Stimulus

I spent last week as a speaker at a technical conference in Japan. Among the many differences between Japan and the US is the quality of their infrastructure. A stark example is the passenger rail system. Japan’s is modern, very high speed, reliable, and efficient. The American equivalent is … well, let’s just say it needs work.

As the Japanese recession slogged on over the last 10 years, their government spent billions upgrading transportation infrastructure, as well as power grids and many other structural elements that support thier economy. Their infrastructure spending did create jobs, but it didn’t provide a quick fix for their recessionary problems. It did however, greatly improve the one element—infrastructure—that is the backbone of modern commerce. Only private job creation can cure recessionary trends.

Now it’s our turn. Barack Obama initially indicated that the stimulus plan he invisioned would focus on job creation. So far, so good. He further indicated that he’d endorse major infrastructure spending, creating construction and related jobs. Still good. His mistake was turning the authorship of the bill over the Nancy Pelosi. The Speaker, with the help of others in the Democratic leadership, crafted a “stimulus” bill that was not very stimulative. Only 12 percent of all monies allocated went to infrastructure improvement. The rest went for social welfare programs, and a non-trivial percent was allocated to pure pork and completely unnecessary spending.

Instead of asking for major modifications, President Obama defended the indefensible. The Wall Street Journal comments:

Speaking to a House Democratic retreat on Thursday night, Mr. Obama took on those critics. "So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is? (Laughter and applause.) That's the whole point. No, seriously. (Laughter.) That's the point. (Applause.)"

So there it is: Mr. Obama is now endorsing a sort of reductionist Keynesianism that argues that any government spending is an economic stimulus. This is so manifestly false that we doubt Mr. Obama really believes it. He has to know that it matters what the government spends the money on, as well as how it is financed. A dollar doled out in jobless benefits may well be spent by the worker who receives it. That $1 of spending will count as economic activity and add to GDP.

But that same dollar can't be conjured out of thin air. The government has to take that dollar away from someone else -- either in higher taxes, or by issuing new debt in the form of a bond. The person who is taxed or buys the bond will have $1 less to spend. If the beneficiary of that $1 spends it on something less productive than the taxed American or the lender would have, then the net impact on growth will be negative.

Some Democrats claim these transfer payments are stimulating because they go mainly to poor people, who immediately spend the money. Tax cuts for business or for incomes across the board won't work, they add, because those tax cuts go disproportionately to "the rich," who will save the money. But a saved $1 doesn't vanish from the economy, unless it is stuffed into a mattress. It enters the financial system, where it is lent to others; or it is invested in the stock market as capital for businesses; or it is invested in entirely new businesses, which are the real drivers of job creation and prosperity.

The media is reporting this morning that the Senate has agreed to support a 780 billion “stimulus” package. The details have not yet emerged, but its fair to say that the bill will be more spending than stimulus. If you follow the logic of the WSJ argument, that’s not really what we need for a solid recovery over the long term.

In a way it’s kind of sad. Barack Obama campaigned on a promise to reform business-as-usual in Washington. A noble goal. What we see with this “stimulus” package is the very worst of Washington politics ... business-as-usual on steroids.