrees is absolutely necessary? How about insulating all government buildings and putting solar arrays on each one in areas with high annual sunlight? At least those projects would still be paying real benefits in energy savings and generation 10 years hence.

Making scattershot malinvestments via "wish list" projects dreamed up at the bubble top simply continues the malinvestments of the past decade: trillions squandered on malls nobody needs, office towers nobody needs, granite-counter McMansions nobody needs (19 million vacant dwellings in the U.S., 5 million foreclosures in the pipeline), foreign wars nobody needs, $300 million per plane weapons programs no nation can afford, prescription drug plans to reward the pharmaceutical cartel, etc. etc.-- gargantuan "investments" with increasingly marginal returns paid for with borrowed money: $1.6 trillion a year at last count, and that's just Federal borrowing; it doesn't include the trillions being squandered by the Federal Reserve to prop up the housing market.

Sadly, the only thing left in 10 years will be the debt we've collectively taken on to fund marginal "make work" projects of fleeting or zero value.

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