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What Should We Do about the Stimulus?



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I’ve written posts pointing out what I think are problems with the stimulus proposals currently in Congress. It seems to me, though, that any responsible critic must answer the question, “If not this, then what?”

First, some table-setting.

1. Don’t be panicked into passing a law right now.  A major focus of analysis of any proposed stimulus is how quickly the money gets spent, measured by quarters and years (basically, FY 09, 1H FY 10, 2H FY 10, after FY 10). This shouldn’t be conflated with a sense of urgency to get a stimulus bill signed into law on February 15 vs. March 15. As I pointed out in a prior post, the rate of increase of the unemployment rate in the current recession is just about the same as it has been in all prior recessions for at least the past 25 years. We have time to carefully consider and negotiate the biggest single spending bill in the 220-year history of the Republic

2. The long-term fiscal position of the U.S. is unsustainable.  The U.S. has been executing a stimulus plan by another name for a decade. In addition to Fed interest-rate reductions in the middle of this decade, we are running a large budget deficit. We have consistently increased the national debt under presidents Reagan, Bush 41, and Bush 43 (the national debt was reduced under President Clinton). This increase in the debt under Reagan and Bush 41 was, in my view, justified by the needs of the time, and has increased the living standards net of the debt that we enjoy today versus what would have happened without the Reagan economic program and defense build-up. But it remains the bad part of a trade-off (again, a trade-off that I believe was, on balance, a good one) that we have to deal with now. The increase in the national debt under President Bush 43 is far harder to justify, and seems to me to have been extraordinarily irresponsible. Republicans need to come to terms with this, but ultimately the country has to move on to what to do now. 

According to the Congressional Budget Office (CBO), under current tax rates and locked-in spending plans, prior to any stimulus plan, the U.S. will add over $3 trillion to the national debt.  Over the course of the next several decades, the national debt would balloon to levels as high as hundreds of percent of GDP. Barring some unexpected and miraculous increase in productivity, this isn’t going to happen. Taxes are going up and/or the economic benefits provided by these programs are going down. 

The current stimulus will add at least another trillion dollars to this, and likely much more as it will increase the baseline for future budget negotiations. If you think about it, though, even if we didn’t pass any “stimulus” bill, we still running a big deficit, which is to say, we are already doing stimulus.  Our debate is over how much.

3.  Nobody can reliably predict the impact of the proposed incremental stimulus plan, but it’s almost impossible to imagine “do nothing” will be a real option.  This is somewhat unfair as it elides the “what should be done” argument with the “what will be done” argument, but I think that the practical wisdom embedded in the political process, or what I’ve called the Costanza-Hoover Principle, or what Warren Buffet has called “fighting a fire with all available tools” is sound.  Recognition that this is an intuitive leap, rather than a quasi-scientific  judgment, however, should rationally lead us to be cautious about risks in this direction.

Given that background, here’s my take at a crude cut at what I think ought to be done.

1. Execute a targeted stimulus program.  As per Alice Rivlin, we should separate the long-term “seems like a good idea anyway” legislation from the stimulus spending that can happen quickly, and consider it through the normal appropriations process. Further, we should structure the law so that any fiscal commitments beyond FY 09 are only an indicative plan, and must be affirmatively re-authorized by a new vote later this year. Further, we should rely heavily, but not exclusively, on taxes and withholding rebates for this purpose. This is for two practical reasons: (1) it can be done quickly, and will therefore mitigate the timing risk, and (2) it is less likely to become a new baseline for future budgets, and will therefore mitigate the future debt impacts.

 

2. Make an at least off-setting change in future liabilities under entitlement programs.  This would include things like means-testing benefits, increasing the retirement age, and making this sustainable by linking it to a longevity measure, and so forth. 

3. Reduce the military budget by reducing military commitments.  The United States is increasingly a nation among nations. This will likely become ever truer as the economic rise of the Asian heartland continues. We need to recognize this, and scale our expenditures accordingly. 

4. Demand accountability from state governments.  A significant part of the stimulus package is transfer payments to states that have large deficits and would have to engage in contractionary tax increases or spending cuts without a bailout. Just like banks that have been bailed out are now (and should be) subject to greater control by the government, state governments that come to the citizens of the states that don’t have unsustainable debt need to be held accountable. California, for example, wants a bailout from other states that haven’t spent as much. If this appears to be the in the national interest, OK, but it should be provided in the form of a loan with conditions. The U.S. government should have authority to seize sales tax and other tax revenues until the debt is repaid. In order to prevent this from simply becoming a driver of yet more state deficits, the federal government should also have the authority to hire, fire and make all spending cuts that it chooses in California’s budget until the debt is repaid. Ultimately, the debt should have recourse to state assets. You don’t want the taxpayers of the other 49 states to start selling oil drilling rights to the area off your cost, or selling off your state beaches to build condos? Then pay back your debt. If you don’t want these conditions, then don’t come to me with your begging bowl. This would have the effect of mitigating the moral hazard of this part of bailout in a very direct way: by humiliating the governors and legislators of states who have gotten themselves into this position.

5. Deregulate.  Ultimately, our ability to support this debt, and increase our standard of living, will be determined by productivity growth. It’s unfashionable to say this, but the market revolution must be defended and extended. Yes, we need regulation, to some extent, of everything. The financial markets, as I’ve gone into previously, need to be regulated better than they have been (which is not to say more heavily, just better). A good example of how the stimulus proposal could be used as a lever for deregulation, however, is schools. School funding has been an item that has varied most widely between the various bills, but in any proposal I’ve seen, this one bill would more than double federal spending on schools. Unfortunately, education is a broken sector in our society that responds to more and more spending with no observable increase in results. We should have a vision for education, that goes way beyond choice–which I think is a good idea–to incorporate deregulation of this whole sector.

Of course, none of this (other than the spending) is really going to happen, but it seems to me that conservative and libertarian opponents of the current plan ought to have some positive vision of how to address the current situation. This is a quick sketch of mine. Plus 75 cents, it will get you a copy of the Washington Post.



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