Tuesday, January 27, 2009

Economics with Jack

Marginal Revolution recently posted a link to a debate on the pros and cons of a government stimulus package. DeLong argues that government spending, by using unemployed resources--that would be you and me--will create $150 of output for every $100 spent. Murphy says (and I agree) that DeLong is giving the government far too much credit: he assumes the politicians will be able to directly target the various underemployed/unemployed tech workers, small business entrepreneurs, and former bankers who are being shifted out of dying industries as the financial system reboots itself. He estimates the gain at $50 of value added for every $100 spent.

My take on the issue is that Congress is inherently wasteful. John McCain made his whole Senate career by pointing out how much pork is tucked into every piece of legislation--and let's not pretend that the non-pork spending went to the best firms for the job, either. The stimulus, as a political issue, is going to happen anyways of course. Unlike Murphy, I don't see that as a bad thing.

The economy is shifting resources from construction, manufacturing, and high-level banking into whatever the next big growth industry will prove to be. Obama needs to invest in retraining these workers instead of building highways--to make an investment in human capital instead of plain capital. Pell grants need to go up, state and local debt needs to be assumed, and research and technology firms should get more money as well. Recapitalizing the bank system needs to happen as well, and that should be the focus of the short-term tactical debate. In the long run, though, we need to support the college-educated and experienced workers who are currently underusing their skills. An infusion of cash into sick industries, like autos and construction, is not going to benefit the intended stimulus targets in the long run--like Murphy says, can you imagine an unemployed investment banker working a jackhammer? Stop sending money to inefficient companies. Money spent reorienting the workforce and making full use of the university research system will eventually drive the recovery and prove itself the best option.

Failing that, let's recognize that top-down intervention is possibly a bigger headache than it is ultimately worth. A corporation that can't earn more than a dollar back on a dollar spent has an obligation to return that money to its owners in the form of dividends--this from no less an authority than Warren Buffett--and there's no reason why government should be different. Tax cuts would put cash back into the private sector, and the arguments in favor can be seductive. On the other hand, that means we would be hoping that average citizens, who would almost certainly use the money for bills, interest, or saving, would gradually begin to start buying and investing once more (or so the logic goes). If we go through with the tax cuts, you would in fact see saving and investment balance out--because the sector shift will also balance out. It's much much better to concentrate on providing a safety net for workers than on public works. Trust me, I'm a poet.