I'm Back

I have been thinking lately about what Republicans and Democrats get wrong. I will use Republican and Democrat as shorthand for errors more common in the mainstream of the respective US political parties whether politician or rank-and-file party member.

Republicans: Market failures do exist. For example, many industries pollute the environment. Negative externalities should be taxed or property rights should be created and those that can abate pollution least expensively will do so. Basically, you should not get to pollute and externalize all those costs on everyone else even if it is good for a particular industry or "creates jobs".

Democrats: A price you do not like is not a market failure. Gas prices too high, somebody must be gouging whatever that means. Of course, we need to have rent controls to protect those poor tenants. In most cases there was not a market failure to begin with and the "cure" causes the disease.

I have a few more brewing for the Democrats, Republicans, and maybe even a few aimed at Ron Paul and his supporters.

I just can't be too surprised

If you liked the first stimulus, you'll love the second one. Politicians, particularly Obama and Congressional Democrats are nervous that the stimulus is not enough. First, look at some basic facts and reasonable judgments.

A Few Points

A small proportion of the stimulus has been spent - A $100 billion just isn't what it used to be. In addition, a majority of the $110.3 billion was spent in the month of June. Other articles, I've seen show that even less has been spent.

Economists say that only 10 percent of stimulus dollars have been spent and the president's plan has been criticized for not creating enough jobs.

Most agree that there is a lag - The economy is a complex system and nobody expected the stimulus to work instantaneously. Given that little spending out of the total has occurred and a majority was spent last month, it is too early to know what's working. Pushing the button again won't help in the near term.

States are using the money for short-term needs - People were promised grand projects to increase efficiency and build American infrastructure. However, much of the money has been used to close short-term budget gaps.

Cash-strapped states have used federal stimulus dollars to close short-term budget gaps and avert major tax increases but generally have not directed the money toward long-term expansion, according to a new report.

I had a few other observations, but these are the most important ones that I have for right now.

How else could it have been done?

Drop it from helicopters
If you remember the great economist Milton Friedman, he proposed that we "drop money from helicopters" in the event of a liquidity trap. This bypasses the slow and often inefficient process that we face in finding "shovel-ready projects" (or the latest phrase we want to use). If individuals receive money they are limited to a few broad options to dispose of the money.

• Spend or invest
• Save
• Pay down existing debt

If you believe that deficit funded fiscal stimulus can stimulate the economy, spending or investing the money obviously helps matters. In this particular economic downturn, there are serious issues with the banking system. If individuals don't spend or invest, they can save put their money into banks. The banks would have a larger deposit base and less issues with liquidity. However, the best result may be that individuals pay down their high debt levels. Finance author and perhaps philosopher, Nassim Taleb, argues that the global economy needs $40 to $70 trillion in deleveraging.

Grant it to the States on based upon a simple formula
Much of the money is being administered by states for projects or being used to prop up state budgets. If we want to have the States administer the funding for projects or simply prop up their short-term budgets, a simple approach would be to transfer an amount calculated in proportion to population, state product, taxes to the Federal government paid by its citizens, or some other available measure. The Congress does not have a tendency to be succinct, and a stimulus bill on one a sheet of paper is not likely to happen (or at least short enough to be read).

Some combination of individual stimulus and grants to the States
Combining these two approaches should not result in a stimulus bill so long that you would fall asleep reading it. The approach that Congress actually used has not been shown to actually focus on long-term, high return investments. A quickly enacted and carried out stimulus that simplistically dropped money from helicopters to the States and/or individuals would likely pack more of a punch. (If you grant the initial premise that deficit spending will stimulate the economy)


I will be continuing to research this issue with the following sites:
Stimulus Watch
Recovery.org

Thanks for reading, tell your friends.