Another modest proposal

  What, no interest in annexing Iceland?  Ni modo.  Let's turn instead to the stimulus plan winding its way through Congress.

To this observer, it seems quite brilliant as Keynesian countercyclical spending.  Such a stimulus works best when all the money is spent on labor-intensive stuff and spent quickly.  That's why the recent Republican lie that a CBO report indicated that only $45 billion would be spent in the first two years got so much traction.  Sadly for the Republicans, the CBO didn't say what they said it said.  (What did you expect?)  The report is here; it covered a now-withdrawn $61 billion bill proposed in September.  Getting $45 billion of a $61 billion full of big infrastructure projects out the door in two years ain't bad, but like I said, H.R. 7110 is moot. 

So how does the new bill, the American Recovery and Reinvestment Act of 2009, stack up?  I went through its $543 billion in line items and grouped them as follows:

1. An Army of Roofers: people doing stuff like weatherizing homes, retrofitting office buildings with energy saving windows, or replacing old car engines with new ones.  Plus some building of small-scale stuff like schools and army housing.  $91 billion.
2. An Army of Programmers:  people redoing computer systems across government bureaucracies and the health care system.  $24 billion.
3. An Army of Hardhats:  people building bigger cooler stuff like new electrical transmission lines or freeways.  Or, yes, sewers, lots of sewers.  $60 billion.

That comes to $176 billion spent pretty quickly on stuff that's already pre-approved or pretty simple to ramp up from scratch.  Call it 2.0 million jobs for an outlay of 1.2% of GDP.

But there's more:

1. Keeping bureaucrats employed:  $173 billion in temporary aid to state and local governments.
2. Handing out cash:  $116 billion in various types of temporary aid to individuals.

That's an additional $289 billion that will do a lot to maintain demand, since the governments getting the aid will have to pay the associated salaries (instead of laying people off) and the individuals getting the cash are all people in serious economic trouble.  (There's another $79 billion in there that I couldn't classify, mostly R&D and educational spending of various types.)

Anyway, as a Keynesian stimulus, the package seems pretty brilliantly designed to this observer.  A lot of it will even have long-term payoffs in terms of lower energy use and higher administrative efficiency.  No high-speed trains, no universal health care, but a lot of money out the door very quickly in a way designed to maximize the chance that it will be spent.  Not bad, new Administration, not bad at all.

Comments

[Andrew R.]

I'm impressed, but I kind of worry about the medium range impact of the Obama plan. The construction worker who goes to work on a job that he knows is going to last until, say, that city gets the new watermain might have enough money to get spare Chinese made knick-knackery, but he's probably not going to be engaging in a long-term purchase like a car made in Hamtramck because he doesn't know about where his paycheck will come from after the current job is done. Ditto the IT contracter.

OTOH, the Obama charisma might be able to convey a, "Things are better" attitude which will have a salutary impact in itself.

[Peter]

Major construction projects are not necessarily huge job creators. I read not long ago that at its peak, Boston's Big Dig (an enormous, costly undertaking, of course) employed about 5,000 people. To create, say, 100,000 construction jobs you'd need twenty projects of similarly enormous scale. That just doesn't sound too practical.

[Noel Maurer]

Andrew, your instincts are, I think, correct.

One way of thinking about recessions and depressions is that they're a coordination failure. Keynes used the metaphor of two trucks driving down a road with no passing rule. Instead of keeping to their side and whizzing onwards, they manuever and swerve and wind up crashed into each other.

If everyone decided to start investing again, then investments would be profitable. If everyone decided to start spending again, then everyone would have income to spend. If one of those things happen, we'd be out of the soup.

So a Keynesian stimulus tries to solve the coordination failure. The first hope is that it breaks the downward cycle where businesses and individuals see economic chaos out there, retrench in response, and thereby cause more economic chaos. If it works in doing that, then the stimulus won't cause recovery, but the economy shouldn't start heading south again once it stops.

Here leadership can be as important as the stimulus itself. That's the Obama effect you postulated.

The second hope is that the stimulus actually brings back enough confidence that businesses start investing again. As the government ramps up spending, businesses find themselves with lower inventories than expected, and they place new orders with suppliers. Those suppliers may save their profits, but the banks see that incomes are rising, and (assuming the credit system gets fixed) lend them out. New businesses start, things look good, and that foot soldier in the Army of Roofers starts to think that he or she will be able to get another job once the gravy train stops.

And once again, leadership helps a lot.

There are many places where this could go wrong. The credit system could remain broken. Pessimism could become endemic. Some other shock could come along. (It did in 1937.) The stimulus could leak out into imports bought from countries that refuse to spend the resulting income on imports. (I'm looking right at you, Germany.)

But even if it does go wrong, which I'd bet against, you've got (1) a lot less human suffering along the way; (2) a lot of energy efficient buildings and better information systems; and (3) both of the above gained by borrowing at pretty much zero interest.