Tuesday, July 14, 2009

How to Do a Stimulus Package Right

Today the Wall Street Journal has an op-ed explaining how the U.S. job market is worse than it looks. It talks about such details as the work week, now just 33 hours on average and shrinking month by month. Around October, the headline may read “The Part-Time Economy” after we wake up to find that we have more part-time workers than full-time workers.

It’s all basically on point, but then it calls for a “second-act stimulus” — a stimulus bill that doesn’t repeat the mistakes of the stimulus bill Washington gave us at the beginning of the year. Realistically, though, an attempt to repeat the stimulus bill would lead to a repeat of the same mistakes. A well-crafted stimulus bill would do some good for the economy, but to accomplish that, Washington would have to give up most of its preconceptions. Here are some rules I would suggest for a second stimulus bill:

  1. Stop thinking stimulus. In a average recession, economic stimulus can get the economy going again. In the current depression-like recession, stimulus has no such effect. It maybe shouldn’t even be called stimulus this year, because the whole objective is just to get some productive work out of people who would otherwise go unemployed.
  2. Think small. Well, okay, not “small” in the sense of “eating a small lunch,” but not “risking national bankruptcy” either. An economic stimulus package with a price tag so high that it produces reactions like shock and awe does not exactly generate confidence in the economy. The first stimulus bill was said to cost $787 billion, which is kind of like learning that the doctors in the hospital have injected your grandpa with 5 kilograms of stimulants. When you see that, you don’t say, “That’ll bring him back for sure!” It’s more like, “Good lord! Will he survive that?” To minimize the shock and awe effect, no single stimulus bill should go much over $100 billion.
  3. Make it labor-intensive. To qualify for a stimulus package, at least 75 percent of a project’s spending should end up in payroll to pay the wages of workers who otherwise might have been unemployed. You don’t get the economic benefit of the spending if you don’t move people from unemployment to employment.
  4. Speed up spending, but don’t buy anything extra. The purpose of a stimulus package is not to expand the role of government, but to spend on things that people can agree are governmental responsibilities. The biggest category for this is going to be transportation. We all know where the bridges are, and approximately when they are going to fall down. If we don’t replace them before they fall down, we will still have to replace them after they fall down, and then, the costs are likely to be greater. Replacing at-risk bridges now instead of next year is not buying anything extra. It is just meeting a governmental responsibility sooner.
  5. Be strict about returns on investments. Every legislator says all their spending proposals are investments. For stimulus purposes, a good investment is one that improves the government’s bottom line, usually by reducing future expenses. The prime example of this is improving the energy efficiency of buildings. Seal cracks and add insulation to a building, and future energy bill will be lower, and some such projects offer impressive returns on investment. But to qualify, it has to be a government-owned building — a courthouse, school, barracks, etc.
  6. Make the stimulus pay for itself. About one fourth of the stimulus spending comes right back to the government in the form of income taxes and lower unemployment compensation. Then, use the energy cost savings and reductions in future transportation infrastructure spending (because you are doing some of that spending in advance) to pay off the stimulus debt.

With this kind of approach we would see a stimulus bill that would have little resemblance to the so-called stimulus we saw at the beginning of the year. It would create more jobs, and do so with no net cost to government. It still would not make the recession end sooner, but that does not mean it would not have an effect. The impact would be huge for the people who spent their time working instead of worrying, and all the work they would accomplish would be real work with real consequences.

Look at it this way: what kind of country lets its bridges collapse while 25 million of its workers are sitting at home doing nothing? Quite obviously, the only reason the United States finds itself in this situation is fear. But really, when we can put people to work, doing work that we know has to be done soon, there is nothing to fear about that. Can Washington put together a second stimulus bill that doesn’t repeat the mistakes of the first? Politically speaking, probably not. But if it wants to try, these are the rules I believe it should follow.