Q. What do you think of the American economic stimulus packages being proposed (as of early 2009) and what should be in a stimulus package?
A. Leaving politics aside, at a fundamental level, the objectives of an economic stimulus package should be to (a) get the economy going again near term (i.e., create jobs and economic growth) in a way that hopefully has longer term benefits and (b) ease the transition to new employment for folks who are unemployed as a result of the slumping economy. Clearly there are social (e.g., health care, education, home ownership), environmental, energy, financial regulation, and other objectives that a government might attempt to address with a stimulus package as well.
From the perspective of velocity of economic improvement, many “true infrastructure projects” will not yield near term benefits. Project definition, engineering, and permitting processes will delay the bulk of investments in bridges, roads, dams, upgraded and expanded power grids (e.g., using superconductors to increase electricity transmission for the same footprint, etc.), new power plants, high speed rail links, new airports, new schools, and the like for one or more years. The development of economically and environmentally viable alternative energy solutions will not be completed in a year either. Having said this, these types of initiatives ultimately tend to generate tangible economic benefits. Given the diffuse nature of the benefits (i.e., the benefits don’t accrue to an easily defined group of investors who can therefore show a good ROI), many true infrastructure projects should probably be undertaken by the government for the greater good. To the extent that project definition, engineering, permitting, some equipment fabrication, and some construction create jobs during a weak economy is good.
The fastest way to put money to work in the economy is to stop taking money from consumers and employers. A near term (1-2 year), temporary reduction in payroll, personal income, and corporate income taxes will immediately leave money in the hands of consumers and employers to spend, save, invest, or pay down debt as needed. Even if a consumer merely saves the money in a bank account, the bank’s capital structure is strengthened and the bank can loan multiples of the saved amount into the economy. Likewise, creditors will spend or re-invest the proceeds from debt repayment. Leaving money with taxpayers will also spread the economic benefit across more economic sectors.
Current unemployment, COBRA, and other similar benefits tend to be of short duration, offer low benefits, or are too expensive for the beneficiary given the current level of economic distress in the country. A near term, temporary increase in the size and duration of these benefits to reflect the difficulty of finding employment in a difficult environment will be helpful to many.
In summary, a stimulus package should include a mix of true infrastructure investments, high velocity temporary tax reductions, and temporary increases in transition benefits. Governments should avoid long term, large budget deficits which strain their debt capacity and create significant inflation. Trying to address too many long term policy issues of great complexity in a crisis-driven economic stimulus package will have negative and unintended consequences due to the lack of planning and evaluation.
From the perspective of velocity of economic improvement, many “true infrastructure projects” will not yield near term benefits. Project definition, engineering, and permitting processes will delay the bulk of investments in bridges, roads, dams, upgraded and expanded power grids (e.g., using superconductors to increase electricity transmission for the same footprint, etc.), new power plants, high speed rail links, new airports, new schools, and the like for one or more years. The development of economically and environmentally viable alternative energy solutions will not be completed in a year either. Having said this, these types of initiatives ultimately tend to generate tangible economic benefits. Given the diffuse nature of the benefits (i.e., the benefits don’t accrue to an easily defined group of investors who can therefore show a good ROI), many true infrastructure projects should probably be undertaken by the government for the greater good. To the extent that project definition, engineering, permitting, some equipment fabrication, and some construction create jobs during a weak economy is good.