What To Do With The Stimulus

The Democrats’ proposed stimulus plan has got to be the most brain-dead response to our current economic crisis. Even if the stock market continues to rally, and if credit markets loosen up, we’re likely to see a really dramatic drop in investment. There is already word that private sector investment in technology is likely to go down markedly over the next year or so–that may be the tip of the iceberg. Government has to step into the gap here.

The criteria for stimulus should be simple:

a) Will the money be spent on things we should have been buying before the financial crisis? We’ve been massively underspending on public transit, energy infrastructure, scientific research, etc. If we’re going to be spending a great deal of money by way of stimulus, use it for things that will produce higher economic growth long-term. I think this is absolutely the most important criteria, especially because the Democrats seem to be focusing so much of their stimulus on proposals that simply maintain consumption (like unemployment insurance).

b) Will the money get into the economy quickly enough? Mark suggests that doubling federal scientific research spending fits this criteria. He’s right. Rubin suggests injecting lots of money into infrastructure projects that are already up and running. Lots of these kinds of projects are ridiculously spread-out, in order to save money. It’s not that hard to ramp them up to the speed that would be efficient in construction (rather than budgetary) terms. Increasing Medicaid/Medicare reimbursement would do the same thing (the former would also help state budgets). Maybe also speeding up government programs for upgrading IT systems would fit the bill–many parts of the federal government, and many state governments, still have fairly miserable computer systems. This would help the tech sector get through a slump in private investment.

c) Will the money actually lead to more investment? Tax cuts are not terribly effective at doing so when financial confidence is low–they just lead to more savings, but in a slump savings doesn’t equal investment. Having the government spend makes more sense.

d) Will the things done by way of stimulus make pursuing Democratic priorities easier once the crisis has passed? Some kinds of spending will have positive political feedback effects. I like the idea of having a fair amount of highly visible spending, that helps to convince the public that government can be sensible and effective (at the same time that the market is appearing less and less so).

A couple of other considerations that stimulus-designers should consider:

a) Put in place tax increases a few years out to help pay for current borrowing. The wealthy are flat on their back now, and will have a hard time fighting back against increases in their taxes a few years out. The estate tax, in a reformed form, would fit the bill. A Tobin Tax might make sense as well. This will also help to push back against claims of fiscal madness–we’re spending now but we’re planning on getting some of the money back from those who will benefit the most, once times have gone back to normal.”

b) Exercise massive restraint with this stimulus package. They should announce that they’ll be putting NO earmarks in the plan, and then stick to it. Say, “We’re in favor of big and ambitious government, but not corrupt, featherbedding government.” Put in place some sort of oversight mechanism to measure and publicize the effects of the additional spending. Maybe also accompany it with some longer-term measures to improve the quality and effectiveness of government.

Right now the Democrats are in danger of doing the obvious, which will be bad economics, bad government, and bad politics. Someone needs to get them thinking bigger.

Author: Steven M. Teles

Steven Teles is a Visiting Fellow at the Yale Center for the Study of American Politics. He is the author of Whose Welfare? AFDC and Elite Politics (University Press of Kansas), and co-editor of Ethnicity, Social Mobility and Public Policy (Cambridge). He is currently completing a book on the evolution of the conservative legal movement, co-editing a book on conservatism and American Political Development, and beginning a project on integrating political analysis into policy analysis. He has also written journal articles and book chapters on international free market think tanks, normative issues in policy analysis, pensions and affirmative action policy in Britain, US-China policy and federalism. He has taught at Brandeis, Boston University, Holy Cross, and Hamilton colleges, and been a research fellow at Harvard, Princeton and the University of London.