Tuesday, November 11, 2008

Fiscal Stimulus: Smart and Dumb

With all due respect to Governor Kulongoski, (and the Oregonian's Editorial Board) while fiscal stimulus in the form of government spending on public works projects is probably a good idea in this time of deep economic malaise, you can do it in a smart way or in a dumb way and, well, let's just say that his plan does not make a lot of sense.

Before I get too negative, I will admit that it is partly not is fault. State fiscal rules that insist on balanced budgets leave no room for real counter-cyclical policy. [The legislature did a tremendous favor for Oregonians in establishing the rainy-day fund, which allows for exactly this kind of counter cyclical fiscal policy but the ability to run a deficit would be much better] He is also a skilled politician and knows more about the reality of policy implementation than I. That said, just where in "fiscal stimulus 101" does it make sense to tax in one part of the economy and spend in the other? Taking money out of consumers hands in one area and putting it into another set of hands does not necessarily boost the economy. I suppose that there is a marginal propensity to spend argument: that the extra money collected from car registrations, for example will lead to a lower negative impact on consumer spending than the positive impact on spending that will come from employing construction workers who will likely spend it all. But I don't buy it. Think of the raw material purchases, equipment rentals, etc., that coincide with road and bridge projects. This is money that is going to businesses that may not lead to any extra spending than would leaving it with car owners. As a make-work project, it may help employ a particular population, but I am skeptical that overall employment will be much affected.

My other problem with his plan is the focus on road infrastructure. Again, this may be politically expedient as a job creation mechanism, but it is not terribly inspired. Investing in infrastructure to support automobiles is just plain short-sighted and will hamper our efforts to become more energy independent. Energy independence is perhaps the one thing Americans can agree on (if not how to go about achieving it): it is the trifecta of being critical to our economy, our environment and our national security - in other words to our future. Equally important to our future is a population of well educated and skilled workers. So why can't we invest in mass transit projects, renewable energy projects and education? It is true that new mass transit projects (as an example) take a long time to plan and get going, so this might not be appropriate for an immediate boost from fiscal policy, but renewable energy projects can be done quickly. So can things like tackling deferred maintenance in schools, more school programs and a longer school year, projects at public universities and tuition grants to those wanting to attend college. The common link to all of this is the eye on the future. Fixing essential transport links is fine and necessary but building bigger and more roads just creates an incentive to drive more in cars. [As a contrast, Portland Mayor-elect, Sam Adam's plan seems to be a lot better in its focus on the future - though he has a head start in mass transit projects that are already planned]

Here is an idea: how about a new tuition credit for college? This would get a lot of potentially unemployed young Oregonians in school, which would not only reduce unemployment (they would not be looking for jobs) but be an investment in their future productivity which will benefit all Oregonians long into the future.

Here it is in a nutshell. Fiscal stimulus 101 calls for deficit spending in the time of recession to add new money into the economy, not for shifting money around through taxes and transfers. Without the ability to do deficit spending, any tax and transfer policy should emphasize investment that will pay off in the future, not just the employment of same at the expense of others. It is pretty clear what the high priorities for investment are in the 21st Century: education and energy independence. If we are going to fight this recession, lets do it in a smart way.

Note: it turns out that persons more eminent than I are pretty smart as well.


Dave Porter said...

I agree entirely and would add two points: (1) There is no real logic to focusing entirely on construction projects. If put to work right away, teachers, researchers, etc. spend their salaries in Oregon just like construction workers (with no out of state spending on materials). Same stimulus. So, some of the funds should go to creative knowledge workers to create, develop and design the infrastructure and businesses of our 21st century economy. High on my list would be alternative forms of energy and transportation. (2) Part of gaining a competitive advantage in the global economy of the 21st century is to connect better to the emerging growth economies (China, India, Russia, Brazil). One way to do that is to teach their languages in our schools (and then send our students to those countries to study). The most effective language programs are immersion programs that start in kindergarten. We have few immersion programs and need more. Immersion programs have start-up costs (mostly staff time, some for materials). We should use the stimulus funds to invigorate our world (foreign) language programs. Such programs are more important than most roads for our economic future.

Gregory said...

The more I read this blog the more I like it. Thanks, Prof. Emerson, for continuing to run it.

My children are enrolled at the Japanese Magnet Program at Richmond ES, and while we are satisfied with the school and its efforts, it is by no means a panacea for our economic challenges. For that matter, I am not even certain the graduates of the program will have sufficient language skills to be proficient in doing business in Japan.

Back to the original post, I believe Pres. Elect Obama might, can, and should announce a "moon shot" program to become energy independent within 10 years. It is feasible, but it will require massive investments and coordinated policy responses. Much of the technology hasn't been invented yet, but that didn't stop the Apollo program. A major key to success, which Obama could pull off, is to support domestic production of ALL forms of energy, including those opposed by traditional liberals such as nuclear power and off-shore drilling, on top of wind and solar and wave/tidal. For the Big 2/3 car makers? How about government help to produce within 5 years cars that weigh 1/4 of today's cars and double the fuel efficiency based on carbon composite materials.

Much of the work would be standard infrastructure stuff (like building new power lines), but would be part of a coordinated effort instead of piecemeal make-work programs.

Doug Parrow's Blog said...

There is no question that road maintenance is lagging badly, partially as a result of inadequate funding and partly because we keep building more roads without thinking about how to maintain the ones we already have.

However, the funding that the Gov proposes from license and title fees is counterproductive. These are fixed costs that have nothing to do with the extent to which drivers actually use roads. At least the gas tax, despite its warts, has some connection to the amount of use.

The Gov's approach makes about as much sense as an electric utility basing the bulk of a consumer's monthly electric bill on a fixed account charge rather than on the amount of power consumed. It will exacerbate air quality, global warming, and traffic congestion problems.