CBO Summary
1. Increased deficit spending hurts long-term wages and GDP
An interesting observation by the CBO:
To the extent that people hold their wealth as government bonds rather than in a form that can be used to finance private investment, the increased debt would tend to reduce the stock of productive private capital....
The reduction in GDP is therefore estimated to be reflected in lower wages rather than lower employment, as workers will be less productive because the capital stock is smaller.
http://www.cbo.gov/ftpdocs/99xx/doc9987/Gregg_Year-by-Year_Stimulus.pdf
2. Buy American
If two contractors make the same quality government product or service, but one can do it at a lower price, the government should chose the lower price. By restricting competition to only American contractors, the legislation allows contractor to charge higher prices for the same service. We will pay higher taxes all to promote greater inefficiency and lower productivity.
If the goal is to spread some cash around the US economy, we'd do better hiring the cheaper foreign contractor and dumping the savings out of a helicopter.
3. Wage restrictions
Further, the legislation requires that all workers on a project must be paid the same as any other worker in the same locality. We will pay higher taxes to pay for less productive workers.
Again, if the goal is to spread some cash, give it away and be honest about it.
4. A whole lot of dumb tax credits $200B +
For the most part, many of the tax credits serve simply to make the tax code more progressive. Specially stupid ones include increased "home-buyer" tax credits as if a new housing bubble would save us.
Then there are several tax credits awarding good behavior. Generally, policy should not be made in the tax code.
Lastly, taxes are cut on new automobile purchases. What happened to energy policy? Subsidizing the purchase of new cars won't save the US auto industry. This is clearly an example of a provision that was made for the benefit of the manufacturers (few) rather than the consumers (many).
5. Limits on Executive Compensation
This is stupid. Companies took or were pressured to take TARP funds and now find themselves under strong restrictions. The law includes an exception for employment contracts written before February 11, 2009. This type of legislation will only further encourage future employees to demand longer contracts in case further limits are placed in the future.
(This paragraph previously incorrectly stated that "It's probably unconstitutional, both in terms of its infringement on the freedom of contracts and its ex post facto nature." Corrected thanks to an observation by a devoted reader.)
The only good that can come out of this is that companies will seek to exit the TARP as fast as possible that that previous error can be corrected.
Excessive executive compensation is a principal/agent problem. Those that are best suited to correct this version of the problem are not seated in the Capitol but are in fact the shareholders of these Corporations. Already steps are being taken to form independent compensation committees or to require formal shareholder votes on CEO compensation. The government should not be involved either as a shareholder through the TARP or through random wage ceilings.
6. Quibbles on Education Spending
The legislation pours new money into Education, including $13B for the Elementary and Secondary Education Act of 1965, currently reauthorized as the No Child Left Behind Act of 2001, $11.3B for the Individuals with Disabilities Education Act, and $15.8B for the Higher Education Act of 1965.
I have no objection to the last and little objection to the first. The US economy, as a developed economy, grows primarily by increases in productivity technology and not by increases in capital stock per capita. In order to promote that growth the US needs as many highly educated individuals devising new ways to be productive as possible. We should invest heavily in ensuring that our best minds receive the best education possible.
Financing education at the elementary and secondary level provides a lower return for the national economy than financing graduate school, but it is also an effective way to break the cycle of poverty, and to reduce crime, both equally important economic targets. Families in poverty cannot afford to increase their human capital with further school or training, and property rights are fundamental to the competitive market model.
Spending on disabled children helps to soothe a bleeding heart, but does it do any more than that? Each dollar used to train a genius generates far more wealth for society than a dollar used to train a dullard. Families with disabled children deserve our sympathy, but can they be said to be a national priority?
7. A stupid way to build national infrastructure
The legislation appropriates $27.5B for highways, rails, and ports. Rather than spending the money on the most important roads and bridges, the law requires the money to be spent as fast as possible without regard to the usefulness of the infrastructure. Rather, it is to be spent only in "economically distressed" areas. The DoT only has 21 days to parcel out the cash and the States have only 120 to start using it. So much for time to think and do the right thing! A state failing to meet this timeline will have its funding redistributed to other states.
8. The end of state government
The legislation awards $53.6B to be distributed among the several states for the primary purpose (81.8%) of education. At $11k per kid (tied for highest among developed countries), that would fund the education of just under 4 million children, but so what?
As any economist knows, all this means is that states can cut education budgets and spend the money elsewhere. All that is happening is that we're saving incompetant state governments from having to raise taxes or borrow because the federals are doing it for them.
This is ok if you don't care for federalism at all. If states get into this habit, then the federal government will start attaching strings to the money it passes down.
One good thing though is that this money is apportioned based mostly on population (overall and schoolage) rather than political power.
9. Liberal Wish list
Much of the rest of the legislation, $1B here and another there, reads like a wish list of government programs that were starved during Republican rule and now are being funded.
It isn't big money, so it's not worth going through the details. I'm sure some of them, at least, are worth funding, but please, let's not pretend we're funding the projects to "create jobs" or revive the national economy.
10. It's not a stimulus
Government cannot bring the economy out of recession. It never has, and it never will.
And really, perhaps it shouldn't.
Testing comment
ReplyDeleteI believe the Tarp restriction was created by Dodd, because he wants to move people to hedge funds which are often based in connecitcut, politicans don't just enact changes because they feel like it, usually there is an underlying cause.
ReplyDeleteThere's always a reason. That there is some excuse for policy does not make it the best economic policy.
ReplyDeleteExactly, that is how politics work, however if people start learning and complaning and having insight, then politicans ways can "bend" but not necesarily "break".
ReplyDeleteEducation spending is a bit tricky, there are certain "non-economic" benefits to education, so I would generally support such policies, however education spending is not always linked dollar for dollar with higher incomes, there is a point in which further education spending doesn't do that and it varies with geographic location and socioeconomic groups, and so many other factors.
While, its true that states and cities with a higher education demographics and more education funding do better than states with the oppposite ways, there are excpetions and a sort of cliff or a law of diminishing returns in certain areas , cities and states. Also, in pure economic terms education is not purely vocational and not matched dollar for dollar, for instance a history major , or an art major, or music major may earn less than a engineering major in most cases. However, their may be non-economic benefits , for a person may love doing music therapy and while it pays lower, its not necessarily a dumb degree as one user had blogged on a persons website listing the top 10 most "worthless degrees".
For any degree to have economic value it must be applied, however education is not strictly vocational as taking a networking or computer class, its more broad based and encompasses research , thought exchange,etc while that can lead to higher gdp there is no exact math formula or way to predict a dollar for dollar amount as oppposed to a networking technician vocational class graduate making $20k a year starting working with cables for Verizon.
Thus , non-economic reasons such as lower crime rates, and learning about various topics and subjects in school can improve a persons quality of life. A person who learns a few things from his/her teacher about how to avoid mold in his/her apartment or comprehensive sex education or how to control rats or even social politics and psychology may not become a scientist and make 100k or become involved in healthcare but may make better informed decisions in his or her life , also social policy a person may study psychology , how and why sexual harrasment occurs for example and case studies, and become involved in politics and make a greater "non-economic" contribution to society rather than strictly a dollar amount.
In the case of college or vocational education, the benefits of education overwhelm flow to the student. In this case, better for the government to facilitate loan programs or provide the loans directly. (Practically, the direct loans have proven the most cost effective.)
ReplyDeleteProviding universal free college educatione noble is often not worth the tax dollars required to pay for it as you note.
Elementary and High school education do have significant externalities especially in crime and poverty reduction in low income families who are at the highest risk. These externalities can justify subsidies.
In order to justify government intervention, a program must not simply have benefits, but those benefits need to accrue to those other than the recipient.
What you call "non-economic" benefits are not strictly non-economic. At the very least they have a cost. Society must determine whether those non-economic benefits are worth the price tag. They may very well be, but this cost cannot be ignored.
Exactly, however economics can vary over time, for instance preventing logging on a national forest or park may have economic consequences, however in the case of alternative energy , the logging may not be needed in the future.
ReplyDeleteNote, I never said that non-economic benefits didn't necessarily not have a cost in reverse, however some "non-economic benefits" may be a bit cost neutral but have a higher quality of life.
The non-economic benefits may actually offset costs however in itself be cost-neutral in theselves.
For instance, if a woman has 8 children instead of 4 in a place of limited resources and economic opportunity this could be detremential to each individual. Now this is not to say that the 8 won't lead healthy productive lives in industrial nations, however there generally won't be the same standard of living on the split income (assuming income is the same regardless of number of children).
As such it is economic netural in a sense, 4 children -100k a year instead of 8 children 50k a year, again this is a very simplified example, lets assume one family.
Regarding this, this simplified example is cost neutral, but the non-economic benefits are clearly better (standard of living) for the family with 4 children rather than 8.
There is also a debate about confusing non-economic benefits perceived as cost when there may be an underlying reason that is not known immediately. For instance, in America unlike in Mexico and may nations, there seems to be a tolerance even among the poor, I will not go into detail among this subject at this time - but unlike other countries there has been no real guerilla warfare or uprising and the like which occurs in other countries democracies included.
This is despite glaring poverty, there seems to be a standard of living or a hope or some just acceptance standard which many would percieve as non-economic.
Psychology is non-economic in many instances for example and hard to value in purely economic cost terms.