Our Government in Action — Will Stimulus Succeed?

By Marc Seltzer; originally published on November 17, 2008, at politicsunlocked.com

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Know Your History
The Federal Reserve lowered interest rates back in 2007, with hopes of persuading businesses to borrow more money, bolstering their operations and growth.  Unfortunately, there is a considerable lag time between when rate cuts are enacted and resulting increases in business activity occur.  These rate cuts may have stopped even more dramatic declines than we are currently seeing, but they certainly have not reversed the downward slide in stock prices or business activity leading the global recession.

Consumer and business spending reflects confidence in stable prices, employment and business prospects.  As exploding oil prices sucked up a disproportionate share of family budgets and business profits and as real estate values declined, confidence fell.  Now, with the unemployment rate rising significantly, people are increasingly less confident, and more importantly, spending less, regardless of whether they have a job or not.

Now What?
The talk in Washington and near water-coolers around the country, concerns fiscal policy related to revenue and spending.

There are two approaches:  Lowering taxes to leave money in private hands and government spending to boost commercial activity and jobs.

Polls have found that the middle class tended to pay off debts and save for a rainy day with recent tax rebates, although these rebates were meant to stimulate spending in the economy.  Small tax cuts for a distressed middle class may ease hardship in the heartland, but have not stimulated the economy as predicted.

On the other hand, rebates for the lowest income segment of society are immediately put back into the economy, being used on day-to-day necessities.  Tax cuts for wealthy Americans may promote entrepreneurial enterprise, but were already significantly lowered during the Bush administration.

President-elect Obama campaigned against the widening gap between the richest members of society and the middle class, so it is unlikely he will lower high-end income taxes further.  However, Obama may decide to delay repealing Bush’s tax cuts for the wealthy, so that in the near term, this money could enter the economy directly rather than being paid to the government.

Government spending programs also face a significant delay from the passage of legislation until full implementation.  If we could predict recessions more than a year in advance, it would be highly advantageous to commence most of our nation’s infrastructure spending before recessions and slow public spending when the economy heats up.

Traditional stimulus legislation allocates public money for infrastructure, although bailing out the auto industry could also be seen as maintaining or promoting economic activity.  Spending on defense programs such as FDR’s Manhattan Project or Reagan’s Strategic Defense Initiative, “Star Wars,” also created jobs, as did civilian spending, such as the Kennedy’s Moon Mission and the great dams of the Tennessee Valley Authority.  “Star Wars” led to a boom in civilian software and Internet technologies, which were responsible for a lion’s share of the prosperity and productivity gains in the 1990s.

President-elect Obama gave a hint of his thinking on fiscal stimulus recently, responding to a reporter’s question about aid to the auto industry, “It should be a bridge to somewhere, not a bridge to nowhere.”

The real risk with government spending is not deficit, but waste.  Temporary deficit spending that produces a stronger economy, more prepared to compete in the global marketplace, is well worth the cost.  Infrastructure such as bridges, ports, green technology and alternative energy or even a trained and educated workforce, that advances the productivity and competitiveness of the nation, creates employment and serves the long-range national interest.

However, if the money only temporarily stimulates jobs and spending, but produces no long term productive gains, it will be just a “bridge to nowhere,” the moniker attached to an expensive and unnecessary Alaskan pork-barrel spending project.  Such wasteful spending not only uses up limited resources, but increases the deficit without providing improvement to the foundation of our future economic prosperity.