Diary

A Nascent Study in Government Spending, Job Creation and "Growing the Economy"

I live in the high desert northeast of Los Angeles, an area known as the Antelope Valley. We have several small towns and two principal cities, Palmdale and Lancaster. Our major industry is defense and aircraft; Edwards AFB stretches from Mojave (about 35 miles to the north) to the near north end of Palmdale. If you remember “The Right Stuff” you know something of our area from the introductory scenes of Chuck Yeager and the other early flyboys partying in a bar in the desert. That bar was The Happy Bottom Riding Club, owned and operated by a barnstorming aviatrix named Pancho Barnes. It was burned to the ground in the mid-1950s because the Air Force wanted to expand AFB and her land stood in the way.

We are also home to a California State Prison, the Challenger Youth Camps and the Mira Loma Detention Facility for federal prisoners, principally those awaiting deportation. They are all within walking distance of each other, and the County of Los Angeles is launching a program to build a solar facility in a large field between the facilities to provide power to the prison and Challenger. It’s a $24M project which if it has not been approved by the Board of Supervisors already will be approved within the next few days, and its contours have triggered some thoughts about government spending, job creation and “growing” the economy (LA County has a 5-member Board of Supervisors; our Supervisor is a Republican named Michael Antonovich and he says it will be a “stimulus” to our economy).

Our economy can certainly use some stimulating. Official employment in each of the two cities (they abut each other; the only way you know  you have crossed from one to the other is because a street sign tells you so) is at 16 to 17% (Mojave, home to the space shuttle and the Rutan brothers is at just over 13%). You don’t know anything about the crash in the housing market until you drive the residential areas up here; houses bought 5  years ago for $600K are selling for $250K and the prices are still dropping. Nobody up here would begrudge a little actual stimulating, whatever the source.

The solar project is close-ended. It is projected to last one year and conclude when the construction is done. The plan is for the project to employ Antelope Valley residents, giving priority to people who live within the two Lancaster zip codes. I don’t know how many are actually to be employed. I am not aware that the project will bring ongoing employment after construction is complete. And so the question: is it a stimulus?

Consider the basic capitalist “model”. Widgets, Inc. produces widgets that it sells to Gewgaws R Us, a company that produces gewgaws, which in turn are sold to the public. The public pays Gewgaws R Us, which in turn pays Widgets Inc., and the cycle repeats and grows as Widgets Inc. uses its profits to buy more raw materials and hire more workers, as does Gewgaws R Us. The basic idea is that the system is open-ended; it is self-regenerating and expands organically.

If I put money into Widgets Inc. I do so anticipating profit. I invest $10 to earn $15. If Widgets Inc is successful my investment pays off; if gewgaws don’t sell and Widgets loses its main customer, my investment fails. That’s what investment is: putting capital at risk in anticipation of gain.

By contrast, this solar project is close-ended. The government is going to spend a defined sum of money to accomplish a defined project within a defined period of time. And then it will be over. The solar facility will not produce any marketable product; at best it will reduce the cost of supplying power to the prison and youth camps. But it will not produce power to be used by any private businesses in the area.

Nor is there any guarantee that it will provide a market for locally-produced raw materials. I don’t know where the steel, concrete and panels will come from, but there are no such production facilities here. So to that extent the money spent on raw materials will go elsewhere. There is at least one solar company here, but I don’t know what benefit if any that company will derive.

Yes, there will be some positive jolt in employment, and as I say we can certainly use it. But that too is close-ended; the employment will end when the project is done. Some of the hirees may get the benefit of hooking up with contractors who will hire them for other projects, but that is impossible to define or anticipate. Still, a year of working is better than a year of not working.

The workers will most likely spend what they earn, which will give some boost to local businesses and raise sales tax revenues. But again, the project is close-ended; retailers will have no particular reason to expect that the consumer market created by working on the project will continue past one year, much less expand. This is the exact opposite of the basic capitalist model which as I indicated is based on the premise that production, employment and markets will tend to grow in repeating cycles.

So what, then, does the project represent? It will provide a short-term employment and retail benefit. At the end it will save the state and county some money in providing power to the prison and youth facility, but no saleable surplus. So is it a “stimulus”? Only in the short term. Will it open the door to lowering unemployment over the long term? There is unfortunately no reason to think so. Will it produce profit that will in turn make future such projects possible? No. If other solar facilities are to be built they will be financed by public means, either through issuing debt instruments or taxes.

And herein lies the real difference between government spending and investment: investment aims to achieve an increase in value; government spending of this type aims to accomplish a project: build a bridge, repave a road, build a solar facility. These projects accomplish some public good no doubt, but they are not investments except in some cosmic sense of investing in the public good. There is no anticipation of real economic return.

And yes, this kind of government spending creates jobs but those jobs are time-limited by the nature of the project involved. The project itself does not generate capital for ensuing projects. As I said above, those projects will only happen if new debt instruments issue or new taxes are imposed (hence Obama referring to “job-killing tax cuts”).

All of which is why, for whatever short-term benefits such projects may provide, they do not “grow the economy” in any long-term sense. On the one hand, the project does not generate any organic growth; no new business or expansion of existing business really ensues. And on the other hand, since the project depends on public funding, to that extent capital is taken out of the private sector and rerouted into economic dead-end roads.

The project may end up doing what it is supposed to do, and if it does that it may be a something worth doing. But it is not “stimulus”, it is not a path to “job creation” in any meaningful sense, and it will not “grow the economy.” All the worse then that it is touted on these grounds by a politician on the Board of Supervisors who presents himself as a conservative Republican.