US household wealth decline &1930s public Invstmnt

Dec.18, 10:40 p.m.

As I explained in my last post the shock effect due to lost household wealth is an important factor in predicting consumer and investor behaviour. According to recent data   U.S. household wealth has declined from its level of $59.4 trillion at the end of the second quarter of 2008 to $56.5 trillion at the end of the third quarter. This loss of 2.9 trillion is due to the combined impact of the stock market crash and the fall in house prices. Overall it is a loss of about 5 % in net household wealth and while slowing the shrinkage may not yet be over. This is what makes urgent the infrastructure spending and public sector investment as a major offset.In planning and executing these expenditures there are useful lessons to be learned from the historical record.For example, one of the useful books from the 1930s that I have in my library is an autographed copy of   Arthur D.Gayer's work, Public works in Prosperity and Depression prepared for the National Planning board published by the National Bureau of Economic research in New York in 1935.   In many respects given its early date of publication Gayer was remarkably insightful about both the wisdom of using public works as a method of economic stabilization in an unstable economic system and in the modalties of implementing these stimulus measures.

Someone in Chicago or Washington or New York or wherever with access to the President- elect ought to be looking through Gayer at this very moment.
Gayer makes the very useful point that public works as a method of economic stimulus has a long and largely honourable history in America that dates back to the depression of 1855 when the state of New York sent recent immigrants to work on the enlargement of the Erie Canal. In 1857-58 during similar periods of economic distress the Mayor of New York suggested that the unemployed be hired on public projects at a "fair wage" in street cleaning and stone quarrying projects.During the long depression of the 1870s several cities undertook similar measures.(p.5 in Gayer)

According to Gayer, the French as early as 1902 endorsed the policy of reserving key public works for periods of unemployment. Similarly in 1909 in England the Poor Law commission made similar suggestions about using capital works as a measure of economic stabilization.Similar policies were endorsed by Germany, Prussia, Sweden, Norway, Finland and   Italy. (pp. 6-7)

This book along with Keynes' General Theory, Alvin Hansen's guide to Keynes and Abba Lerner's work on functional finance and his work the Economics of Control and the work of John Kenneth Galbraith and Hyman Minsky's, Can it Happen Again ? ought to round out the Obama economic team's over Christmas reading. If they have any time left over they might also have a look at Randall Wray's work on monetary theory, Paul Davidson's writings on post-Keynesian economics and my own work on deficit finance.

Happy holidays!