In today’s Wall Street Journal, the Brookings Institution’s Clifford Winston points out some critical pitfalls likely to face the infrastructure spending element of President-elect Obama’s “stimulus” plan:

One of the biggest killers of all is that states insist on allocating federal transportation funds through a politically devised formula. The result? Smooth, well-paved rural highways and worn-out urban roadways that are paved with a layer of asphalt too thin to withstand heavy use and are therefore in need of excessive, costly maintenance.

But don’t blame the states for all the inefficient use of highway dollars. Federal regulations have also inflated the cost of providing roads, trains and so much more for a public on the move.

It takes the nation’s busiest airports decades and billions of dollars to build new runways, for example, because of onerous regulations imposed by the Federal Aviation Administration and the Environmental Protection Agency. Davis-Bacon mandates, which effectively require that “prevailing” union wages (often much higher than the actually prevailing market wage) be paid to workers on any construction project receiving federal funds, also drive up the costs of roads and other federal transport projects. The Federal Transit Act also makes it extremely expensive to lay off transit employees.

Winston is right to point all this out, and he makes some sensible recommendations, including reform of Davis-Bacon. However, reforming the federal infrastructre spending process can only lessen wasteful spending so much, since as long as government is involved, politics will remain a part of the process. (Still, a light touch is too much to expect from Washington, so Obama taking Winson’s advice into consideration is to be hoped for.) For more on Davis-Bacon, see here.

Tomorrow, electric utilities and green groups team up at the National Press Club to ask for billions of new spending on what they term energy efficiency. New versions of such stimulus and bailout proposals appear almost daily.

We spend a lot of time at CEI now proposing wealth-enhancing alternatives to these massive wealth transfers to government contractors and corporations. The right “stimulus” instead liberalizes wealth creation, it doesn’t spread around the dwindling wealth that already exists, like a self-appointed Benevolent Vulture; I submit one important approach–especially in today’s crisis situation–is to inventory all the regulations that impact a small business as it grows, and look hard at rollbacks. Below is the rough inventory I’ve compiled over time, but I’m sure it’s out of date and some things have changed. And this doesn’t even addess industry-specific rules (see endnote), which are probably the ones most in need of reform. I heartily welcome any additions and subtractions. We can’t manage something if we can’t measure it.

FEDERAL WORKPLACE REGULATION IMPOSED ON GROWING BUSINESSES* (Draft—Wayne Crews)

ONE EMPLOYEE

-Fair Labor Standards Act (overtime and minimum wage [27% min. wage increase since 1990])
-Social Security matching and deposits
-Medicare, FICA
-Military Selective Service Act (90 days leave for reservists; rehire discharged veterans)
-Equal Pay Act (no sex discrimination in wages)
-Immigration Reform Act (eligibility must be documented)
-Federal Unemployment Tax Act (unemployment compensation)
-Employee Retirement Income Security Act (standards for pension and benefit plans)
-Occupational Safety and Health Act
-Polygraph Protection Act

4 EMPLOYEES: ALL THE ABOVE, PLUS

-Immigration Reform Act (no discrimination with regard to national origin, citizenship, or intention to obtain citizenship)

15 EMPLOYEES: ALL THE ABOVE, PLUS

-Civil Rights Act Title VII (no discrimination with regard to race, color, origin, religion, or sex; pregnancy-related protections; recordkeeping)
-Americans with Disabilities Act (no discrimination, “reasonable accommodations”)

20 EMPLOYEES: ALL THE ABOVE, PLUS

-Age Discrimination Act (no discrimination on the basis of age against those 40 and older)
-Older Worker Benefit Protection Act (benefits for older workers must be commensurate with younger workers)
-COBRA (continuation of medical benefits for up to 18 months upon termination)

25 EMPLOYEES: ALL THE ABOVE, PLUS

-Health Maintenance Organization Act (HMO Option required)
-Veterans’ Reemployment Act (reemployment for persons returning from active duty, reserve, or Nat’l Guard)

50 EMPLOYEES: ALL THE ABOVE, PLUS

-Family and Medical Leave Act (12 weeks unpaid leave or care for newborn or ill family member)

100 EMPLOYEES: ALL THE ABOVE, PLUS

-WARN Act (60-days written plant closing notice)
-Civil Rights Act (annual EEO-1 form)

*Assumes non-union, non-government contractor, with interstate operations and a basic employee benefits package. Includes general workforce-related regulation only. Omitted are categories such as environmental and consumer product safety regulations, and regulations applying to specific types of businesses such as mining, farming, trucking or financial firms.

Well, who can possibly be surprised by the revelation that “The federal government’s economic stimulus package will include investment in broadband Internet infrastructure and funds to upgrade and repair the national power grid alongside more traditional funding for road and bridge repair.”

Details, as usual, do not exist, other than the obvious golden chains that come with power grid investment: get the cash, but throw it away on inferior “renewable” investments, thereby draining future wealth and resources (for example, no fuel is “greener”—in the proper sense of the term of using fewer overall resources—than petroleum based gasoline). Meanwhile, government power over energy grows.

Labor groups are not merely being placated with the package but helped spearhead it (they insist “millions” of jobs will be created). This helps assure that future generations will see more fiascoes like the disaster in the current auto industry—yes, tomorrow’s productivity will improve, but the workers who are sent home still get paid (that’s the auto industry’s actual problem).

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President-elect Obama wants a massive stimulus package of $700 billion or more.  But previous attempts to artificially stimulate the economy have generally been failures.  The $160 billion in stimulus rebates early in 2008 failed to stimulate the economy, much less prevent the financial crisis that followed, even as they drove up the federal deficit and the national debt, while punishing hard work and providing pork for left-wing special interest groups.

During the Great Depression, Herbert Hoover and Franklin Roosevelt attempted to artificially stimulate the economy by pushing up wages — Hoover through pressure on industry, and Roosevelt through unionization and the cartel-enforcing National Recovery Act, which the Supreme Court later declared unconstitutional in the Schechter Poultry case.

The net result, according to economists, is that the Great Depression, which might otherwise have ended by 1936, instead lingered on until 1943 (a phenomenon for which President Roosevelt escaped responsibility, as he cleverly scapegoated and demonized industrialists and businessmen as “economic royalists” and “malefactors of great wealth,” and attacked critics as being unpatriotic).

By contrast, the sharp recession of 1920-21 swiftly ended and gave way to an economic boom, when the government did nothing to meddle in the economy.

As George Will notes in today’s Washington Post, “stimulus” measures largely failed in the Great Depression, policies that ”included encouraging strong unions and higher wages than lagging productivity justified, on the theory that workers’ spending would be stimulative. Instead, corporate profits — prerequisites for job-creating investments — were excessively drained into labor expenses that left many workers priced out of the market.”

“In a 2004 paper, Harold L. Cole of the University of California at Los Angeles and Lee E. Ohanian of UCLA and the Federal Reserve Bank of Minneapolis argued that the Depression would have ended in 1936, rather than in 1943, were it not for policies that magnified the power of labor and encouraged the cartelization of industries. These policies expressed the New Deal premise that the Depression was caused by excessive competition that first reduced prices and wages and then reduced employment and consumer demand. In a forthcoming paper, Ohanian argues that “much of the depth of the Depression” is explained by Hoover’s policy — a precursor of the New Deal mentality — of pressuring businesses to keep nominal wages fixed.”

Current bailout proposals also seek to artificially prop up wages.  Liberal lawmakers and the President-elect plan to bail out the automakers, at a cost to taxpayers of tens of billions of dollars.  But the automakers wouldn’t be going broke if they didn’t pay their workers so much more than the average American worker — a whopping $70 an hour.  The auto bailout proposals contain largely symbolic limits on CEO pay, but nothing limiting the inflated compensation packages of unionized auto workers — which exceed those of non-union auto workers at Toyota’s American factories by more than $20 per hour.  Even without such a bailout, the automakers would keep operating after filing for bankruptcy under Chapter 11 – using a bankruptcy discharge to get rid of their ruinously expensive labor contracts and liabilities to auto dealers under state laws designed to milk automakers for the benefit of dealers.  A taxpayer bailout only delays the day of reckoning and makes the painful adjustments needed for the auto industry’s survival even more painful when they finally happen.

In 1993, Republican Senators filibustered President Clinton’s “stimulus package,” correctly arguing that it was just pork for special interest groups that was unnecessary for an economic recovery (which then occurred without any “stimulus,” despite cuts in deficit spending).  Today, however, Democrats have such a commanding majority in the Senate that a similar filibuster may not be possible.

Today’s Washington Post and Los Angeles Times both endorse passage of the U.S- Colombia free trade agreement, which many Democratic politicians, pressured by organized labor, have refused to endorse. House Speaker Nancy Pelosi has ducked the issue by refusing to bring it to a vote. President-elect Obama got considerable help in his campaign from labor unions that oppose the deal, but no political debt is worth undertaking such a disastrous course as scuttling this trade deal.

Not only is Colombia the United States’ strongest ally in South America — a fact that would make scuppering the deal a slap in the face for Colombia and a political victory for the increasingly unhinged Hugo Chavez — but the last thing America needs in a time of economic turmoil is a Hawley-Smoot lite in the form of failed trade liberalization.

For all the bailouts and stimulus packages being batted around Washington, what the American economy really needs is greater opportunity to innovate and invest — in other words, less burdensome regulation and more open markets. As the Times‘ editorial argues:

The pact would balance and normalize a trade relationship that is now one-way. Colombia has almost unfettered access to U.S. markets — 91% of its goods enter duty free — but U.S. products face tariffs of up to 35%. Each Caterpillar truck sold in Colombia, for example, is taxed more than $200,000. This is a hindrance to prosperity for both countries. Currently, about 9,000 U.S. businesses export to Colombia, and were this deal passed, that number would skyrocket.

And, as the Post’s editorial says:

The main economic effect of the trade agreement would be to enable U.S. producers — automakers included — to export to Colombia tariff-free. This would simply level the playing field, because 90 percent of Colombian goods already arrive in the United States tariff-free under temporary trade preferences that Congress recently renewed. With U.S. goods exports to Colombia totaling over $8 billion per year, the pact offers a nifty dose of stimulus for U.S. businesses and workers.

Stimulus, indeed! As CEI’s Wayne Crews argues, to stimulate, deregulate. The same is true of liberalizing trade.

For more on the U.S.-Colombia trade deal, see here and here.

Facing an economic downturn and an election, politicians of both parties sought to stimulate consumer demand—and some business investment—through political action. They promised that if the early 2008 “Stimulus Package” didn’t succeed, there would be “more to come.”

It didn’t work, and a stimulus is now the number one Obama priority. His “Big Bang” agenda has to wait its turn.

As in recent stimulus campaigns—for example, during the first terms of presidents Bill Clinton and George W. Bush—almost all today’s politicians accept the legitimacy of government stimulus and rarely ponder the future economic harm such intervention may cause.

Genuine stimulus would entail liberalization of the economy from excessive interventions, regulations, and spending, and from political inflation of the money supply. It would maintain the conditions—legal order, minimal regulations and stable institutions—within which wealth can be created. It would recognize that governments do not themselves create wealth.

“Say’s Law” (as I discussed in the report Still Stimulating Like It’s 1999) holds that supply creates its own demand. A relative overproduction of certain goods may occur, implying that too many scarce inputs have gone into the production of unwanted items relative to inputs for desired goods. But general overproduction to which demand stimulus would (presumably) provide relief is not the core economic problem confronting societies. The leading pre-requisite for economic well being—along with negligible political interference—is low tolerance for special-interest pleadings that transfer resources. This means no political maintenance of wages or prices at above market levels, and a rejection of government-granted monopolistic abuses. It means no “Bailouts to Nowhere” and no “Bailouts on Wheels.”

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As soon as the elections are over, Congressional leaders are planning to have a “break the bank” party. On top of the $700 billion bailout that unfortunately both Republicans and Democrats supported, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid plan to call Congress back into a “lame duck” session in mid-November to pass a $300 billion “stimulus” package. The attitude seems to be, what’s $300 billion for “Main Street” after we just approved $700 billion for Wall Street fat cats?

But all the package is really likely to do is add $300 billion to Main Street’s public debt without spurring economic growth. There is no reason to believe that the hodgepodge of programs Pelosi and Reid want the stimulus to fund — from food stamps to unemployment benefits to infrastructire — will be any more successful at jumpstarting the economy than the hundreds of billions spent earlier this year for the first “stimulus” earlier this year.

This is because of the economic forces spelled out in the late Nobel Laureate Milton Friedman’s “permanent income hypothesis.” Friedman and other economists found that most individuals and businesses do not change their spending habits based on short-term changes in income. Unless they believe their raise in income is long-term, they will save rather than spend any bonus in the short term. Saving would normally be a good thing, but in this case since the government is spending, it will negate the effect and simply add to the national debt. In the case of infrastructure, there is also a time lag of several months before the money appropriated gets in the economy as payment for roads, bridges etc.

Fortunately, there is an economic recovery proposal being offered that will affect long-term expectations. This is the “Rapid Recovery” plan unveiled this week from House Minority Leader John Boehner. This would cut tax rates on business and individual investment and remove burdensome regulations to energy exploration.

The Boehner plan would cut the U.S. corporate tax rate, among the highest in the world, to 25 percent from 35 percent. It would eliminate some capital gains taxes. This is important because, in addition to economic turmoil, a significant part of the stock market decline this year has been due to expected higher tax rates on dividends and capital gains. Folks are selling now to pocket their gains before rates go up next year. This was the conclusion of a recent New York Post op-ed by CNBC reporter Charles Gasparino, who wrote that Obama’s “plan includes some of the most lethal tax increases imaginable, including a jump in the capital-gains rate … This is clearly the wrong way to go in the wake of an economic meltdown.”

The plan has another provision costless to taxpayers that would be very important for economic stability. It would get rid of burdensome regulations that curtail oil exploration in the shale and offshore. This is crucial in helping to prevent a sudden oil spike from crimping an economic recovery

I would suggest adding another costless provision that would do wonders for growth: require the SEC and the bank regulators to suspend mark-to-market accounting for illiquid assets. These accounting mandates, as I have written in the Wall Street Journal, force healthy banks to take huge paper losses based on a troubled bank’s fire sale. These losses — most of the time on paper as the bank is still holding to maturity a performing mortgage or other loan — drastically reduce a bank’s “regulatory captial” to lend with.

Overall, Boehner’s plan deserves kudos for recognizing that a “rapid recovery” can only be spurred by the right long-term policy incentives.

Today’s Wall Street Journal highlighted a new $300 political stimulus campaign. Keynesian demand-management has re-conquered economics as surely as Fall 2008 has cemented Alexander Hamilton’s dreams for centrally managed governed finance.

Today’s global consensus: free markets cannot clear without government intervention.

This year’s dual stimulus “packages” foster political ends unrelated to actual economic recovery. Innumerable special interests benefit from an interventionist, mixed economy—and when things go bad, fundamental free-market reforms fly further off the table.

As George Mason University’s Richard Wagner points out, unconstrained democracy has a built-in bias toward deficit finance, so demand-side, Keynesian policy prescriptions have permanent survival value. Since modern legislatures are at root wealth transfer institutions, it is suicidal for them to acknowledge the limitations of their actual contributions to the real economy. So they “stimulate.”

Indeed, the political price is too high for election-bound lawmakers to entertain non-governmental recession recovery. As Friedrich Hayek pointed out, the politicians blamed during a bumpy transition to something closer to laissez-faire will be the ones who stop interest-group benefits or stop the inflation, not the ones who started those costly processes decades earlier. Thus the market’s prospects are very gloomy.

Any sincere economic stimulus would reduce the “tariff” on wealth creation. It would liberalize the world’s largest economy from excessive regulations, interventions, high spending, and from the undisciplined political money and credit creation at the core of the financial crisis. For starters, rapid and retroactive marginal tax rate cuts could facilitate economic activity via increased supply.

But such real stimulus requires unpalatable changes in what people expect from government, and more importantly, in what representatives in government are constitutionally able to do in the name of public service.

So political reality prevents halting the compounded economic damage that artificial stimulation and financial “bailouts to nowhere” promise to deliver.

“Stimulating” demand for the burgeoning supply of government programs, services, and wealth transfers never seems to be difficult, and it becomes ever-easier as earlier interventions fail but escape blame. So we get no sustained, wealth-enhancing campaigns to reduce regulatory interventions in the economy; and we establish no institutions to keep future such interventions minimal. That’s depressing, not stimulating.