Nathan Scandella (personal)

Stimulus

Now that we've committed to a massive economic stimulus, it's probably (past) time for me to render an opinion on it. First of all, I'll discuss stimulus in general, mainly because I haven't yet had a chance to study the details of the recently passed stimulus bill.

In general, I'm in favor of large government stimulus during times of severe economic downturn, even if it results in purely deficit spending. Of course, it would be a lot better if that deficit spending didn't come on the heels of 8 straight years of deficit spending, but that's water under the bridge. Nobody aside from me seems to be very concerned with our comfort level with spending money we don't have, even in times of plenty.

I believe that stimulus is necessary, because the psychology of fear has already taken over the country. Our economy is normally based on consumer spending, which is at the discretion of folks like you and me (or like me and me, since nobody reads my blog :). That might not usually be a problem, since people don't usually decide en masse to stop spending all at the same time. Now they are. In order to keep our economy moving, or even just to minimize the dislocation we're currently experiencing, spending needs to continue to occur. If the private sector, which includes banks on the lending side, and businesses and private individuals on the borrowing side, has decided it's going to severely cut spending, there really is no other option other than to force spending through the government.

It doesn't take much of a brain to realize that cutting spending (as a society) won't get us out of recession. But, most actors in society don't act with society's best interests in mind. People are acting out of self-preservation, understandably. But, the role of government is to act in the best interests of society. People may know that continuing to make reasonable purchases is the way to economic recovery, but if they're afraid that their neighbors won't join them, then they feel like they're sticking their neck out. Spend when others aren't and you'll consume your savings, and very well lose your job at the same time. So, the dominant selfish strategy is to save. Even if you get tax breaks, there's a good chance you'll just use them to give yourself a bigger cushion. That's because the fear has already set in.

The only way to break the cycle is for the government to force us to spend, at the expense of future tax increases. It's a little bit like teaching a toddler to swim. A scared parent may not be willing to let them even get near the water. But, a rational parent knows they just might need to nudge their child, to get them to test the waters. They've seen people learn to swim before, and they have the rational belief that their child will probably be able to learn, too. With careful oversight, the chance of the child drowning during swimming lessons are low. But, of course, the frightened child can't be convinced of that! The Federal Government needs to be that calm, rational parent, not the one freaking out because their baby is crying.

That's the general philosophy. Now, onto the specifics.

There have been studies conducted investigating the efficacy of different stimulus measures. A rational person need only look at past results, and use them to craft new stimulus policy. Of course, our politicians aren't rational. As Bill Maher says, they're "irrationalists" (aka religious folk). They have ingrained ideologies about what kind of fiscal policy works, and their minds can't be changed by so-called data. Mine can, however.

Moody's put together this analysis more than a year ago:
http://www.economy.com/mark-zandi/documents/assissing-the-impact-of-the-fiscal-stimulus.pdf

In it, we find a table of various types of stimulus measures, from different kinds of tax-cuts, to an array of spending measures. The different alternatives are graded, based on the ratio of dollars spent (or tax revenue lost) to Real GDP increases, 12 months after the money gets spent. Many of the numbers are near 1.0. It's tempting to think that anything with a score of better than 1.0 should be something that we do, in good times or bad. Unfortunately, that's a misconception. This ratio is really sort of phony. It appears to be dimensionless, but it really does have dimension. The dollars on one side of the colon (":') are not the same as the dollars on the other side. When we use $1 of deficit spending, that dollar gets added on to our mountain of debt, and stays there for as long as we have a non-zero deficit (you might call that "forever"). However, a dollar of GDP is measured as a dollar of goods and/or services produced in one year. When we print new money, I believe that one dollar bill changes hands approximately 7 times in its first year of activity. This means that there are $7 of goods and services out there that the dollar was involved in transactions for. So, a ratio of 1.0 may not be that great. Certainly, it doesn't mean that the "investment" completely paid for itself. Among other things, every dollar we print actually erodes the value of all the other dollars out there (by a very small margin). So, my point is that this ratio has very little absolute meaning. What it is useful for is assessing the relative values of different stimulus measures, in as much of an apples-to-apples way as is possible.

Among the most effective uses of deficit spending for stimulus is infrastructure. Spending on infrastructure creates jobs to build the infrastructure, but then becomes an enabler for other industries that then use the infrastructure. It may require large spending up front, but you're left with something in return. Some of the more successful programs of the New Deal fell into this category. Jobs for jobs' sake is a bad idea. But jobs that leave us with new infrastructure help create, and retain, more jobs. As an environmentalist, I am conscious of simply building more roads, creating more sprawl. But, effective use of infrastructure spending can be repairing existing roads, bridges, water and electrical plumbing. Building power transmission lines to connect solar farms to metropolitan areas. Bringing real broadband internet connectivity to all of America. Not simply 1.5Mbps DSL. DSL can hardly even be referred to as broadband. High speed links that operate in excess of 20Mbps in both directions (upload and download). These are the tools that allow us to connect to the rest of the world, teleconference, and telecommute. Spending time stuck in traffic doesn't help anyone in our economy, outside of oil companies. Allowing business to be conducted more efficiently should be a primary focus of the stimulus. The measures that ease traffic congestion, speed data connectivity, make utilities more reliable, and end-user costs lower are those that return a profit on the initial investment. If infrastructure spending, according to Moody's report, is already more effective than tax cuts, only 12 months down the road, imagine the effect after several years. Temporary tax cuts are not the gift that keeps on giving, but infrastructure leaves you with something that pays you back year after year.

A dollar spent can produce far more than a dollar in return. Unfortunately, they usually don't. And recently, our debt dollars have been doing less and less. See Karl Denninger's post on the impact of debt over the last few decades. This brings us to a common theme of stimulus debates. Many don't want stimulus packages to turn into "political" affairs whereby legislators steer the money where they think it should go. Those people would argue that a stimulus bill should preserve the status quo, but just fund the things we normally buy with government dollars. But, that's a horrible idea. Based on Denninger's graph, that type of stimulus is likely to create less than a quarter of GDP for every dollar of deficit spending. In order to make the stimulus an investment, we need to divorce ourselves from the status quo, and spend money on things we think are good long-term investments. Will Congress likely get that exactly right? No, of course not. But that doesn't mean we shouldn't even try, and instead continue to flush money down the same old toilets.

There are many instances where government spending has produced excellent returns for the economy at large. Spending on the space program, and many defense R&D projects (that does not include a low-tech ground war in Iraq!), have yielded phenomenal results in the commercial sector. The medium this blog is posted on, the TCP/IP Internet, is one such example. Does anyone know which famous Seattle-area company was part of developing the original Internet: Boeing (via their government-funded defense division) or Microsoft? I'll give you a hint. It wasn't Microsoft. The key here is spending on technologies that become part of our future. Data communication, energy technology, and basic research and development should all be part of our plan. Money that creates jobs today, and teaches us how to work better tomorrow. Teaching us to fish instead of just giving us a fish. With government procurement cycles, the fish would likely be rotten by the time it got to us anyway.

Which leads me to the next hot-button issue with stimulus: is it fast enough? Well, maybe, and maybe not. But, sitting around talking about how fast it's going to be isn't making it any faster. We need stimulus now, but we're also going to need it later. This recession isn't ending soon. Our economy will be slow for years, I guarantee it. Even if money isn't going to be spent this year, that doesn't mean that it doesn't help right now. If the government commits money for FY2010 to a contractor, that helps give the contractor certainty about their business next year. If the contractor barely has enough work for this year, and has no firm contracts for next year, they'll probably be laying off workers soon. If they know they have a big project coming online in a few months, that may affect their decision to let people go now. Or they may be able to furlough workers temporarily (instead of laying them off) if they know they'll have business to support them in the foreseeable future. So, while sooner is better than later, we have to stop thinking that all stimulus needs to be consumed immediately. That rationale leads to a lot of bad spending decisions, which provide very poor returns on investment.

I've also heard critics argue that there's just not enough infrastructure projects to spend money on now, and so we need to utilize tax cuts (which the Moody's study rates as less effective than infrastructure spending). That is nonsense. Just in Seattle alone, I can think of a handful of large projects, all needed right now, or already underway. The 520 bridge replacement, the Alaskan Way Viaduct replacement, the Monorail, Sound Transit. I happen to know that the Viaduct alone is a $4B project. The Monorail project was around $11-14B, and got cancelled after several years of design, simply because we couldn't afford it. Just those two projects alone represent more than $15B dollars. Multiply that by the largest 50 US Cities? There's your stimulus package. No pointless Republican tax cuts (capital gains?) needed. Furthermore, Seattle, supposedly one of our high-tech hubs, doesn't even have a truly high-speed internet provider (no FiOS in Seattle). One local vendor charges $380/month for 3Mbps x 3Mbps internet access. As a small business, I simply can't afford that, and it's not even all that fast.

Stimulus can work. It can give us back more than we put in. Of course, we need to use any "profits" to pay down our debt, not continue to squander it, as we've gotten used to doing. If we're going to maintain any manufacturing in this country, become energy independent, and move towards renewable sources of energy, it's going to take massive government support. And a stimulus package is the perfect way to kill two birds with one stone. If we can find another stone to throw at the War Hawks (that includes you, President Obama), then our bottom line starts looking even better.

Posted at 12:39AM Feb 24, 2009 by Nathan in Economics  |  Comments[1]