Monday, January 26, 2009

Stimulate This

A contradiction between the federal stimulus and reality looms...

The stimulus package, if the Democrats have it their way, will be over $1 trillion. It simply will be. It will be because that’s how, in spite of what the leader of their party (incidentally our President) said, when he said that it would contain no earmarks. So instead of creating ear marks to the legislation, they cast ear marks as stimulus.

House Minority Leader John Boehner criticized the $87 billion for contraception, saying “How can you spend hundreds of millions of dollars on contraception?” It’s true: contraception does not stimulate the economy. However, House Majority Leader Nancy Pelosi shot back. “The family-planning services reduce costs. The states are in terrible fiscal budget crisis right now, and part of it…[is] to help the states meet their financial needs.” But reducing debt is not the same as stimulating the economy – otherwise a stimulus package that created debt would not be considered a good economic idea. That just makes sense. I’m not against encouraging contraception, but this is an ear-mark, no doubt about it.

Here are a few other stimulus-inspiring spending projects:
$44 million for repairs at the Agriculture Department headquarters in Washington.
$200 million to rehabilitate the National Mall.
$360 million for new child care centers at military bases.
$1.8 billion to repair National Park Service facilities.
$276 million to update technology at the State Department.
$500 million for the Transportation Security Administration to install bomb detectors at airports.
$600 million for General Services Administration to replace older vehicles with alternative fuel vehicles.
$2.5 billion to upgrade low-income housing.
$400 million for NASA scientists to conduct climate change research.
$426 million to construct facilities at the Centers for Disease Control and Prevention.
$800 million to clean up Superfund sites.
$150 million for the Coast Guard to repair or remove bridges deemed a hazard to navigation.
$6.7 billion to renovate and improve energy efficiency at federal buildings.
$400 million to replace the Social Security Administration's 30-year-old National Computer Center.
All of these are covered under the “job creation” argument, but none of these create long-term employment. They either support currently-employed blue-collar jobs, or will temporarily increase blue-collar jobs (which, incidentally, are not the best kind of jobs to encourage, because they provide no incentive to employers to maintain when demand is low – a bomb detector installer cannot remain billable when there is no need to install bomb detectors, whereas a software developer can work to improve or create new software thereby creating future revenues that more than cover the cost of that developer).

What’s more, none of these inspire increased consumption or long-term growth. The National Mall is free – making it nicer will not generate any revenue. I’m sure that at least some of the new child care centers on military bases are needed, but other than the small staffs that will be assembled to operate them this does not create economy-shifting stimuli. The $426 million for new facilities at the CDC probably means that with this money the CDC can do more work to earn its last C and silent P (for prevention), and this is good, but it doesn’t stimulate significant long-term economic growth.
By announcing that this would be an earmark-free piece of legislation, President Obama curtailed Congress’s ability to steer money to their states. But he really did not do anything to protect tax payer money from being spent erroneously. While I champion his spirit, all he did was make it harder than normal for us to see where the money goes, because politics will still be allowed. Decision-making power on how the money gets spent is simply shifted from Congress (who would normally have to list each project and how much money is marked for it) to un-elected bureaucrats at state and federal agencies who will have the power to decide where and how the money gets spent. What this means is that if someone (anyone) wants to find out how their dollars are being spent, they have to track down the agency or program manager to find out.

Now I’m a supporter of individual states rights, and applaud President Obama for removing Bush regulations on states’ ability to regulate automobile emissions. That said, the President and his economic team need to be mindful of the inherent conflict between a federal stimulus package and individual state budgets. When Congress gets around to voting on the federal stimulus package, which by pairing tax cuts with increased spending will increase national debt, the governors of 38 states, those states who require a balanced budget and prohibit budget deficits from being carried over year-to-year, will be introducing their plans to balance their budgets. Many of these 38 governors will, like California’s Arnold Schwarzenegger, propose increased taxes and reduced government spending (just the opposite of the federal approach, which is not hamstrung by the requirement to balance the budget). The worry is that states will increase taxes at the same time the federal government will reduce taxes, neutralizing the stimulating effects of the massive federal package.

This contradiction underscores a reality that the national discourse is not pondering: for any state that is carrying a deficit, the need to balance the state budget will likely blunt the effects of the federal package. California, for example, is currently riding a deficit of $40 billion. As part of the federal stimulus, the state will receive roughly $11 billion for education and the state’s health care program for the poor. Congress’s intention for this money is to boost spending, but California will simply use it to pay off current debt.

The stimulus package will reduce California’s deficit from $40 million to $29 million, which is great because it may lead to a smaller tax increase. But it won’t boost spending, job creation, or economic stimulus as the federal money is intended to do. This isn’t Congress’s fault, but it calls into question the brilliance of the plan. I am no economist or financial expert, but this is just common sense stuff that Congress seems to be ignoring.

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