The Stimulus: Too much and not enough

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerAfter I made some cautionary comments on the pending fiscal stimulus plan on a local television news program, a friend said that I “sounded like a Republican.” I never did find out whether this was intended as a compliment or a criticism. Regardless of her intent, I found her comment troubling. Should caution have a partisan label?

I despair that elected officials seem to remember only half of a course in economics. We get more-or-less balanced policy in normal times because they remember different halves. Republicans remember 18th Century political philosopher Adam Smith proclamation that competition can harness initiative and build a stronger economy—yet forget Smith’s injunctions against concentrations of economic power. In this crisis, Democrats remember 20th Century economist John Maynard Keynes’ observation that public spending can stimulate the economy—yet forget that what we spend our money on and the amount of debt we incur matters rather a lot.

The just-passed fiscal stimulus plan did not bring out the best in either party. The Dems won this round. Yet the fiscal track record of Republicans over the past eight years has been unenviable, so I not have been happier had they held sway—I’d just be upset about different things.

I can support many provisions in this law. Fiscal stimulus works by boosting spending, either by consumers and business, or by government directly. Cutting the taxes of Americans who live from paycheck to paycheck certainly qualifies. Re-starting the nation’s many stalled construction projects will increase construction worker payrolls and spur worker spending. Accelerating the restoration of crumbling infrastructure—money we’d have had to spend in the next few years regardless—makes good sense.

Yet I’m troubled by the number of provisions in this bill that simply add to existing program budgets or begin new ones. A recent headline in the New York Times proclaimed that Education Secretary Arne Duncan has his work cut out for him figuring out how to disburse the $100 billion in stimulus money that has landed in the Education budget. One suspects the following rationale: “Who is going to campaign against us for spending more on education? Let’s send $100 billion to Arne Duncan and let him figure out what to do with it.” Will this boost employment? Sure—Duncan will have to hire up at the Education Department to get the money out the door.

Health care was another popular target for new money. Liberals and conservatives alike struggle to balance the benefits and costs of new drugs and new therapies. So Congress added a billion dollars to the stimulus bill to fund research on the efficacy of new approaches to health care. I wasn’t aware that the unemployment rate among health care researchers or Washington functionaries was a particular problem. Why spend the money now? Because Congress can justify pretty much any spending by claiming it is “good for the economy.”

What else was passed? Out of curiosity I printed out the first 20 pages of so of the House appropriation bill, H.R.1. Let’s start right at Title I, Agriculture, Rural Development, Food & Drug Administration and Related Agencies. Congress just decided to spend an additional $24 million for agricultural buildings, $22m for the Ag Department’s Office of Inspector General, $176m on Ag Research Service buildings, and $50m on Farm Service Agency salaries for “maintaining and modernizing the information technology system.” Watershed and Flood Prevention Operations got $290m (including $145m to purchase & restore floodplain easements). That’s the first two pages of 800 some. In addition to many other piddling sums (just a few hundred million dollars each), Title I goes on to award $11 billion to rural housing, $1.4b to rural water, waste water and waste disposal programs, $2.5b to rural broadband, and $500m to the WIC program, all worthy expenditures.

Some of what I list above will be stimulative and can be delivered quickly. Yet it appears that every Member of Congress got some cash for his or her particular priorities.

The economy needs this fiscal stimulus. Yet we’ve added vast sums to countless federal programs and initiatives that simply can’t be spent both quickly and wisely, thus will either contribute little to jump-starting the economy—or needlessly waste our capacity to borrow in the future. Moreover, as Treasury Secretary Timothy Geithner said last week, the other task we must assume—repairing crippled markets in finance and real estate—will require more of our national treasure, perhaps much more.

This crisis has made us poorer, not richer. When the dust settles and the economy rights itself, we’ll be looking at a level of indebtedness we’ve not seen since World War II. With the rest of the world’s economy in the ditch beside us, U.S. Treasury debt is in big demand today, allowing us to borrow on world markets at very low rates. It will not always be so, particularly as our need for credit expands dramatically and the rest of the world economy recovers.

I’d rather my tax dollars were going to be spent more cautiously—more on immediate stimulus, like tax cuts to working people, and less on new initiatives we might find unaffordable in normal times. Nor should the federal money let states “off the hook” for actions that rationalize the delivery of services at the state and local levels. Another famous economist, Joseph Schumpeter, argued that the strength of capitalism was its tendency toward “creative destruction”—hard times forced hard decisions on owners and managers. The economy became more productive as a result. Let’s not use federal money to fully insulate the states from the productive reorganization thrust upon them by the slowing economy.

But the bill has passed. Now our task as taxpayers shifts to accountability. Let’s hold the President accountable for his promise of transparency. There may not be formal “earmarks” in this legislation, but pork typically flows through agency budgets. Necessary as the stimulus is, it cannot be an excuse to spend on programs and services that appeared to be unaffordable when the economy was booming only a few years ago. Let’s not spend money to spend money. We can’t afford it.

Kent Gardner, Ph.D. President & Chief Economist
Published in the Rochester (NY) Business Journal February 20, 2009