Infrastructure Spending and Democratic Credibility

The theory is that Governments are supposed to borrow and spend during times of recession and excess capacity.  

Then, during economic booms, to pay down the debts, restore future borrowing capacity, and reduce inflationary pressure.  

Maybe democracy does not work anymore.

Except we are in a boom, not a depression.

Take a moment to recall the world of 2007-2010.  In 2007 the banks were announcing huge earnings. Home prices were high. The stock market was at a record high.  TV ads for banks and mortgage companies urged people to borrow 110% of the value of their homes.  Citigroup's president said that things might crash and burn but not yet, and while the music played you had better be dancing.

Then in 2008 it all fell apart.

People realized loans that were the assets of banks were not worth their face value.  Why?  Because--surprise!--the mortgages were not collateralized by the underlying value of the homes.  As homeowners in distress rushed to sell their homes, prices fell further.  

Banks were insolvent.  This meant insurance company AIG which guaranteed bank loans was insolvent.   

I was there, up close, a financial advisor at one of the failing banks.  I helped clients withdraw their money from banks and money market funds while they still could.  

That was then, in a recession.

Obama was elected in the midst of this crisis.  He seemed calm and confident and he wasn't in the party in power.  

There was in a panic and recession.  Unemployment skyrocketed.  People wanted cash, not long term assets.  A business that wanted a new building could buy one cheaply from someone in distress, so of course building stopped.

There was huge excess capacity in the construction industry.  

Obama attempted an infrastructure bill and was blocked.  Bids for infrastructure would be rock bottom.  Republicans blocked an infrastructure bill.   Roads and bridges didn't get built.  Contractors and workers stayed home and drew unemployment.  Newt Gingrich called Obama the "food stamp president." 

Obama

The GOP Congress did not say they were intentionally sabotaging the recovery to hurt Obama.  They said they were protecting us from deficits.  It wasn't cynicism and politics.  It was principle.

Things slowly got better: 2010 to the present.  We recovered. Unemployment fell from 10% to 4.5%.  Home prices recovered. Stock prices recovered. Contractors are busy.  People who want projects done are put on waiting lists.

Meanwhile, the infrastructure got ten years older and ten years worse.

Trump was elected. There is a Republican House and Senate.  Now, with full employment and at full capacity, with inflation starting to rise, but with Republicans controlling the House and Senate, now there is political capacity to do what was sorely needed back in 2009 and 2010.  Repair infrastructure.  

They stood and applauded Trump.

State of the Union

The GOP deficit hawks are still complaining, but they aren't digging in.  They will pass the bills they should have passed eight years ago. Between tax cuts and  an infrastructure bill, America will create a pleasant sugar-high of prosperity and inflation. 

The GOP has a president of its own party. It is good politics.  It can lead to another crash and burn, but that is later probably, after the midterm election.  Dance when the music plays.

Russia and China and the Middle East Monarchies watch America and the democratic system.  Out of the rubble following World War Two there had been a bipartisan consensus in America that democratic government had "won".  Free elections, political freedom, economic freedom, capitalism: they were proven the effective way to create happy, prosperous people and sound government. There was talk of the "end of history", because the question of whether capitalism and political freedom and democracy was best was answered definitively.  Yes.

China expressed a different vision: a Chinese benevolent dictatorship led by a party of the people, one that could plan and operate for the long term good, making sensible economic decisions, free of the manic excesses of boom and bust capitalism and free of the short sighted political selfishness of electoral politics.  It sought harmony and thrived under it, in contrast to democratic elections where politicians thrived by creating division and enemies.  There was state TV--China's version of Fox--telling people that the leaders were wise and reasonable.  

Trump represented a challenge to a bipartisan, free trade, pro-immigration DC consensus, pro-diversity consensus.  Clinton, both Bushes, and Obama were more alike than different.  

Trump, though, is different. Trump is testing whether democratic norms still work and whether the pushes and pulls of checks and balances still serve to block  excessive power in any one person or institution.  Nixon and Clinton bowed to prosecutors and the judiciary.  Trump has discredited the prosecutors and judiciary and may well spurn Mueller, and if he does he will get away with it. He prepared the groundwork and the GOP will have his back. We are testing checks and balances.

We are also testing sound policy, and whether a democratic system can work to smooth an economy or to damage it.  An infrastructure program that was impossible in 2009 may well get done in 2018. The world is watching.