Barry Ritholtz has a post on some strategies for stimulating the U. S. economy that I think is worthy of your attention. Here are the measures that he proposes:
- Greencard for Buying a home
- Corporate Tax-Free Repatriation
- One Year Payroll Tax Holiday
- Pure Science R&D Program for Alternative Energy
- Roads, Bridges, Tunnels
- Electrical Grid Refurbishment
- Airports, Ports
Some of these I agree with, some I’m skeptical about. So, for example, I think there are problems with #1 due to how it interacts with other aspects of our immigration law, specifically the emphasis on family reunification. You can buy a home for thousands (not tens of thousands) or even hundreds of dollars. I doubt that cobbling together a small amount of money, buying a teardown, getting your green card, and then using that to bootstrap the green cards of your relatives is what Barry has in mind. I guess the devil of this proposal would be in the details.
I think that #2, #3, and #6 are all worthy ideas. However, while we’re at it why not just abolish FICA and fund Social Security directly from general revenues?
IMO the results of #5 and #7 (at least from an employment standpoint) are likely to be disappointing. Contracts are let to a very small number of approved vendors for whom failure to deliver on time is more damaging than delivering in the shortest amount of time would be. They’re a lot more likely to space projects out so that they can execute them with the personnel they’ve got than they are to hire more people so they can bring them in ahead of schedule.
I think there’s a serious policy issue here, too. Vehicle miles driven have decreased in recent years. There is some evidence that the capacity we’ll need over the productive lives of our roads will actually be significantly smaller than was expected. As a matter of policy should we be encouraging or discouraging increased vehicle miles?
Should we really be paying to refurbish airports from general revenues (and borrowing)? Or does it make better sense to impose higher landing fees and use the proceeds to refurbish airports? I’m not sure this particular form of redistribution really makes sense from a policy standpoint.
As to #4, I think it’s a good idea but it’s one that needs bipartisan support, commitment, phasing in, and careful management if it is to be effective. I’m not sure any of those things is credible right now let alone all of them. And however worthwhile it might be we’re certainly not going to employ 8 million people doing alternative energy research. It’s a long term project not a “jump start”.
But that’s the title of Barry Ritholtz’s post: “Jump Starting the U.S. Economy” and that brings us around to the title of my post. Does the economy really need jump-starting? Or is the battery unable to hold a charge, the alternator broken, and the gas tank nearing empty?
That’s not just a flip response. The solutions that one proposes depends on how one thinks of the problem. I think our problem is more one of the battery being unable to hold a charge rather than needing a jump-start. We can’t just run down to Sears for a new battery for the U. S. economy.
I think there are probably a number of good ideas. But how do we move forward on anything innovative when the government is two dinosaurs fighting over a bone while the comet rushes toward earth?
I think that we had a demand shock, with massive cyclical unemployment which has become more structural. Companies found they could make lots of money w/o those marginal employees. I think that the idea Ritholtz suggests would help, but we are mostly in for a long slog as new businesses and products develop. Overhanging all of this will be the real estate inventory that needs to sell off, and housing prices that need to settle. I am still worried about Europe crashing and how that will affect us.
Steve
Michael gets to the heart of the problem. We can talk potential solutions all day but at the end of it we have to deal with political reality and that reality is two political parties that are about as effective as trying to run Windows 3.1 in 2011. Given the unsustainability of our current course, the only question is when cold, hard reality will finally break through the wishful thinking of our sclerotic politics.
At the risk of looking self-serving I like #2, #3, and #6 as well.
The payroll tax is horribly regressive, so a holiday would likely help provide some stimulus on the demand side.
The third idea could bring back more money into the US for investing which could help current unemployment and future output.
The last is not that well known, but our electrical grid is quite old. Here in California one of the big reasons for the electricity crisis was the lack of transmission capacity (the ability to move electricity over large distances). Various inter-ties would become congested making it much easier to game the market. Problem is that there is a lot of NIMBYis, and BANANAism involved that makes this one hard to get going quickly.
I’m also skeptical o f#5 and #7. Japan tried this, some parts of the country are nearly entirely paved with roads and airports.
Linky
More here too.
We are only at about 90% debt-to-GDP ratio, so what the heck, lets just keep right on going. There is no down side to this.
#4 sounds great, problem is the pay off wont come for some time if at all. The payoffs to R&D are similar to a random process, you learn/discover something that is useful, but most times not, or it doesn’t become useful for another decade. And what is the net impact going to be today? How many scientists/researchers are there languishing on the unemployment rolls? Are we going to be reducing unemployment now, or are we just going to push up the salaries for people in that field and eventually get more scientists and researchers in 5, 10 or even 15 years?
I’ve blogged on this over at OTB in the past but the research of Rogoff and Reinhart suggests that when a country’s debt-to-GDP ratio goes over 80% the growth rate of GDP takes a 1% hit. So if you are used to clipping along at 2.5 to 3.5% growth, after the rise in debt you’d drop down to 1.5 – 2.5%. That is a loss of trillions and trillions of dollars over several years and it also means that you’ll have lots less jobs as well.
Add on that we are likely in the “unit root” scenario that Mankiw described vs. Krugman’s “lots of slack capacity we just need more demand”. Have people forgotten how not too long ago the big complaint was how Americans were spending too much, consuming too much, that PCE was 70% of GDP? Now we need to make it even higher!?
Or that we have massively over invested in housing and financial services. That it is going to take a long time to re-balance that distortion in the allocation of revenues. People will need to change fields in terms of employment which will likely take re-training, pay cuts, and relocating. And these are things people don’t like to do so they put them off as long as they can. That it will probably take years for the excess housing inventory to unwind itself.
And all the while corporations are sitting on piles of cash. Could these firms be wary of investing only to find their investment under-mined by some “bold” new policy from our political class?
After all a crisis is a wonderful time to implement policies that absent the crisis would never have been implemented (health care, finance reform, the de facto government take over of GM, etc.). Investment spending is way down, and right now is a good time to make investments when you can get good prices. Normally during a recession you’d see a rebound in investment spending, but not now. Nonresidential investment is decreasing through 2009 in real dollars (reaching a level comparable to 2004). It started to go back up, the rate of increase has dropped of and is below 1% now.
This is why I’ve stated that a policy to help spur investment spending might be the best way to help get us out of the doldrums that we are currently in.
Demand shock, if you mean demand as a result of lack of investment then fine, if you mean consumer spending, I’m skeptical.
PCE is already 1.4% above its previous peak. Granted that was 2007 Q4, so not stellar, but compared to investment spending it is f*cking awesome (investment spending is still 16.79% below its previous peak. Non-residential investment is still 10.66% below its peak and the trend has been weakening in the last 3 quarters or so.
And have you always been thinking we needed to goose consumer spending or that it was getting too high?
If this is addressed to me, I’ve been bitching about inadequate investment for more than 10 years. I thought the tax cuts of the early Aughts, targeted as they were to goose consumer spending, were a screw up since consumer spending hadn’t dropped much while business investment had taken a nose dive. That was about the time that China was admitted to the WTO and a lot of investment was going in that direction.
I might also add that I as I’ve suggested here recently I think the “slack capacity” explanation in the U. S. case is, frankly, loony. Back to my metaphor our problem is that the battery can’t hold a charge. That’s not a slack capacity problem.
In reference to the other steve’s comment I think the cyclic explanation for what we’re experiencing right now presupposes that both the Internet bubble and the housing bubble were just part of the ordinary cycle. We have no idea what the economy would be like right now without them but it’s a pretty good guess that GDP, income, and job growth would have been lower without them.
That means a downshift from the 3% long term growth rate and that’s structural.
Admittedly this is local, and largely derived from family in the business, but:
1. Did the highway spending increase the number of employers? No, recent mergers have reduced the number of businesses.
2. Did the highway spending increase the number of employees? Not much, mostly the same people were showing up at the jobs, with overtime pay. There was a disappointing few temporary employees drawn from the construction trades here and there.
3. Did state and local government increase employment in the highway departments? No, the state was either incapable or unwilling to increase jobs in this area, though it cost them stimulus money.
4. Did Caterpillar increase jobs to manufacture more highway equipment? No, following the announcement of the stimulus project, CAT cut pay and ordered furloughs.
Did more people enroll in highway construction oriented engineering programs? Were building construction projects delayed due to spikes in material costs due to road construction?
1 through 4 strongly suggest that more road spending is not going to change much, at least unless we commit to something much more long-term like paving the country. Because all of the actors appear to be assuming that road construction is going to be a short-term project, not worth much investment. A good deal of this work was time-shifted from the future.
I don’t support any of the suggestions except six (I would have supported more of them a couple of years ago). My opinion of Ritholz is less than it was before reading this piece. Has he jumped the Frieman shark?
“some US airports look like they are from 3rd world countries.”
Not you Dave, everyone who is now suddenly on the “demand shock/demand stimulus” band wagon. Have they ever bemoaned the high level of PCE/consumer spending?
“Normally during a recession you’d see a rebound in investment spending, but not now.”
The data I have been looking at suggests that non real estate investment is doing pretty well. That it is real estate that is dragging things down.
Also, did you read Rogoff and Reinhart’s book? I gave my copy away and just got a new one. Based upon their work, I have thought that this was going to take 5-10 years to clear, if things went well. I never expected things to be a lot better by now.
On highway infrastructure, Japan had a lot of new construction. We have a lot of old construction in need of repair. If it needs to be fixed anway, why not fix it now? Same with the electric grid.
Steve
If you really want to get depressed, look at Gordon’s series of charts.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/06/balance-sheet.html
Steve
Before we just dismiss the idea of building airports, can we please recognize that Marin County has no airport of its own, relying instead on SFO and Oakland?
I’m just saying.
Commentators might be turning over “what might have been,” but policy makers are no where near any stimulus band wagon.
I mean, show me any actual legislative proposal for more spending in any area of Federal government.
(We were short transmission lines in California because f’n Enron declared good working lines “down” for their own convenience. It’s in the record.)
Agreed that from a short-term employment standpoint, #7 would probably not be much help. But airport bottlenecks are a huge drag on the overall economy. The 2008 stimulus bill should have done far more to address these.
Before we just dismiss the idea of building airports, can we please recognize that Marin County has no airport of its own, relying instead on SFO and Oakland?
Speaking of the Bay Area and airports, I found San Jose’s airport to be shockingly small.
I don’t know that there is necessarily a rule that airports need to be pleasant for economic growth.
In fact, it’s probably a fair bet that if they are pleasant, someone has overspent.
It’s not the lack of spacious accommodations, it’s the lack of terminals (and thus, the lack of direct flights). I suppose it’s because everyone uses San Francisco’s, but it just came as a shock when I was in San Jose and felt like I was in Boise.
Listen, I think we all have a God-given right to a local international airport with Air France, Jet Blue and/or Virgin, a selection of decent restaurants, free WiFi, and a club I can get into using Amex Platinum. Also shopping.
“Listen, I think we all have a God-given right to a local international airport with Air France, Jet Blue and/or Virgin, a selection of decent restaurants, free WiFi, and a club I can get into using Amex Platinum. Also shopping.”
I know that’s in jest, but it encapsulates the liberal mindset perfectly. I once mockingly remarked that it was just a matter of time until the cause of cell phones for the poor would be joined. Sure enough, not long after I saw “advocacy groups” doing just that. Subsidize cell phones. Its a “safety” issue, you know.
Drew:
I am not advocating that poor people be let into the Admiral’s Club.
Even if cell phones were an entitlement, I would not have one. If G*d had meant for us to suffer constant interuptions to one’s train of thought, he would have given us two heads.
You set a very low bar for “a lot better by now.”