Saturday, September 25, 2010

Stimulus Funds: Misdirected Efforts

In most situations one can choose to take one path or another and end up in the same place either way.  That is true for economic activities too.  If the Federal government did nothing to stimulate the economy, eventually the economy would recover all by itself. Eventually the GDP will return to pre-recession heights and the economy will be healthy once again.  If we followed that course the Milton Friedman devotees would be excited beyond belief.  With the policies that are being implemented now, the economy will recover and the Keynesian Economists will be the ones who celebrate while the Friedman say that it recovered in spite of the spending and it would have recovered faster if they were in charge.  So pick your side.

The reason we need the government to intervene with public spending is that while the economy is healing itself and returning to normal humans need to eat.  They need to stay warm in the winter and obtain medical services in order to survive until the post-recession economy once again has a place for them.

One of the problems is this country has chosen to not repair the infrastructure we built at the same rate as it is decaying.  The decay is occurring at a very predictable rate and the required spending is a calculable number.  In not keeping pace with the required repairs, the Budgetmen look like they are watching our money, but all they are doing is creating a future debt that will be passed on to our progeny.  Fiscal Conservatives claim that our monetary debt is irresponsible while ignoring the fact that the physical debt continues to mount with each day that infrastructure decay is ignored.  There is no difference between the debt obligations of borrowing money and that of ignoring the spending that will be made eventually.  Infrastructure decay will not go away on its own.

Infrastructure decay will not go away by Friedman Economics either.  There is no corporate entity in this country, no marketplace, that will benefit from replacing the broken sidewalk pavement in a city or small town.  There are no businesses who will step up and rebuild a sewage treatment plant gratis.  There are no wealthy families who seek to keep the estate tax on hiatus who will donate the untaxed assets to replace all the 100 year old water mains in the city.  For this we need taxes and legislators who have the guts to stand up and say we need to spend the money now.

Over the last couple of decades of deficit spending and debt creation we have amassed a physical debt of several trillions of dollars.  Wherein we may have needed to dedicate $200 billion to infrastructure replacements we actually allocated $100 billion.  To make matters worse we borrowed much of that money.  So for a period of ten years we have a deficit of $1 trillion to make up for.  These numbers are not exact.  No one has tracked the actual amounts nor committed to detailed studies of all the items that have been neglected.  It is only when Mississippi River Interstate bridges collapse or California gas transmission lines burst and incinerate 169 houses do we suddenly and temporarily take notice of our failings.

And like monetary debt incurring interest, physical debt incurs interest in the form of higher costs at later dates.

Stimulus spending needs to do two things.  First it needs to satisfy human needs like food and shelter.  Second, it needs to accrue value to the future.  When the Bush tax rebate of $300 was distributed, most people used it to pay a debt.  Most of the money went directly back to a credit card company.

If cash is given to a poor person, let us say a single mother with two small children, the children will get food to eat and be warm on a January night in Ohio.  That money will go to the grocery store and home heating utility company.  From there it will go to the checkout clerks and truck drivers who delivered the food.  It will also go to the utility company stockholders and gas price speculators.  At the next exchange the farmer, manufacturer and jobber will get the money for growing, producing and shipping the food. The utilities will invest some of the revenues in replacement infrastructure and use funds to buy the gas it sells.  In a greatly simplified money stream, the funds end up at the bank when all the business and mortgage loans are paid on time.

The other schema is to give the money directly to the banks and leave out the littleman.  In that process, the bank gets the money and no one else derives any benefit from it.  The economy is short circuited and the large wealthy people end up with the cash and we get nothing for it.

Let's look at $300 billion in bank bailout funding.  What did we get and what could we have gotten?  We made it possible for some very wealthy bank employees to get huge bonuses and salaries even as the economy tanked.  The intended liquidity of funds did not happen.  Yes, many of the banks paid back the money, but we got hundreds of thousands of mortgage foreclosures at the same time.  Every foreclosure means a family had to move somewhere else.  Mostly it seems they moved in with friends or relatives since the rental market tanked too.  Maybe they left the country to follow their outsourced job.

Now $300 billion disbursed to 10 million home owners would allow and average of $30,000 per mortgage.  A 3 year recession is 36 months.  That would mean that a subsidy of as much as $833 per month could have been made for each of 10 million mortgages.  It would not have to be free money.  It could be taxable.  It could be repayable at the sale of the property.   The bottom line is that all the home owners who lost their homes could have been spared the suffering had the stimulus/bailout plan placed the funding as the bottom of the scale rather than at the top.  If the money had been invested at the bottom, many people who lost jobs and therefore their homes would have been in a better position.

Stimulus politics aside, we do need to invest in our infrastructure, now or soon.  It might as well be now when we need to stimulate employment.  We need new sidewalks. We need to repair bridges.  We need to bury our overhead utilities.  We need to redevelop our energy systems.  We need to overhaul our sewage treatment plants and water distribution systems.  We need to do it today or tomorrow.  You take your pick.  Today stimulates our weak economy.  Tomorrow it is just another perfunctory project that needs to be done and there is no political strength to get it done.