Considering Government Spending

Mark Zandy at Moody’s Economy released an interesting 18-page report on January 21. It’s title is “The Economic Impact of the American Recovery and Reinvestment Act.” In it are some interesting numbers.

For example, there are times when government spending is preferable to tax cuts. Mr. Zandy calls it “Bang for the Buck” in a table on page 9 of the report. He defines Bang for the Buck as the estimate of a one year dollar change in GDP for a given dollar reduction in federal tax revenue or increase in spending.

Granting accelerated depreciation returns 25 cents.
An across-the-board tax cut returns $1.03.
General aid to state governments returns $1.38.
Increased infrastructure spending returns $1.59.
Interesting that increased spending on food stamps returns $1.73, the best of all.

To point out the obvious, a dollar spent on infrastructure returns 56 cents more than on a tax cut.

Who but an ideologue would insist on leaving that kind of money on the table?

Following is the report’s conclusion, emphasis added

A long history of public policy mistakes has contributed to the financial and economic crisis. Although there will surely be more missteps, only through further aggressive and consistent government action will the U.S. avoid the first true depression since the 1930s.

In some respects, this crisis has its genesis in the long-held policy objective of promoting homeownership. Since the 1930s, federal housing policy has been geared toward increasing homeownership by heavily subsidizing home purchases. Although homeownership is a worthy goal, fostering stable and successful communities, it was carried too far, producing a bubble when millions of people became homeowners who probably should not have. These people are now losing their homes in foreclosure, undermining the viability of the financial system and precipitating the recession.

Perhaps even more important has been the lack of effective regulatory oversight. The deregulation that began during the Reagan administration fostered financial innovation and increased the flow of credit to businesses and households. But deregulatory fervor went too far during the housing boom. Mortgage lenders established corporate structures to avoid oversight, while at the Federal Reserve, the nation’s most important financial regulator, there was a general distrust of regulation.

Despite all this, the panic that has roiled financial markets might have been avoided had policymakers responded more aggressively to the crisis early. Officials misjudged the severity of the situation and allowed themselves to be hung up by concerns about moral hazard and fairness. Considering the widespread loss of wealth, it is now clear they waited much too long to act, and their response to the financial failures in early September was inconsistent and ad hoc. Nationalizing Fannie Mae and Freddie Mac but letting Lehman Brothers fail confused and scared global investors. The shocking initial failure of Congress to pass the TARP legislation caused credit markets to freeze and sent stock and commodity prices crashing.

Now, a new policy consensus has been forged out of collapse. It is widely held that policymakers must take aggressive and consistent action to quell the panic and mitigate the economic fallout. An unfettered Federal Reserve will pump an unprecedented amount of liquidity into the financial system to unlock money and credit markets. The TARP fund will be deployed more broadly to shore up the still-fragile financial system, and another much larger and comprehensive foreclosure mitigation program is needed to forestall some of the millions of mortgage defaults that will occur otherwise. Finally, another very sizable economic stimulus plan is vitally needed. While there will be much more discussion about the size and mix of government spending increases and tax cuts to include, the House Democratic plan is a very good starting point. This is important, for while such debate is necessary it must be resolved quickly. Unless a stimulus plan is implemented beginning this spring, its effectiveness in lifting the economy will be significantly muted.

Fiscal stimulus does carry substantial costs. The federal budget deficit, which topped $450 billion in fiscal year 2008, could reach $2 trillion in fiscal 2009 and remain as high in 2010. Borrowing by the Treasury will top $2 trillion this year. There will also be substantial long-term costs to extricate the government from the financial system. Unintended consequences of all the actions taken in such a short period will be considerable. These are problems for another day, however. The financial system is in disarray, and the economy’s struggles are intensifying. Policymakers are working hard to quell the panic and shore up the economy; but considering the magnitude of the crisis and the continuing risks, policymakers must be aggressive. Whether from a natural disaster, a terrorist attack, or a financial calamity, crises end only with overwhelming government action.

Again, to state the obvious, the federal government needs to spend money. Lots of it. Immediately.

The first half of TARP is a disaster and has provided no benefit to anyone other than the scoundrels who contributed to creating the mess we’re in. No one is lending to anyone for anything, harkening the time-worn stereotypical perception that banks only lend money to those who don’t need it. As implemented, TARP has not worked.

Something else needs to be tried. Money must start flowing again and since not even Donald Bren has enough to make a difference nationwide, the feds are the last best chance.

Calling this logic an intellectual fraud, as has been done, is itself intellectually fraudulent and could be considered projecting.

Watching Congress, chiefly Republicans, cling to the failed ideology of things like cutting taxes and the corporate welfare known as TARP reminds me of Nero and his fiddle.