Why not a WPA type program? My take.

A friend responding to one of my facebook status posts about S&P's downgrading of U.S. debt from AAA to AA+ asked a fair question on a sentiment expressed by many:

... why don't we do something like the programs many years ago that employed lots of people to build roads and interstates and plant forests and stuff. Seems it would be good for all of those forest fires out west. And we wouldn't have so many bridges falling apart. Seems better than becoming a welfare state.

The following was my reply:

While something like re-instituting a modern version of the WPA may sound good on paper to proponents of Keynesian economics, the numbers never add up in the end. They contend that government spending money by creating “make work” jobs will grow the economy. Their argument being that people on the receiving end will spend that money on goods and services, and pay taxes on that income, increasing the government revenues.

Take a hypothetical pair of workers, Bill and Phil. Bill works in the private sector, receives a weekly pay of $1000 and pay taxes of 20% on that income, adding $200 weekly into government coffers. Phil works at a government “created” job, also receives $1000 per week, taxed at the same 20% rate. Keynesians point to Phil and reason that they have “grown” the economy by $1000 and increased revenue by $200.

However, while Bill and Phil contributed a combined $400 in tax payments, the government paid out $1000 to keep Phil working – a net LOSS of $600. Therefore, the government must tap not only Bill and Phil, but three other workers at $200 per week just to keep the books balanced. In other words, the government must take $800 out of the private sector (taxes paid by Bill and three others) just to maintain one job for Phil.

Now let’s assume both Bill and Phil are tradesmen skilled in bridge building. A company gets the contract to replace a failing bridge. The company owner can hire Bill, using money out of his own pocket, or he can hire Phil and have the government pick up the tab. What company owner would pass on that deal? Phil gets the job and Bill is out of work, with the net result of government revenues dropping by $200.

The government must now find that extra $200, either by raising taxes on Phil and the three remaining workers, taking more money out of circulation, or borrowing enough to cover the difference – plus enough extra to cover unemployment insurance payments to Bill until he can find another job. That is the beginning of a downward spiral with only one outcome, a shrinking economy burdened by excessive government debt.  -- Sound familiar?

Dennis P. O'Neil