Grading the Stimulus Ideas

US Politics

Word has it that the Senate has a compromise stimulus plan ready, but the details are being held up while negotiations are still in progress.  We might not know what is in the package, but we’ve seen plenty of trial balloons over the last couple of weeks.  Here are my thoughts on those ideas, both as stimulus and as good policy.  I’ve provided a grade for both and these grades represent only my thoughts.

Critical infrastructure project spending (Stimulus: A+, Policy A+)

This one is a no-brainer for Congress and you could easily spend a trillion dollars on just this alone if Congress has sufficient desire.  Infrastructure spending results in the direct creation of jobs and the purchase of mostly local materials.  Infrastructure improvements directly benefit the economy by laying the groundwork for more efficient use of resources as in roads, electrical grid or data grid improvements or by minimizing loss with levy improvements and wildfire control.

Non-critical infrastructure project spending (Stimulus A, Policy C)

Non-critical infrastructure is my friendly term for a certain type of pork.  But pork is bad, right??  For most people, pork is only bad if it is not in their district.  Still, pork is stimulus for the same reasons that critical infrastructure spending is.  Almost by definition, the spending is very localized, it stays in the US economy and generates local jobs.  What makes it bad policy is that the future benefits of pork spending are secondary to the local, short term impact.  That new VA hospital might be useful, but not in a district with no veterans.  The center to study frisbee dynamics at the local university?  Those research dollars might allow the college to keep a couple of professors on the payroll and maybe avoid a tuition increase next year.  Will it generate the type of sustaining, well paying industries that might have been spawned from putting that money in stem cell research?  Probably not.  Still, that bridge to no where is valuable to the folks living in no where and some projects are too big for local governments even if they have great local value.  Pork doesn’t always have to be bad.

Incentive payments for purchases (Stimulus: C, Policy D)

There’s talk of a $15,000 credit to new home buyers and possibly a credit for car purchases as well.  On the home owner front, this will certainly allow some renters who are close to moving into home ownership to make the leap.  It will also prop up home prices since sellers will know that buyers have this incentive and price their homes accordingly.  Buyers and sellers with a little more cash might go out and buy a little more, but peope are afraid to spend and this type of credit is a very indirect way to stimulate the economy.  It also doesn’t increase sales, just moves them up.  Car and home buyers taking advantage of the credit are probably already in the market and would make a purchase in the next year or two.  By incenting them to buy now, you get a short term boost, but drain the pool of buyers for the next couple of years.

Increased “safety net” payments (Stimulus D, Policy A)

With more people out of work, there is a lot of talk about extending unemployment benefits are making shifts in the tax code to help those at the bottom of the spectrum.  The children’s health insurance program, SCHIP, has already been extended.  In terms of stimulus, this is not going to do much.  Many people in this situation have reduced their spending as far as they can and they are getting by on credit.  More government support will allow them to limit the debt spiral, but it won’t make them spend any more money.  But in terms of policy, this is a home run.  The rapid increase in the unemployed is the first pebble in an avalanche that could overwhelm our social systems.  The demands of high unemployment suck up all the available oxygen at the state level, killing other necessary programs and forcing cutbacks in other areas where we need more spending, not less.  Increasing government support in this area limits this disruption and provides enough time for the shocks to be absorbed by the states.

General tax breaks or credits (Stimulus F, Policy F)

I love low taxes as much as the next guy, but in the situation we’re in now, they have no stimulus effect.  I’m sure my Republican friends would disagree, but the whole idea of the stimulus is for the government to make up for the lack of private sector spending.  The private sector is not spending because of fear.  Some of that fear is very reasonable (“will I have a job tomorrow?”) and some is irrational (“things are bad!”).  In a mild recessionary situation, tax breaks add a little more to the banking account and provide a little “wealth effect” spending, but all the tax breaks in the world are not going to alleviate the fear running through the economy.  People are hoarding their dollars and if you give them a small tax break, they will just hoard it also.  Without spending, there is not stimulus.  From a policy point of view, tax breaks are also terrible.  Over the last couple of decades and especially under the Bush administration, Americans have come to believe that the federal government has tons of money and can do everything without any contribution from them.  You really don’t see this on a local level.  Communities that lay out reasonable, transparent bond referendums for education or recreation generally are successful in getting the votes they need to move forward.  People understand that services must be paid for.  We’ve lost that sense at the federal level.  Tax breaks at this point would further undermine the idea that we pay for what we receive.

Increased Higher Education Spending (Stimulus: B, Policy A)

OK, no one is really talking about this… but they should.  Our economy is changing and our population has to change to meet the need.  The GI Bill after WWII was one of the most successful long term spending efforts ever implemented by the US government.  What was a huge spending program at the time reaped an entire generation of well educated, productive employees who went out and grew the US economy into the juggernut that it is today, even in recession.  If you consider human capital as part of our country’s infrasturcture, this is a way to invest in that direction with proven long term results.  Create an opportunity for all of those unemployed workers to go back to school and get the training they need to really succeed.  It takes them off the unemployment lines immediately and pours money into their communities.  If you combine it with a living stipend, you can make it possible for displaced workers with families to pursue new opportunites.  When the economy needs them in a couple of years, they’ll be ready.

8 Comments

7 Comments

  1. nimh  •  Feb 9, 2009 @1:13 pm

    Good post, overall, though I’d certainly pick nits on some of the categorisations. Notably the one of “Increased “safety net” payments”.

    I’m far from an economist myself, I’m something of a novice to all of this policy field. But from what I’ve read this is actually one of the most effective stimulus measures around.

    Prof. James Galbraith created a neat chart on what types of stimulus spending provides for the most bang for your buck in terms of stimulating the economy in the short term, back in December – which Kevin Drum helpfully passed along. Here it is – I hope it fits in the comments field…

    Again, dont ask me how exactly each item works, but Galbraith’s definitely someone I’d listen to..

  2. engineer  •  Feb 9, 2009 @5:27 pm

    I agree with the general impact of each of the items listed here, but to provide true stimulus, this spending must be additional spending. Food spending does have a great Keynesian multiplier, but you have to give the money to someone who is not already buying food or get people to buy more food. By extending unemployment benefits, are you going to get more spending from the unemployed or are you just going to allow them to not run up credit card debt? I think both of these items are great policy because they prevent or mitigate the very human side of an economic downtern, I just don’t see how they generate spending. Infrastructure spending is the first item on the list that will, no kidding, guarantee that additional money enters the economy. I also think that the table above assumes a rational behavior in the marketplace. There are several tax cut items on here that would have the desired multiplier effect in a normal economy. But we’re in a panic now. People are not going to spend additional money if you just give them some. I don’t think that tax cuts at any level will have a stimulus effect until people start to see the economy in a rational way, and I think that is a year off.

  3. sozobe  •  Feb 10, 2009 @7:08 am

    Nice post, engineer!

    Re: the tax cuts, I used to think that but read something in the New Yorker that changed my mind. I blogged about it here:

    http://observationalism.com/2009/02/02/consuming-from-income-not-wealth/

    Basically, if the tax cuts get into pockets via paychecks (less withholding), they’re much more likely to be spent than if they get into pockets as a lump-sum check.

  4. squinney  •  Feb 10, 2009 @7:34 am

    I would grade the extension of unemployment benefits higher, perhaps as high as a B on stimulus. I’m looking deeper than just the recipient spending more. If the unemployed are able, through receipt of unemployment benefits, to continue to pay for their rent/house payment, electricity, car, gas, insurance, credit card debt, etc. then all of the people and companies involved down the line stay in business and employed.

    We can’t have millions of unemployed passing their misfortune onto the apartment complexes, mortgage companies, car industry, banks, states, etc if we ever hope to stop the downward spiral.

  5. engineer  •  Feb 10, 2009 @7:58 am

    Thanks.

    I’ve read a lot of these articles recently and my take is that they miss a fundamental point – people are scared. They are not making rational spending decisions based on the amount of money in their checking acounts because they are uncertain of where the economy is going. Maybe I should say that they are making completely rational decisions based on their potential situation and the risk of not having savings versus the reward of instant gratification. The down side for the economy is that consumer spending is dropping at a much faster rate than the economy can automatically correct for. My thought is that the old supply and demand curve says that if demand drops, then supply will correct, but the demand has dropped so fast that manufacturers have built a surplus and are taking dramatic action to reduce supply, not just to the level of demand, but to the level where they project demand to be and they project that things are going to get a lot worse. (My experience with business forecasts are that they essentially connect the last two points. If things are down, they will be down forever, if they are up, happy days are here.) In this environment, I think people either people will save their tax cuts or they are already living on debt and it will just slow the rate private debt is growing at the expense of public debt. Of course, all these articles could be right instead of me. Always a risk.

    That said, I am all for adjusting the tax code to be more progressive which is what I think the President would like to do. Taxes on the rich essentially do nothing to the economy (within reason). An few extra thousands in taxes is not going to stop the multi-millionaire down the road from going out on his boat, in fact I doubt he’ll notice it. In better times, adding that money to the lower end of the economic spectrum would provide stimulus and also provide real standard of living improvements.

  6. engineer  •  Feb 10, 2009 @8:00 am

    Just as an aside and not directly related to the original post, this article on the Great Panic of 1907 shows a lot of parallels with our current crisis, and least on the banking side.

  7. FreeDuck  •  Feb 11, 2009 @1:21 pm

    Nice round up. I agree that people should talk more about your last item — education spending. I think that right now this is a no-brainer. At some point someone is going to have to pay for all of this. It would be nice if we could show them that they benefited from this spending in ways that are good for the country.

    Also, and this may just be a reflection on the last few stimulus bills, I don’t really believe in stimulus legislation. I would rather just see a bill for infrastructure and education spending and let that be that.

1 Trackback

Leave a Reply

Allowed tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>