What I Want in a Stimulus Package

It is interesting to see what is regarded as spending for stimulus, and how this is debated. I’m afraid I don’t give the Democrats too many points for putting it together, and the Republicans really haven’t done all that much about tearing it apart. Since I’ve complained about it a bit, I thought I’d give some thoughts on what I think would work, so that people could complain about what I propose. And of course, I must provide apologies for writing so far out of my own field of study again.

While I know that when the word “billion” is involved, it’s a great deal of money, minor increments in the total spending packages, such as were negotiated for the Senate version, are not going to make that large of a difference. On the other hand, tax cuts aren’t all that helpful a suggestion as part of a stimulus package either, though they might well have their place in another policy.

When you’re working entirely in deficit range, even tax cuts work very much like spending, only somewhat worse. The government decides where to distribute the tax cuts, just as it decides where to spend the money, and it often doesn’t do nearly as good a job with the cuts as it does with the spending.

OK, am I a raving lunatic? Perhaps, but I don’t think this is evidence of that. The problem is that the tax cuts are not essentially returning money to people who earned it. Because of the shape of the tax code, they are redistributive, and thus they are similar to targeted spending, only spending targeted at people who will not necessarily be all that good at creating new wealth. It’s the folks who created wealth that we took the money from in the first place.

There will be an improvement in production based on tax reductions, but that isn’t infinite, else a 0% tax would produce the most revenue. In practical terms a 0% tax won’t even produce the greatest economic activity, because we do need infrastructure and regulation. Tax cuts targeted at businesses, at least if those businesses are potentially productive, are an improvement on this, of course.

The first thing both opponents are proponents of the bill need to decide is whether spending money we don’t have is a good way to stimulate the economy, and whether we can handle the potential inflationary pressure after we do it. If we start a half a trillion dollar deficit, and add another trillion to it (and this is ignoring the financial system bailout), something is going to happen. If we bring the economy out of recession a few months quicker, and add a few years of inflation and assorted associated problems, we may not consider it an overall win.

There are a number of voices in the media who are claiming that there is no question that we must spend to stop the recession. Rachel Maddow called it Economics 101. But it is not that well established, and bluntly looking at the last few decades I’m not all that inclined to trust the collective wisdom of economists. But there are quite a number of would disagree at this point. The loud claims that stimulus is “obvious” and “Economics 101” ignore a pretty strong body of contrary evidence.

It’s on this point where I would respect those Republicans who take a straightforward, “this isn’t the right idea at all” approach. Of course, there’s no negotiation there. The gulf between stimulate and don’t stimulate is a bit big to bridge! But at least it’s a position with integrity.

I’m personally inclined, nonetheless, to support the idea of spending to stimulate the economy. But contrary to what seems to be popular opinion, I think it very much does matter what we spend the money on. In terms of stimulus, the a business does not provide a very good analogy to the national economy. I cannot, after all, borrow large amounts of money, pass it around, and expect it to stimulate my single business. That is a course of action open to government, but not to me.

But I can borrow money for a business, and as any businessman knows, it’s very important what I do with it. If I’m borrowing to make payroll, I better be very concerned and have good reason to expect the situation to change for the better, and soon! If I’m borrowing to add a new plant and increase productivity, that’s likely a good bet, presuming there’s demand.

So if I were going through this bill and looking at what I think is a good idea and what is not, I would actually largely ditch those tax cuts. In a considering the entire bill lives inside the deficit, I think they’re going to have less effect than is hoped. On the remaining spending, I’d ask for one of two things: 1) Is this an improvement in our nation’s infrastructure that is going to produce new economic activity, or 2) Is this something that will have such a substantial effect on the nation’s mood that it will tend to stimulate individual activity. Under the first category, one should ask whether government is either the only agency, or the best agency, to carry out that particular activity.

As it is, much of the spending in the bill looks good to me, though some of the government spending seems to me to fail the test of whether government can do it best. In the second category, I think some support for unemployment insurance is a beneficial psychological stimulus.

As examples of the first category, I think that both improvements in the energy efficiency of government buildings and investment in basic scientific research are good things.

In the first case, I think the government obviously must invest in its buildings, and given an economic downturn, investing in them now is a good idea. This is borrowing that will produce savings in the future as well as build future jobs in the technologies and techniques involved. The buildings appear to me to be winners all around. Ironically, or perhaps as one would expect, such spending was cut. It strikes me that some Republicans regard any spending that involves the ecology to be some kind of green pipe dream and knee-jerk oppose it. To be fair, I must admit that for some Democrats, if the word “green” is in there, their support is assured.

While I believe basic scientific research is a good thing, I am not convinced that government consistently spends such money well. I would prefer that the government take on tasks that it needs to see performed, such as improvements in government buildings, or in transportation, or in information technology, spend money in those areas, and in turn expect that spending to stimulate private investment in developing those technologies.

If tax cuts were so structured as to stimulate this same type of activity that would improve our productivity in the future, then those might also be valuable. As a general way of getting money back into the economy, I don’t think they will be very productive at this point.

The problem down the road, of course, is to get government to back off of deficit spending once the corner has been turned, always assuming that we do turn the corner using these methods. In the past, that has always proven a problem.