Friday, June 27, 2008

After the Stimulus Payments, Plan B

Consumer income, after taxes, was up 5.7 percent in May, according to statistics released today by the Commerce Department. The increase is the result of the economic stimulus payments made by the Internal Revenue Service; apparently about half of those payments were made in May. Consumer spending increased by 0.8 percent. That is only a sixth of the boost in income.

Gasoline prices were also up, 10 percent in May, and that came on top of a 10 percent increase in April. And so the initial consumer spending from the stimulus payments was entirely absorbed by higher energy prices. Consumers were spending more money, but not getting more. Many consumers set aside their stimulus payments for summer vacation spending. Here too they will be absorbed by higher fuel prices as people drive or fly to their vacation destinations. Gasoline prices are up about 3 percent in June, and oil prices hit a new record high this morning. Despite the stimulus payments, real consumer spending is falling.

Some of our people in Washington are saying, “Well, hey, if one round of stimulus payments didn’t work, let’s try a second one.” This sounds to me like my friends who want to take a second trip to Atlantic City because they lost money on their first trip. The federal government is not so rich that it can just throw money around. (Rather, it has the largest debt of any institution in history.) I have a better idea.

The two huge drags on the U.S. economy are energy imports and overseas military spending. Energy is more than half of all U.S. imports and growing rapidly as the price of oil goes up. The high level of imports is one of the biggest causes of the continuing decline of the U.S. dollar. Overseas military spending is also money lost to the U.S. economy, as most of the money stays in the region where we spend it. And this is not a trivial amount of money, but several percent of GDP, an amount similar to the growth in national income. In other words, we may be giving up the chance to grow economically as a country by spending so much money placing our military forces in other parts of the world.

So to stabilize the economy, I am proposing a substantial cut in overseas military spending, perhaps a reduction of 50 to 70 percent. We could bring home all the troops from Iraq, most from Kuwait and Qatar, and some others.

It costs much less to keep troops in the United States than in the more distant reaches of the world, and we wouldn’t need reservists on active duty, so there is money saved by bringing the troops home. We could spend most of that money on investments to reduce energy imports. A good way to start would be with projects to install high-efficiency lighting and rooftop solar panels in federal buildings. The federal government is the world’s biggest user of energy, so any plan to bring the country’s imports in balance with exports has to start with reducing the federal government’s energy bills.

I can already hear the critics saying that this plan is too small to solve the country’s economic problems. True enough. We would need to do more than this. But those stimulus payments didn’t really do anything.