Creative Class

Guess what’s the biggest building project in the stimulus – or should I say “economic recovery” – plan?  Highways, which are slated for a cool $27 billion. Writing in the Financial Times, Christopher Caldwell shows why we need to undo the Interstate Highway Act if we want the economy to recover.

My new Globe and Mail column is out:

Less than a month after taking office, the Obama administration unveiled its massive stimulus package aimed at recharging the lagging American economy – a staggering three-quarters of a trillion dollars. As the Harper administration rushes to dole out a $40-billion stimulus of its own, it’s high time to ask a simple question: Are we stimulating the right things?

Confusion was nowhere more evident than in the debate on the U.S. Senate floor, where a relatively small amount marked for the National Endowment for the Arts was derided as nothing but pork-barrel spending and waste. The stimulus, such thinking goes, ought to focus on infrastructure only.

As Jack Kingston, a Georgia Republican, put it: “We have real people out of work right now and putting $50-million in the NEA and pretending that’s going to save jobs as opposed to putting $50-million in a road project is disingenuous.”

However, the facts are that the locus of economic growth has shifted dramatically and a stimulus that focuses on traditional infrastructure cannot succeed. What drives the economy today is not the old mix of highways and single-family homes but new, idea-driven industries. They range from software, communication devices and biotechnologies to culture and entertainment – and importantly the convergence of the two.

The familiar kind of stimulus – the “shovel-ready” kind that built highways and roads, and worked so well during the Great Depression and its aftermath – worked precisely because it didn’t stimulate that period’s aging agriculture economy. Instead, it accelerated the transition to a new economy based on housing, autos and all the products of the industrial assembly line, from refrigerators and washing machines to air conditioners and television sets.

The Keynes-derived notion of pouring money into public works built the roads and infrastructure that spurred postwar demand and primed North America for postwar global economic dominance, because the consumption embedded in our suburban way of life stimulated just the right kind of industrial production.

But eventually the system got out of whack. The housing and credit bubbles of the past decade ultimately biased and distorted our economy, channelling money and investment toward older industries, real estate and construction and away from more productive, innovative and creative ones.

For a stimulus to work today it has to stimulate the emerging creative economy, the engines of regional economic growth and higher incomes across Canada and the U.S.

Companies and workers in these fields also have “spillover effects.” Computer scientists and designers – unlike, say, lawyers and doctors – foster productivity in others, beyond the services they provide themselves. Creative industries also benefit from considerable synergy as arts and design combine with technology, from iPods to video games.

But it’s not enough merely to produce more scientists, engineers and artists or even high-tech entrepreneurs and entertainment moguls. We must also build an infrastructure and an economy that can sustain a demand for their creative efforts. In his book The Venturesome Economy, Columbia University business professor Amar Bhide shows how sophisticated, risk-taking consumers who demand new things and buy new products are the key to technological innovation in places such as Austin, Tex., and Silicon Valley.

It’s unlikely that the BlackBerry would have succeeded if it had come from Eastern Europe, for example, because consumers there would not have appreciated its security, convenience and systems integration the way that the Western world did.

The creative economy already includes roughly 30 per cent of Canada’s work force and about a third in the U.S. It accounts for more than half of all wages and salaries paid in each country. So, if the stimulus were allocated proportionately, between $250-billion and $375-billion should have gone to the U.S. creative economy; in Canada, the figure would be $12-billion to $20-billion.

Stimulus funds could be used to strengthen Canada’s science and technology infrastructure and its music, film and art scenes; it would provide entrepreneurial assistance and garage-like incubation spaces for innovators the Bloomberg administration is doing in New York City.

It would make far greater sense to invest precious infrastructure dollars in high-speed rail and broadband Internet lines to connect our communities than in roads and highways.

We will begin to move toward a durable recovery only when we stop unnecessarily propping up the old economy. Indeed, we have to make housing and transportation cheaper, as we did with agriculture during the New Deal, in order to free up the demand that will provide enduring stimulus for the creative-economy businesses and jobs of the future.

Fortunately, in the U.S., the $50-million for the NEA was reinstated at the very last minute. But it still aimed a huge amount of its stimulus at the old economy. Canada has the chance to do much better.

The stimulus process brings to mind the old adage that while you might like sausage or legislation, you don’t want to watch either one being made. But I think the final bill came off better than most expected. For the first time in over a decade I have some hope for the U.S. government working in our country’s best interests. Whether or not you agree with the Obama team’s strategy of letting Congress do the drafting until the final negotiations, the investments in high-speed rail, research, and the internet will pay off in creative class productivity (and these are investments – if the government were a business they’d go straight to the balance sheet, not operations spending.)

• A post here worried about cuts to transit to fund tax cuts. The final bill increased high speed rail to $8 billion (up from $300 million in the first House bill), $8.4 billion for mass transit, $1.3 billion for Amtrak (only 60 percent for NE corridor, so maybe some will reach Oregon). Yes, still too much for highways and leaving decisions to the states could be bad, but I think there’s language about focusing on maintenance before new construction.
• There’s $10 billion for the electric grid to support the $20 billion for alternative energy.
• In research, NIH gets $10 billion (thanks to Arlen Specter), $1 Billion for NSF, $1.6 for NASA, and more.
• The funding for $7 billion for rural high speed internet and $17 billion online medical records are steps toward catching up with the rest of the industrialized world.
• Increases in Pell grants and tax credits for college will hopefully help more people go to college.

Beyond these productivity building investments, other parts of the package are necessary or at least not as bad as they could have been:

• The tax cuts, while not as productive as investment, are targeted at the middle class and toward being spent in the real economy, rather than rewarding people buying a third “home.”
• Some of the holes in the safety net are being patched with more money for Medicaid, food stamps, and unemployment.

By the way, probably the best political job in America today is John Baldacci’s, the Democratic Governor of Maine. As far as I can tell, his state’s two Republican senators didn’t ask for anything in negotiating the Stimulus. But don’t be surprised to see some extra job training centers and wind energy farms Down East.

OK, what do you think?

I was always a defender when I played soccer. The best advice I was ever given as a defender was to focus on the ball not the offensive player’s eyes, upper body, or feet. Your peripheral vision takes those things in. In Washington, D.C. parlance, Deep Throat always had it right – follow the money. Any time you hear a politician, remember to watch the ball and the ball is the money.

Ignore the Middle East, abortion, whatever your hot button issue. These, though vitally important, are peripheral. The overwhelming issue that will structure all of the rest of our decisions for the next decade or even half century, is the reorganization of the economy. It is in dire shape. The pie is imploding and powerful interests are motivated to protect their slice and the current arrangements. To do this in this environment, they must have access to the monies and regulatory powers of the state. Remember, when in a high stakes situation where everyone is rushing you to make the most serious decisions of your life (our lives) and you (we) cannot figure out who is going to be the victim, it is probably going to be you (us).

So don’t focus on Obama’s statements condemning Wall Street bonuses, telling you he cares about you, etc. These are part of the drama. Focus on real behavior. For example, his appointment of Geithner (was he giggling while being “grilled” by the Senators?), Summers, and the sub-secretaries – all deeply implicated in the current catastrophe – or the rush to get the second tranche of the earlier bailout (which has not had a positive effect and for which most of the money is unaccounted for or has been paid out in bonuses to those most directly responsible for the current situation). Neither of these and his other economy-related actions have been to benefit you.

But there is an even more significant “tell.” Do you wonder why Obama is letting the Republicans and Democrats do whatever they want with the stimulus package? The answer to me is quite obvious – he doesn’t care about it and what it does. Look through it – it is chump change for everyone. $1,000 tax break per couple, some money for states and cities, money for the road builders, some for solar energy, some for university students, but all of it chump change. The simple reason is that he doesn’t care about the stimulus because it doesn’t matter.

The big prize is what his funders in the financial sector want and that is the bad bank where they can pour the multi-trillions of dollars of bad loans onto the taxpayer without losing their jobs, their stockholders being wiped out, and some of them having to do the perp walk. It is the next banking bailout where the massive transfer from the taxpayers to the wealthy is going to occur. Watch the ball. Don’t listen to the words, believe the “shocked” indignation, or accept that Obama and the Congressional Democrats do not know what is going on.

Why is it important for us to be skeptical? We are going to have to rebuild this place, and there are only so many resources. If they are squandered today, they will not be available tomorrow. Rich has written in indignation about the spending on highways instead of mass transit and remarked upon how we have to put our cities together in new ways for a new set of people. This will not be possible if we are rushed into fundamental decisions about who will benefit in this crisis.

If you watch the ball, you are much less likely to be faked out.

That’s what the proposed $800 plus billion U.S. stimulus has come to. TPM’s Elena Schor has the details direct from Representative Jim Oberstar’s (D-MN) speech fo the U.S. Conference of Mayors.

That is why we set forth this $85-billion initiative from our committee. It’s been reduced in the final going. We expect that it’ll come out somewhere around $63 billion, but $30 billion for highways.  The reason for the reduction in overall funding — we took money out of Amtrak and out of aviation; we took money out of the Corps of Engineers, reduced the water infrastructure program, the drinking water and the wastewater treatment facilities and sewer lines, reduced that from $14 billion to roughly $9 billion — was the tax cut initiative that had to be paid for in some way by keeping the entire package in the range of $850 billion.

Ryan Avent has more to say here; Matt Yglesias here.

So it’s yes to highways and tax cuts, no to transit. I’m speechless.