Can an economic stimulus package work?

Politicians are debating an economic stimulus package for the U.S., with a figure of $150 billion being tossed around.  Can this work?

Let’s consider the question from an employer’s point of view.  A company needs to decide whether to invest in a new factory and whether or not that investment should be here in the U.S.  In deciding whether to build a factory whose useful life might be 20 years, the company would look at long-term economic prospects, not short-term ones.  In deciding whether to build the factory and create jobs here in the U.S., the company would look at tax rates, the education level of the workforce, and the costs of employing that workforce.

Based on tax rates, education, and costs, the U.S. is not looking competitive right now.  Corporate tax rates are among the highest in the world.  The quality of our high school graduates is stagnant or slipping while other countries have enjoyed big improvements.  Our workforce is expensive to employ if only because employers are required to pay for health care costs that are now certainly the highest in the world.

Let’s consider the question from a consumer’s point of view.  The average consumer has a crushing burden of debt and, unless he or she is one of the 40(?) percent of Americans who work directly or indirectly for local, state, or federal government, is concerned about being laid off.  The consumer has been informed by the recently elected Democrats that new and higher taxes are forthcoming.  The consumer thus reasonably expects his or her long-term spending ability to be lower than it is today.  Anyone in that position would be reluctant to incur a long-term obligation, be it a car loan, a mortgage, a lease on an apartment.  If the government sent a private sector employee a check, he or she would most likely use it to pay down some debt, not go on a spending spree.

Maybe the right answer is to send stimulus checks only to people with government jobs and/or think about actions that would give companies long-term confidence in the U.S. economy and consumers long-term confidence in their spending power.

9 Comments

  1. jim

    November 12, 2008 @ 11:18 am

    1

    I’ve seen proposals in the news for a smarter stimulus package than the one you describe. Instead of handing out another round of tax rebate checks, some folks are suggesting that the federal government dump a bunch of money into infrastructure: bridges, trains, power plants, schools, and maybe even broadband wireless internet access. I wonder if they’ve been reading this blog.

  2. K

    November 12, 2008 @ 1:16 pm

    2

    Most of the public money so far has been channeled to employees and alumni of a few favored members of the FIRE (finance, insurance, and real estate) sector, most notably Goldman Sachs and AIG, rather than dispersed to struggling middle-class participants in the real economy.

    This new kleptocratic implicit guarantee of the salaries and bonuses of GS & AIG executives should make said those guys sleep pretty well.

    Therefore, the taxpayer funds are already being directed to the most confident members of society who will spend it on financial assets and imported luxury goods. There appears to be little danger that the subsidies will be “wasted” by the debt serfs who are financing the programs on domestically-made automobiles or consumer goods, or on debt repayment (which, taken to its logical extreme, could eventually threaten the established social order: Imagine if new college graduates entered high-paying white collar jobs without $30k to $100k of debt!).

  3. patrick giagnocavo

    November 13, 2008 @ 3:04 pm

    3

    They could immediately do away with capital gains taxes and/or dividend taxes (which are usually double-taxed anyways). This would allow for people with money to put their cash into companies that pay a dividend , and to stimulate investment into doing useful things. Right now, you buy a stock and hope it goes up. Buying a stock that pays you a small amount for owning it each year seems to be something that would smooth out the markets.

  4. Dan Lyke

    November 13, 2008 @ 5:10 pm

    4

    Jim, massive investment in infrastructure is what the Japanese did to try to climb out of their hole in the 1990s. The end result was a lot of unused infrastructure that needed money be maintained.

    There are a few infrastructure improvements that you could sell to me, new bridges and highways aren’t on that list. Repair of existing bridges, a more efficient electricity distribution system, an automated rail signaling and control infrastructure (we’re depending on people to keep two trains out of the same block? WTF?) that’d let us run higher density trains and passenger trains on time, all of those things make my list, but repair doesn’t have the glory of new stuff.

  5. Charles

    November 13, 2008 @ 11:04 pm

    5

    “unless he or she is one of the 40(?) percent of Americans who work directly or indirectly for local, state, or federal government, is concerned about being laid off.”

    Phil, you must be writing about a different America than the rest of us live in.

    “The mayor of Trenton, Douglas Palmer… plans to lay off 70 municipal employees and won’t fill 40 vacancies. “I’ve even had to demote firefighters,” he says.”

    State and city budgets falling fast
    Christian Science Monitor, Nov 14th
    http://www.csmonitor.com/2008/1114/p01s05-usec.html

  6. Joel N. Weber II

    November 16, 2008 @ 3:06 pm

    6

    I bet a lot more Americans get killed every year when automobile drivers fail to obey a red traffic light than there are Americans who get killed when trains fail to obey a railroad signal. Which makes me think maybe we should be focused on replacing the automobile traffic lights with something more automated rather than the railroad signals.

    Or maybe we should spend money on new bridges that would separate railroads from automobile traffic in the vertical plane; there are hundreds of people killed every year at the existing at-grade crossings, and it wouldn’t surprise me if the life saved per dollar of capital spent would be more cost effective with new bridges than with more automated signaling.

    Better signaling probably would not help with running the trains on time any more than new traffic lights will fix highway congestion in places where the highways are congested, either. A lot of Amtrak’s routes outside the Northeast Corridor run on single track. If anything goes wrong with a freight train on a single track segment, that can create delays until the freight train can be moved out of the way. And there’s quite a bit of freight that contributes to the crumbling of highway bridges because the private freight railroads aren’t motivated to build much new track, and taxpayers are willing to pay for highways but not rail construction (which is probably penny wise and pound foolish).

    I also think we should figure out how to fund a conversion to overhead power lines for all track that sees at least 30 trains a day (or some other reasonable cutoff); that would get rail freight from diesel (much of which has to be imported) to domestic energy. It would also make passenger rail service faster by improving acceleration and removing the need for Amtrak to swap between diesel and electric locomotives in certain places.

  7. John

    November 18, 2008 @ 9:50 pm

    7

    ” … The consumer has been informed by the recently elected Democrats that new and higher taxes are forthcoming. …. ”

    Huh? Did something change on the Democratic platform? Last I heard, income taxes were supposed to go down for anybody under $250K, which is pretty much everybody I know.

    At least that was the plan. Personally, I suspect that the situation has degraded so far that taxes will need to increase, but I haven’t seen that reported yet.

  8. philg

    November 18, 2008 @ 10:07 pm

    8

    John: If you believe in Obama’s campaign promises, we should talk about the Easter Bunny too. The Democrats can raise taxes on people earning less than $250k by letting Bush’s tax cuts expire. The Democrats can raise taxes on people earning less than $250k by adjusting what is deductible, how quickly capital goods may be depreciated, or how capital gains are to be taxed. The Democrats can raise taxes on things other than income. The Democrats can impose new taxes. Democrats at the state and local level can raise taxes.

    If the government is going to spend a lot, you will eventually pay a lot. It isn’t as simple as just taking all of the assets of rich. They don’t have enough to feed the monster of Big Government and there is also a risk that with a slight increase in tax rates a lot of rich people will move assets offshore (like U2 did when the government of Ireland was threatening to raise their taxes).

    [The Republicans have these choices as well too, of course.]

  9. andrea

    November 19, 2008 @ 2:48 pm

    9

    Watch this insightful video about our economy. http://www.thetruthabout.com/public/297.cfm?affID=and16

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