The Curse of “Self-Liquidation” – Direct Job Creation vs. Traditional Public Works (A Job Insurance Supplement)

In Budget Politics, Economic Planning, Economics, Full Employment, History and Politics, Inequality, Liberalism, Living Wage, New Deal, Political Ideology, Politics of Policy, Poverty, Progressivism, Public Policy, Public Sector, Public Works, Social Democracy, Social Policy, Taxes, Welfare State, WPA on July 15, 2010 at 12:44 am

Introduction:

In any discussion about jobs legislation, it is absolutely guaranteed that eventually the debate will focus on the question of what the newly-employed workers will be doing, and what counts as a worthy use. On the conservative side, there are the familiar canards that government jobs are useless boondoggles, spending public funds to dig ditches and fill them up again or rake leaves from one side of a lawn to another – the idea being to restore the assumption that the government cannot create jobs by moving the goalposts (and confusing the issue). Moderate types tend to focus on ensuring that jobs projects should be “shovel-ready.” Even among more left-wing folks, there’s quite a lot of concern about whether the kind of work being done will incorporate women and men equally.

The nature of what work we give people to do is important, and it’s more than just a practical question of how many projects can be set up in what schedule. It’s also an expression of our political values – and the choice we make between prioritizing workers or the works they produce is critically important for the viability of any job creation program.

Background:

The idea of a “self-liquidating” public works project – i.e, one that would generate sufficient revenue to pay back the cost of construction – is one of the most persistent policy ideas in modern history. It was dominant throughout the Western world for the whole of the 19th century, and especially in the 20th century leading up to the Great Depression. Self-liquidation became the gold standard for assessing the value and worth of public works, and it wasn’t an accident that self-liquidation only calculates a narrow economic value without considering the social value of the project, or the economic impact on the workers and the businesses they patronize, or the inherent value of the worker’s labor. As wage labor became a larger and larger proportion of people’s livelihoods, and as the Western world began to experience the first capitalist recessions, self-liquidation played an important ideological role for classical liberals and conservatives alike who opposed the use of public works as an anti-recessionary government intervention. It allowed them to oppose spending money on the unemployed without seeming heartless – a liberal spokesman could claim to be totally in sympathy with the unemployed, but bound by the strictures of self-liquidation, public works could only be done if they fit the requirements for self-liquidation, if they went through the traditional contract-bidding process, and otherwise adhered to liberal orthodoxy on fiscal prudence.

Even among the progressives who arose in the late 19th century, the attitude persisted due to a fear that government was too tied to corrupt, urban machines. Self-liquidation in the eyes of good-government progressives provided an objective standard for measuring the worth of public sector construction. As Robert Caro writes about in his biography of Robert Moses (in his section on Moses’ early life as a good-government reformer), self-liquidation manifested itself as part of the corporate ideal of government – the public sector is inherently inefficient, corporate contractors are naturally superior, and Taylorism applied to the government is the way to ensure that middle-class taxpayers would not be unduly burdened by the needs of the poor.

It worked as an ideological argument because it tied into some of our more atavistic and irrational anti-statist attitudes: the belief that waste, fraud, and abuse must be everywhere even if we can’t see it; the tendency to believe the specific, negative anecdote about government malfeasance while ignoring the more abstract statistical evidence to the contrary; and our habit of mentally separating the entity known as “government” (which we don’t trust or like), with the various programs that make up the government (which we generally like a great deal).

In this fashion, public works was shackled and made incapable of serving as a genuine anti-recessionary tool. Very few kinds of projects are revenue-generating – think dams, bridges, and the like that can charge customers – and the ones that are tend to be extremely capital-intensive (as opposed to labor intensive). Such projects, when sent through the traditional contracting process, are extremely slow to operate, and tend to hire the unemployed only at the margins. The combination of these two factors meant that opponents could always claim that public works would lead to huge deficits without creating the necessary employment.

The even more radical idea that the government should just create jobs directly was completely beyond the pale of polite discourse – undertaking projects on the basis of their capacity to employ large numbers of workers instead of their capacity to generate revenue flew in the face of liberal fiscal orthodoxy and was thus dismissed as a waste of public funds, inefficient in comparison to public works (which produced demonstrable value), morally equivalent to despised poor relief, and dangerously radical.

New Deal Breakthrough?

This state of affairs continued well into the Great Depression, and were a major reason why most governments in the West (including Labour governments in the U.K, Republicans in the U.S, Social Democrats in Germany, and even Popular Front governments in France) did not pursue public works or direct job creation in favor of maintaining their commitments to the balanced budget, the gold standard, and free exchange. This is not to say that no one wanted to do more – in the U.K, John Meynard Keynes had been calling for public works to reduce unemployment throughout the 1920s; in the U.S, Senator Robert Wagner and his allies pushed and pushed against Hooverite orthodoxy; in Germany, Social Democrats proposed the WTB plan for public works employment, but were unable to win a majority within their party; in France, even a sympathetic pro-New Deal Leon Blum was ultimately unable to do the public works he wanted to in the face of the necessity of maintaining the franc.

After the election of 1932, a political space opened up in the United States as a pro-public works, pro-political experimentation president was elected. Even with the rise of the Roosevelt Administration, it still took a political battle to move beyond traditional public works and embrace direct job creation.

In the First Hundred Days of the New Deal, one of the chief priorities of the progressive faction within the Roosevelt Administration was to fund massive public works projects to put people back to work and boost demand – exactly the strategy that Congressional progressives like Senator Robert Wagner had pushed through the Congress, only to be repeatedly vetoed by President Hoover. Thus, when the Roosevelt Administration went to work crafting the National Industrial Recovery Act of 1933, the centerpiece of the so-called “First New Deal,” one of the elements of the bill designed to mollify progressives who were cool to the idea of business self-regulation was Title II, which established the Public Works Administration (PWA) and gave it $3.3 billion to put towards building public works.

And yet, just like the Obama stimulus, it proved more difficult to make public works an economic stimulus than had initially been thought. Now, the problem is the decision to focus on “shovel-ready” projects, but in 1933, the problem was “self-liquidating” projects. the PWA’s Administrator, Harold Ickes, was a dyed-in-the wool progressive, a veteran of Teddy Roosevelt’s 1912 campaign, a staunch member of the progressive faction of the New Deal who were committed to proto-Keynesian ideas, and probably the most racially egalitarian New Dealer. He was also probably the wrong man for the job, because Ickes was also very much a traditional good government progressive – as a result, Ickes made it his first priority, not to spend the money quickly, but to make sure that the taxpayer’s money was spent properly, and to focus on the public works not the public workers. As a result, Ickes made two fateful decisions – the first was that the PWA would only support “self-liquidating” projects, i.e, public works that could generate enough income to pay back the cost of construction, which Ickes felt would prevent the public’s money from being wasted on pork-barrel projects; the second was to spend the PWA’s money through the traditional contracting process, which would allow him to closely vet all applications to make sure that the public’s money would be spent honestly and that the project was of sufficient public value.

This kneecapped public works as an economic stimulus. By mandating self-liquidation, the PWA restricted itself to projects that would generate revenue streams – dams that could sell electricity to consumers, bridges and tunnels that could charge tolls, etc. – which meant that projects that couldn’t generate revenue (schools, libraries, post offices, etc.) couldn’t be done, and it also meant that projects went to where there was enough people to generate revenue, not to where unemployment was highest. Because of the different engineering requirements (the Hoover Dam versus your local library), self-liquidating projects used most of their money on land, materials, and machinery, rather than manpower. By mandating contracting, the PWA slowed down the process of project approval to a crawl, ensured that money would be spent on the lowest bid (a good thing from the point of view of frugality, but not from the view of trying to generate economic stimulus), and ensured that the amount of new employment generated would be relatively low, because most contractors already had an employed workforce, would generally expand only at the margins, and preferred to use a few skilled workers and more labor-saving machinery than thousands of unskilled workers (to keep productivity and profits up).

As a result, by the end of 1933, the PWA had only awarded $900 million in contracts (27% of the allotment), and had spent only $110 million (3% of the allotment). As late as the end of 1934 and the beginning of 1935, the PWA’s workforce had stabilized at only 650,000 jobs a a time when 8 million men were still out of work.

What ultimately saved the New Deal’s public works program was Harry Hopkins’ suggestion to go around the PWA. In late October of 1933, Harry Hopkins, then head of the Federal Emergency Relief Administration, went to FDR with a proposal to create 4 million jobs through “force account,” or direct hiring by the government. FDR, not wanting to go into the first Depression winter of his presidency without having done something, authorized Hopkins to take $400 million of Harold Ickes’ PWA money and establish a Civil Works Administration (CWA). Hopkins took the president’s authority and ran with it, such that by January of 1934, only three months later, the CWA employed 4,270,000 workers.  Hopkins’ CWA, by directly hiring the unemployed and initiating projects on its own instead of waiting for projects to come to the government, was able to lap the PWA – it spent through the $400 million almost instantly, and would eventually spend about $1 billion in six months. Of the 4.27 million workers, paid $48 a month ($780 in 2008 dollars), one-half of them came from people who had previously accepted poor relief, and the other half came from any unemployed worker who applied for a job, eliminating the hated and demeaning process of having to declare yourself as a pauper. In the six months that they were employed on more than 4,000 projects, these CWA workers built a half-million miles of road, built or improved 40,000 schools, employed 50,000 laid-off teachers, built 500 new airports and improved another 500 – and the list goes on and on.

So by late 1934, Harry Hopkins had learned that it was possible to go beyond the traditional stricture of self-liquidation, to do projects that weren’t revenue-generating while still producing public goods of great value, and to hire millions of workers  in a short period of time without going through private contractors. Thus, when the 1935 Emergency Relief was signed into law in April, dedicating $5 billion (which as a percentage of GDP would be equivalent to spending $959 billion today), Hopkins was able to include the brand-new Works Progress Administration as an agency that could bid for funds (through a clever political dodge – the WPA was supposed to be limited to small projects of $5,000 or less; Hopkins simply subdivided larger projects into $5,000 chunks). When Hopkins and Ickes went before Roosevelt to argue for funds, Ickes made the case for traditional public works – only the PWA could produce properly self-liquidating projects that wouldn’t waste the public’s money, the WPA was a waste of funds. Hopkins argued the case on different grounds – the PWA’s self-liquidating projects could only generate 650,000 jobs whereas his direct job creation could produce millions of jobs with the same funds.

And in 1935, direct job creation won the bulk of the funds – and for a while, the policy argument. As a result, in two years, unemployment had been reduced to 9%, and the WPA’s massive workforce represented 61.6% of the newly-hired (with many of the remaining 38.4% being the indirect result of WPA spending and WPA wages). The problem is that, after the war, this lesson was allowed to be forgotten.

Reality Check:

Part of the reason why traditional public works hangs on is that it appeals to ideas about what the public sector should do. There is a kind of romantic appeal to the works themselves, the same feeling of awe and inspiration that we get when we look at the soaring buttresses of the great cathedrals or the monumental scale of the Pyramids and Giza, or the great concrete arc of the Hoover Dam, that short-circuits any appeal to dollars and cents. The very solidity and presence of these objects is testament that money has not been wasted or stolen – because you can reach out and touch the product.

The problem is that it’s just not as efficient as a jobs creator – and as a result, conservatives have not directly attacked public works, but rather have attacked Keynesian stimulus directly as failing to produce enough jobs when the reality is that it’s the traditional systems of self-liquidation and contracting that’s producing the lag and the capital over labor emphasis, not the Keynesian theory.

Here’s the reality:

Focusing on Jobs First, Works :

Despite conservative claims that direct job creation is always and at all times a massive boondoggle, source of nefarious corruption, or disguised welfare (you can really take your pick of their mythology), the reality is that direct job creation actually creates real jobs. The sheer labor power of the number of people involved – a million American workers should produce anywhere up to $105 billion a year in output – means that you can get impressive results even if you make the works a second priority to getting people employed. The WPA used the most basic hand tools and construction methods as a deliberate strategy of using maximum labor power (as opposed to maximum machine power, which is the most common technique in traditional public works) – and yet still produced:

572,000 miles of rural roads, 67,000 miles of city streets
78,000 new bridges and 1,000 new tunnels
19,700 miles of water lines, 24,000 miles of sewers
480 airports, and another 470 expanded
40,000 new public buildings, and another 80,000 improved
including 6,000 new schools, 1,000 libraries, 226 hospitals,
and 2,700 firehouses

To this extent, focusing on traditional public works out of a concern that you’re not going to get enough value of public works through direct job creation is a major   mistake. This isn’t to say that public works have no place. Traditional, capital-intensive public works should be done – we have an infrastructure gap of about $2.2 trillion in everything from schools and transit to the energy grid and our bridges and dams, but that need would be there regardless of whether we had mass unemployment. In our current crisis, we can put millions of people to work directly, and they will still put a huge dent in that $2.2 trillion even with hand tools and basic construction methods.

Building Things is Not Inherently Better Than Services:

Another reason why traditional public works has been favored over direct job creation is that we attach a lot of meanings to the physical work of construction that go beyond the practical. As I’ve said, we have an emotional connection to the works themselves, but there is also a strong cultural perception that hard physical labor is somehow moral and genuine. There’s an association between the physicality of work and our sense of gender roles – manly men are supposed to be providers by using their big muscles to build stuff, and that kind of work is somehow more “real” than the more directly feminine connotations of service work. There’s also an association between the physicality of work and our unease with modernity (and now post-modernity, and god forbid post-post-modernity) – physical labor is tactical and measurable and solid, whereas fiddling around with ideas and words is considered suspect, effete, and somehow associated with trickery.

The reality is that we desperately need both infrastructure and services. We need people to use power tools to build schools, but we also need teachers to staff them; we need I-Beams to build hospitals, but we also need doctors, and nurses, and medical aides to staff them. That $2.2 trillion gap is real, but so are the waiting lines for child care centers and decent nursing homes.

And for those out there who still question what direct job creation would be doing – I say we should be hiring people to do both. Some unemployed people, especially younger workers and entrants into the labor force, and former construction workers will be best suited to “light construction” and there’s no reason why we can’t move what may have been an over-supply of workers in residential construction over to building public and community service infrastructure. Other unemployed people, especially unemployed professionals, recent college graduates, and as feminist groups have argued, many single mothers and other unemployed women, might find work more easily in providing public and community services in the newly-created infrastructure.

Overloading Priorities Prevents the Process from Working:

In the end, physical bottlenecks are not the major reason why traditional public works are slower and less efficient than people have hoped – rather, it has to do with how we organize the public works system, and what kind of priorities we put on the process. In the past, we’ve mandated outside contracts, lowest-bidders, and a thousand other hoops that have to be jumped through. All of these things slow the process down, and often work at cross-purposes – you can’t ask for the lowest bid and the most jobs per dollar spent at the same time, because one argues for using machinery to lower labor costs and the other argues for using the most labor possible.

I’ve already written about how we can streamline environmental impact and other permit processes to allow for speedy approval of projects while still adhering to the spirit and impulse of environmental concerns. I think we can do the same thing with the other steps that go between the authorization of funds and the hiring of workers – given our vastly superior administrative technology, I don’t think there’s any reason that we can’t beat the CWA’s record.

But it will only work if we recognize that the purpose of direct job creation is to create jobs first. Other priorities are important, and shouldn’t be ignored, but must be made to work in harmony with the overriding primary goal – getting people back to work.

In the face of that need, who cares about self-liquidation?

  1. […] other words, in the last eight months we have experienced 1937 in miniature. As I have discussed before, the New Deal’s track record of lowering unemployment has been grossly overlooked. From 1933 […]

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