Building permits were issued at 1:00 pm last Friday morning for a major renovation that was already underway at a hotel. However, due to a recent change in life safety code of which the mechanical engineer was unaware, the permits required that all plastic soil pipe running in the first floor plenum (between the drop ceiling and the concrete plank above) be wrapped in fire insulation.
Insulation contractors were contacted at 2:00 pm the same afternoon. By 3.30 PM two contractors had arrived to measure and estimate, and by 5:30 pm the $6,000 contract was awarded. Workers arrived on Saturday morning and by Tuesday the work will be complete, thus not delaying critical inspections needed for work to proceed.
This only happens during times of great recession, when contractors have little work and construction workers are unemployed. Both are eager to get a few days of work.
Having established the idle capacity during our steep recession, let’s analyze the impact on the economy of the $5 million renovation (and conversion) project:
$5 million will provide an average of $40,000 a year for 125 workers, assuming labor was used to extract and create all of the materials. Moreover, the 125 workers spend their money, creating jobs for others. This is called the “multiplier effect” and a good assumption in times such as ours is a multiple of 2 ½. So that amounts to 312 work years.
Those 312 families will no longer need to draw unemployment compensation, use food stamps, and make use of other subsidies. So instead of costing the government perhaps $1,500,000, they will be paying taxes, let’s say at 12%, about $1,500,000.
The $3 million turn about for the government will permit more government spending…thus more jobs… thus further contributing to a recovery.
From small examples sometimes we can see big concepts. Well directed deficit spending is a virtue in a recession. Moreover, it pays great dividends in the form of infrastructure renewal, education, public health, and investment in innovations that will lead to greater competitiveness.
Thus cutting government spending to reduce a deficit is likely to perpetuate recession and depression, the latter being what happened in 1937 when recovery from the Great Depression was reversed by an attempt to balance the federal budget.
It is a return to relative full employment that reduces government costs and steeply raises revenues, as we saw during the prosperous latter Clinton years that generated large annual surpluses on a projection to pay off the national debt.
Again, Keynesian economics is only applicable to times such as our own, when there is massive economic idleness. This isn’t readily intuitive, but it is correct. We ignore John Maynard Keynes at our peril.
