13 Nov 2009

The efficient way to spend stimulus money

The current method is to look for shovel-ready pitchfork-ready* projects, but those projects were NOT underway for a reason -- their benefit-cost ratios sucked.

Although stimulus money may make those projects cheaper for the locality, it does not make bad projects into good projects.

Here's how I would have distributed the stimulus money.**
  1. Pay off existing debt on existing projects that, presumably, passed the benefit-cost test.
  2. That payoff will reduce debt (helpful when bond ratings are falling) and reduce debt servicing (helpful when 30% of tax revenue disappears).
  3. Communities that want to build more can then choose to do so, but they will consider 100% of costs when judging the benefits from a project.
Of course, none of this happened, because politicians want to wield golden shovels in front of NEW holes (Keynesian holes!) in the ground. They are not interested in standing in front of balanced budgets or sensible, operating projects. Such a pity.

Bottom Line: We manage our own finances in a completely different way than politicians manage "our" finances, bribing our current selves with some promise that our future selves will not have to pay. I guess we are just gullible in believing their hokum.

* Sounds about right for Friday the 13th, huh?
** And remember that this is OUR money, so we are basically borrowing from our future selves and spending now. My overall opinion is that stimulus money is wasted, but this is all about harm reduction!


Eric said...

Having followed stimulus spending in some detail, I see a more nuanced and different picture.

There was a big push to spend stimulus money. The spending was driven by the need to appear to be 'doing something.' The easiest somethings to do were long delayed projects that were delayed because they never met cost benefit criteria. The good part of the long delayed projects was that the details of what to do and what it would cost were well known.

So the government could appear to be 'doing something' by spending money quickly on well detailed, low cost benefit, projects that employed the right kind of people--spenders not savers, people who would put the stimulus money right back into the economy.

Is there an economic, micro or macro, term for such behavior--a term more elegant and with more meaning than 'foolish' or 'shortsighted'?

The approach seems similar to the CCC--get some money into a specific part of the economy and hope that this increased money flow stimulates the rest of the economy. Cost benefit was not a consideration. Speed was.

Better stated, the funded project could be very low cost benefit as long as there appeared to be larger benefits to the economy by funding the low cost benefit project quickly instead of waiting a while, determining the high benefit, low cost projects and funding them.

Or, 'When all you've got is a hammer, everything is a nail.'

Eric said...


Here are Paul Krugman's comments today on the same subject.

David Zetland said...

@Eric -- I appreciate the "speed" factor but the whole idea of "stimulating" spending by consumers who are making money digging holes as workers/businesses is BS. They are going to take that money and SAVE it or pay down debt. It's not like finding $1,000 in the street (which, even then, may get saved) b/c the economy is still in the crapper.

The thing to do (IMO) is worry about people losing their jobs, i.e., increase unemployment benefits, make health portable (as yesterday's post). Oh, and this is brilliant.

dWj said...

1) There's a certain incentive here toward the use of debt. (Unless you're assuming time-inconsistent policy. I'm assuming municipalities are allowed to believe this might happen again some day.) I wanted stimulus to take the form of tax cuts and straight per-capita grants to states. California can use its grant to not default; North Dakota can cut local taxes, or look around for school projects etc. that could use some more funding.

2) I was always a bit annoyed with the idea that any stimulus money that gets saved by people or companies repairing balance sheets is "wasted". Reducing the likelihood of more defaults and reducing severe solvency constraints strike me as productive in this kind of recession.

Eric said...

As to 'this is brilliant,' Krugman made the same point in the referenced op-ed and Germany has already implemented it.

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