In the ‘50s and ‘60s, highway building helped a thriving American economy grow even more. These women worked in Iowa in 1967./UNITED PRESS INTERNATIONAL

By LOUIS UCHITELLE


As the recession deepens, Presidentelect Barack Obama is gearing up to spend hundreds of billions of dollars on public investment projects, counting on them to lift the economy, as they have in the past.

But this time that may not happen. Public spending, American style, has worked best in good times, when people have jobs and executives are eager to invest. A new public highway is soon lined - in good times - with stores and malls filled with consumers. A dollar spent by government generates three or four from the private sector.

That symbiosis makes a humming economy hum more, as it did in the 1950s and ‘60s. But it may not work that way when the American economy is in full retreat, as it was in the 1930s and seems to be today.

As a measure of the current disaster, the Federal Reserve recently lowered interest rates to an unheard-of near-zero percent and offered in effect to give away money if a fearful nation would only spend it. But panicked by investment losses or fearful for their jobs, people tend to hold back. In such circumstances, a new road could be lined not by shopping malls, but by empty, overgrown land.

That is the risk facing Mr.Obama’s more than $700 billion plan. Spent in one year on construction, research or equipment, it might well offset the contraction at first. But unless it also revived general confidence, the economy could collapse again, once the money was gone.

“If that spending can’t get the private sector going, then it is just a make-work maintenance operation,”said Stanley Moses, an economist at Hunter College in New York.

History illustrates how tricky it can be to make public spending work as intended. The many dams Franklin D.Roosevelt’s administration built generated an abundance of electricity, lowering its cost so that families could afford to operate the appliances then becoming available. The construction itself put money into workers’pockets. But the appliances were too costly for most families during the Depression, and the manufacturers wouldn’t extend credit. Public investment was failing to jump-start a key private-sector industry.

His administration found a way around the problem by subsidizing installment purchases. That was when appliance production finally rose. In time, installment plans evolved into consumer loans and charge cards .

These symbiotic relationships between the public and private sectors became an essential ingredient of American prosperity from World War II until the mid- 1970s.

“It is not in the nature of a market system to have adequate private investment all of the time,”said Robert Pollin, co-director of the Political Economy Research Institute at the University of Massachusetts at Amherst.“So we used public investment to smooth things over and improve the climate for private investment.”

That changed. In the 1970s, the public reacted against high taxes and growing budget deficits, and conservatives argued that putting money in private hands would lift the economy more effectively. Public investment tapered off, and was used less as a tool of economic policy as the economy experienced the increasingly sharp ups and downs of the 1980s, 1990s and the new century.

Now, in the opening months of the worst bust since the Great Depression, Mr.Obama is expected to seek sustained outlays over at least two years to repair roads, bridges and waterways; to build and repair public schools; to expand the broadband network; to digitize medical information; to advance green technology. An economic adviser says his goal is“to encourage private investment, particularly in areas where we have too little investment today, for example, solar systems and wind power.”

But Mr.Obama is bucking a deep private- sector funk. Borrowers and lenders have pulled back. Business investment has plummeted. So has consumer spending.“A psychology of bad times is becoming the mindset of the public,”says Andrew Kohut, director of the Pew Research Center, a survey operation.

But the president-elect and his advisers and many others, including some Republicans, see no other choice.

“The most important thing the new administration can do at a moment when the collective psyche has been so shattered is to spend money now on tangible things,”said Mark Zandi, chief economist at Moody’s Economy.com, who advised John McCain’s presidential campaign.“People want to see up front a repaired bridge, a new energy technology, a better water system. They want to feel these will have huge benefits down the road, and that might get them spending again.”