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.

"An international mathematics research team announced today that they had discovered a new integer that surpasses any previously known value "by a totally mindblowing shitload." Project director Yujin Xiao of Stanford University said the theoretical number, dubbed a "stimulus," could lead to breakthroughs in fields as diverse as astrophysics, quantum mechanics, and Chicago asphalt contracting."
http://iowahawk.typepad.com/iowahawk/2009/02/numbers-in-the-news.html

Maybe we do really need funds to research bear DNA. Certainly, some bridges to nowhere will help. I think we can all agree on that. This bill is so big that it is really is incomprehensible.

"There are 1011 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers." - Richard Feynman, US educator & physicist (1918 -
1988)

I have serious doubts that borrowing hundreds of billions of dollars to spend is a good idea. I really don't think the Congress or Senate has any idea what investments have a positive net present value. Even if they do know, there is a temptation to get as much as possible for your district whether or not it makes sense economically. This stimulus bill was sold as a way to modernize infrastructure while putting people to work. This is a dubious reason at best, jobs are a cost. Labor is like a machine or raw material in the production process. Using that input takes it out of the economy and from another productive use. Opportunity cost, opportunity cost, opportunity cost. Parts of this bill are entitlements, which probably have no realistic end in sight. So, much of this stimulus may not be reigned in when it outlives its usefulness.

"Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth! " -- Ronald Reagan

Take some time to watch this speech or read the text of it.

Some skepticism about infrastructure spending

Massive infrastructure projects are being sold by the administration as a way to provide jobs in the short-term and invest for the long-term economic growth of this country. With so much money being spent at once and a belief by many that the current government will make the right decisions, we are setting ourselves up for a "lost decade."

In 1990, Japan's "bubble economy" collapsed. Like our recent economic troubles, it started in real estate. Japan's case was much more extreme in degree. In the Ginza district of Tokyo, some property went for $139,000 per square foot in 1990. Japan propped up existing banks, and banks did not recognize defaulted loans. They created "zombie banks" propped up year after year by the government and pretended they were solvent.

Japan's fiscal policy was to spend on massive public works projects to keep people employed. Airports with no airliners wanting to fly there, concrete tetrapods to prevent beach erosion that actually do the opposite, roads and bridges to nowhere, and countless other projects that did not bring Japan back to prosperity.  

Creative destruction was not allowed to work in Japan. Older firms that were no longer productive were propped up by banks, and Japan's economy was frozen. To show for itself, Japan has the highest national debt as a precentage of GDP in the industrialized world, 170%.   To think that it can't happen here is to disregard the record of inefficiency and contradictions of the US government and governments in general.

Stimulus Package

"The way I see it, the first job of my administration is to put people back to work and get our economy moving again." -- Barack Obama, 1/16/09

Voters and consequently politicians have among other biases, a make-work bias. This make-work bias misses the point of a job and how the economy works.
"The Dallas Fed economist W. Michael Cox and the journalist Richard Alm illustrate this process in their 1999 book Myths of Rich and Poor, citing history’s most striking example, the drastic decline in agricultural employment: “In 1800, it took nearly 95 of every 100 Americans to feed the country. In 1900, it took 40. Today, it takes just 3.…The workers no longer needed on farms have been put to use providing new homes, furniture, clothing, computers, pharmaceuticals, appliances, medical assistance, movies, financial advice, video games, gourmet meals, and an almost dizzying array of other goods and services.”

Since I am not an anarchist, I believe there should be some government jobs and government spending. If we are looking at the government to help create or save job, we need to look ask

1. Is this an public good that will not be produced by the market? A public park or a lighthouse is the stereotypical example. There is not a practical way to restrict access to the benefits and bill for the use of a public good.
2. If government is to provide the good or service, will it be at least as efficient as contracting it out to private enterprises?
3. Does the benefit outweigh the costs? You need to count jobs as a cost not as a benefit. Labor should be counted as a cost like a machine, raw material, or land.
4. Apart from economics, is this a constitutionally allowable activity for the Federal government?

As a practical matter with this most recent stimulus package, I have a trouble believing that this money will be well-spent. I do not believe that politicians will evaluate projects properly. There is far too much emphasis on job creation. They really need to focus on the net present value complete with opportunity costs for all the inputs. With so much money being thrown at projects, how selective will they be? I suspect we will get projects of dubious economic benefit. Ethanol, synfuels, bridges to nowhere