CQ TODAY ONLINE NEWS
Feb. 4, 2009 – 3:53 a.m.
Trade-Offs in the Stimulus Package
By Madison Powers, CQ Guest Columnist
Legislation routinely involves trade-offs and accordingly, there is a need to balance competing considerations.
However, one reason the proposals for economic stimulus seem to defy confident judgment — apart from the arguably unprecedented and still unknown dimensions of the problem — is that there are multiple trade-offs that have to be factored into the decision-making.
Two are of special significance in the debate.
One trade-off is between goals of efficiency and ideals of equity. The second is the need to strike a balance between infrastructure and other activities that also stimulate economic growth.
Much of the public debate centers on doubts about whether the current proposal gets right either of these two trade-offs.
First, the equity-efficiency trade-off.
On the one hand we want the nearly $1 trillion package to be maximally efficient in increasing aggregate economic activity. In simple terms, we want our spending priorities (or tax revenue offsets) to yield a greater amount of economic activity per dollar of cost than the alternatives. This is the multiplier effect that we now hear so much about.
Economists and ideological partisans all along the political spectrum no longer debate whether we should be Keynesians; we now debate how to be really good Keynesians. We want the most bang for the buck.
On the other hand, we want our policies to be fair or equitable.
Because the social safety net has unraveled so much in the last eight — even 16 — years, we are now witnessing a vastly unequal ability of some to weather the economic storm. Moreover, many economists think that the ability to ensure a more stable and enduring recovery is dependent upon engineering a more widespread recovery.
Equity is thus seen as bound up with long-term stability and growth.
Others, however, argue that equity is not something we can afford at this critical moment. Selecting the options that yield the most favorable multiplier effects — more economic growth for each dollar of government expenditure — is the only consideration that should count. Better now to make sure that all boats don’t sink than to insist upon creating a rising tide that will lift all boats.
Closely related to the efficiency-equity debate is the worry over whether we have the right proportion of big infrastructure projects to other components of the economic recovery plan. The right balance, according to some observers, means trimming out what looks to them like extraneous matter, largely on the assumption that only infrastructure spending counts as an efficient stimulus measure.
Republican critics charge that the House plan has become a grab-bag of items that meet a pent-up Democratic demand for pet programs for core political constituencies. Democrats fear a missed generational opportunity to reshape funding priorities and to do something really big and with lasting social and symbolic impact.
Conservatives and liberals alike, each for their own reasons, have gotten nervous about the diffuse package of spending items, many of which don’t involve the big infrastructure projects. These are all reasonable worries.
Nonetheless, there are a few things, when thrown into the mix, that might reduce our collective anxieties.
First, what counts as stimulus doesn’t necessary conform to some canonical notion of big-scale investment projects of the sort we think of when we think of the New Deal. Even the hard-nosed, efficiency-minded observer should take solace in the fact that lots of things that don’t fit the infrastructure paradigm are estimated to have multiplier effects as high or higher than lots of likely infrastructure investments.
For example, various estimates of the effect of extension of unemployment benefits, increased availability of food stamps, and even aid to the overstretched state and local government budgets yield returns in the range of 1.5-1.75 dollars in economic activity. That is roughly what we can expect from the sort of big infrastructure projects we might envision, but of course, these things don’t deliver on promises of industrial transformation. They fall short of the soaring rhetoric meant to warm us to the idea of spending a trillion dollars.
Still, all of these short-term equity-oriented programs compare favorably with most infrastructure projects and they all beat the estimated returns of roughly 30 to 50 cents on the dollar from cutting corporate taxes, making President Bush’s tax cuts permanent, rewarding business with tax credits for investment, or eliminating the hated alternative minimum income tax penalty.
We don’t get our monuments and we don’t get the satisfaction of thinking big, but we do get ourselves going and with far greater efficiency than we would get if we took a narrowly ideological approach that favors either corporate or broad-based tax cuts that don’t give us back much in return. And we get an equity dividend as well without having to sacrifice the demand for efficiency.
Oddly enough, the multiple dimensions of the problems we face may require us to think small and act in hundreds or even thousands of undramatic ways.
There is a saying in international development circles that both the World Bank and the International Monetary Fund know well how to spend a billion dollars on a single project but they have no idea how — and when it is economically preferable — to spend a million dollars on 1,000 projects (or even fewer dollars on still more projects).
There may be a good case for a shotgun blast of relatively small interventions aimed at multiple vulnerable points within the economy.
It may make the most sense to prop up the solvency of state budgets and with it, their bond creditor confidence, shore up vulnerable pension funds, keep basic local services and jobs intact, rebuild the economic safety net, and invest in any number of other diffuse things, each at increased risk of going under and thereby setting off new cascades of economic loss.
Thinking small is a hard sell, especially after we were exhorted to dream of big things of lasting significance. But a diffuse approach to patching up many smaller leaks, unsexy and uninspiring as it is, is precisely what some economists think of as a new paradigm for spurring growth in developing nations.
It may be that this new paradigm is just what’s needed for a major economic power facing multiple, simultaneous structural challenges, not the least of which is the existence of especially vulnerable segments of the population who represent the weakest links.
Madison Powers is Senior Research Scholar at the Kennedy Institute of Ethics, Georgetown University. His column appears weekly in CQ Politics. Beginning next week, his column will appear on Fridays.
Comments
THANK YOU! Very well written, and most importantly, very clear, logical and PRAGMATIC. Just the kind of thinking America needs today.
Yes, we need balance, increasingly and finely tuned balances between the whole gamut of both equity-related issues and efficiency-related issues. And the equity part of it ought to take us back to again equitably taxing the filthy rich. But our erstwhile bi-partisan rulers cannot imagine that for some reason that boggles the mind. Too bad so many writers who also ought to know this are also unbearably timid about writing it.
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