Shovel-ready, Spin or Chicanery?

In his Life of Pericles, the Roman author Plutarch wrote that, having won the people away from his adversary Cimon by spending their own money on the entertainments and spectacles he laid on for their diversion, his eponymous hero further consolidated his hold on power by daring to spend his allies’ tribute (read: tax payments) on a lavish programme of public works rather than holding them, as was supposed to be the case, in reserve for use in time of war.

As Plutarch puts it, as well as building up a powerful fleet to patrol the sea lanes of his world – with the aim not just of cowing friends and foe alike, but also of securing the support of those who derived their living from military service – Pericles turned his attention to addressing the effects of ‘secular stagnation’ plaguing those who remained in Athens:

‘…in his desire that the unwarlike throng of common labourers should neither have no share at all in the public receipts, nor yet get fees for laziness and idleness, he boldly suggested to the people projects for great constructions, and designs for works which would call many arts into play and involve long periods of time, in order that the stay-at-homes, no whit less than the sailors and sentinels and soldiers, might have a pretext for getting a beneficial share of the public wealth.’

Today, almost two and a half millennia later, we could be writing about the likes of Jean-Claude Juncker or, indeed, any of the other ‘fiscal space’ infrastructure junkies among our own bribe-them-with-their-own-money political elite.

In their utter perplexity at why neither extreme monetarism, mountainous debt, nor wildly unbalanced state budgets (i.e., ‘austerity’) have failed to kick-start growth in Europe, the self-selecting closed shop of the international bureaucracy, the incumbent crop of vote-grubbing politicians whom – Yes, Minister – the former purport to serve, and the cabal of court economists from whom they seek the application of a gloss-coat of intellectual respectability have little more to offer us than yet more of Keynes’ notorious ‘two masses for the dead’ – i.e., another round of Big Project hole digging and ‘cultural’ white elephant construction. Flucht nach Vorn, genau!

This time the Cunning Plan comes complete with a near comic mix of collective amnesia regarding the sorts of practices which got us into our present difficulties; a wilful blindness regarding what Public Choice theory has to say on such matters; and a sanctimonious overlay of 68-er higher causes, none of which can have any positive bearing on the likely economic harvest to be expected from the programme. Then again, as Nikita Krushchev remarked in 1963, ‘Politicians are the same all over. They promise to build a bridge even where there is no river.’

Several shrewd commentators have already chewed over the CDO-type structure by which a notional €21 bln in EU ‘capital’ – €8 bln of which does not actually exist but is simply offered as a first-loss guarantee, and all of which has already been committed to various other ‘initiatives’ – will be levered up fifteenfold so as to offer €75 bln of new loans to SMEs and no less than €240 bln in additional infrastructure outlays.

Let us leave aside the smoke and mirrors aspect of all this and also let us ignore the scope for mere budgetary shuffling from one currently operational outlay to the supposedly ‘new’ facsimile with which it will only be replaced amid a barrage of spin and to the accompaniment of a good deal of broken-window crowding out of possibly more worthy improvements along the way.

Let us further overlook the fact that, as Bent Flyberg of the Said Business School has laid out in compelling detail in any number of publications, the vast majority of such undertakings are absolutely doomed to fail, pausing only to take a brief citation from a work he co-authored back in 2002 for the Journal of the American Planning Association. In this we read the uncompromising conclusion that:

‘Cost underestimation cannot be explained by error and seems to be best explained by strategic misrepresentation, i.e., lying…. The use of deception and lying as tactics in power struggles aimed at getting projects started and at making a profit appear to best explain why costs are highly and systematically underestimated in transportation infrastructure projects.’

Let us also not dwell here on the wearisome intrusion of right-on social engineering in what is, after all, supposed to be a fix for Europe’s seemingly intractable economic malaise. Suffice it to note that we are not quite sure where the entries for ‘prioritising high socio-economic returns’ and ‘supporting EU objectives’ fit onto the spreadsheet of the would-be private sector investor, especially when there is not the slightest hint to be found amid all the self-laudatory fanfaronade issuing from Brussels of what might be his expected return.

We shall next pass swiftly by the risible idea that the plan will be properly run simply because it specifies that a selection committee – or, to give it its full grandiloquence, a Joint Commission-EIB Task Force – will oversee the winnowing out of the worthy from the unworthy projects. After all, even the Soviets had their Gosplan and we know how well that turned out. We can at least be sure that its esteemed members will not be short of work to do (or political influence-peddling to endure). For, as the Commission revealed in an annex to its press release on the matter – again combining heroic optimism with unconscious humour – ‘… over an ambitiously short timeline [sic] the Task Force was able to identify €1.3 trillion of potential investments (some 2000 projects) based on the information it received…’

Funny that: the first, faint aroma of meaty sauce wafting from its lavishly-appointed gravy train into the nostrils of the continent’s army of Poo-bahs and Grand Panjandrums and they instantly – nay, ambitiously – whip out a 13-digit wish list, each item on it no doubt having been subject to the most exacting standards of scrutiny by those who will surely never stoop to claiming credit for its execution, whether at their scheduled pay grade review or their next appearance at the hustings.

Nor could such paragons oversee such large-scale public spending with any more than the merest soupçon of corruption attached to proceedings. Just ask the IOC or FIFA if you doubt it? Just drop a line to President Xi as he hunts the ‘tigers’ who did so well out of that country’s mountain of malinvestment and misappropriation.

Finally, let us pay no heed to those sniggering at the back that in a world supposedly careering, one 1.2 child family at a time, down the twilit slopes to ‘demographic decline’ another batch of traffic-sparse Spanish autoroutes, half-empty Zaha Hadid art galleries, or chronically under-utilized Polish airports is not likely to blaze a trail up the mountain of lasting prosperity, nor are such things likely to generate returns capable of servicing, much less paying down, the bulk of that €315 bln being so blithely bandied about.

Yes, it may not be public sector debt – at least on its surface – but debt it still is, with all that entails for the alienation of future revenue streams. Not that any of this seems to register with members of a Nomenklatura who are either so wedded to the short-term dictates of the electoral cycle or else are held in thrall by that mythical deity of Tooth Fairy economics, the Fiscal Multiplier.

Whether they admit it openly or not, too many of our First and Foremost are still prey to the hoary old notion that the answer to the 1930s’ supposed ‘crisis of capitalism’ was, if not the horrors of global, industrialised war, then the Schachtian programme of state-dominated finance which seemed to deliver so much where the freer societies then were failing. Only by harnessing such a ready source of centralised finance to the nurture of that essential corporatist pretence in which an ostensibly private ownership is combined with an intrusive governmental control over its inputs and outputs do they imagine that an upswing could be achieved. After all, not only did Il Duce aphoristically ‘make the trains run on time’, but he and his even more unsavoury northern counterpart built the autostrada and the autobahns and ordered the construction of the first ‘people’s cars’ to run along them, did they not, so delivering the grateful crowd from the curse of mass joblessness along the way?

What goes unrecognised is that the very depression out of which these two gentlemen were supposedly pulling their countrymen was originally ushered in by the impact of a sudden cessation of the avid borrowing from (mainly US) bond-buying yield chasers when the politics turned fractious. Until then, foreign largesse had been showered upon eager local and regional governments, all across the Weimar republic and out into Red Vienna, so that the city fathers could build concert halls, swimming baths, and workers’ housing complexes in profusion – none of which, alas, contributed a red cent towards the service of the impressive debts incurred in their construction.

If it is too much to ask our lords and masters to know anything about the long history of failure of similar schemes of pump-priming, it is also the case that they can hardly fail to be aware of China’s recent official admission that, in just the last five years, it has wasted almost $7 trillion in its attempt to forestall economic deceleration. Nor can they be ignorant that it is now the avowed intent of Xi Jinping to wean his fellow Princelings off their unwholesome diet of force-fed mega-investment and to condition them progressively to rely on the microeconomics of more effective market mechanisms and a more functional legal framework within which these can be allowed to operate.

Shinzo Abe may continue to harp on about his still-quivered ‘third arrow’ and Mario Draghi may sourly remind Europe’s politicians of the need to introduce the very same ‘structural’ reforms about which his own actions allow them to procrastinate so spinelessly, but Beijing seems unequivocal in its aims – if somewhat less unimpugnable in its deeds – on the ultimate folly of building sterile pyramids on the shifting sands of debt.

Though it is hard to deny that both theory and practice reinforce the lesson that debt should principally be taken on in the attempt to further some looked-for productive advance – and that such obligations will therefore be largely self-liquidating – this appears well beyond the ken of those in charge. One only has to look at the sheer insanity of a country like Italy, whose finances are in chaos and whose industry has shrunk by around a quarter to reach the levels of thirty years ago, fondly imagining that her salvation lies in securing that decidedly dubious privilege, the right to provide a temporary home for that vanity of a bonfire, the Olympic flame, in 2024. At least when the Roman emperors attempted to placate the masses with a diet of ‘panem et circensis’ the imperial fisc was in reasonably good order, even if only thanks to the plunder extracted from the latest victims of its legions’ unremitting aggression.

In fine, so ill-advised is this whole European Fund for Strategic Investments idea that some are beginning to suspect darker forces are at work. For out of this unwieldy structure, it might not be too difficult to finance the ‘private sector’ contribution by the issuance of covered notes (Junckers bonds?), or some other form of ABS and guess who or what is just itching to purchase a trillion or so of those? Why, Mario Draghi’s might engine of ‘Whatever it Takes’ – the ECB, of course.

For this, as well as for the reasons laid out in our previous post, if Europe is to grow, it needs fewer Junckers plans – indeed fewer Junckers – not more.

What a typically anti-democratic, unconstitutional piece of chicanery that would be with which not only to evade Stability Pact strictures on the size of state deficits but also to circumvent the interdiction on the central bank from financing said shortfalls directly! No need to worry about all that German recalcitrance on either score: just insert a paper-thin, credit-wrapped, pretend private entity – no doubt purpose-built for the occasion – between the Versorgungsstaat and the end purchaser and how are you left now, Jens, my man?

NB The foregoing is for educative and entertainment purposes only. Nothing herein should be construed as constituting investment advice. All rights reserved. ©True Sinews