In my last article, I described ways in which government and business have similarities, and how one could apply the business principle of “good debt” to government. Today, let’s peek inside the (ARRA), which is often referred to as the “stimulus bill.”
The bill was sold to the public as a means of jump starting the economy, primarily through the application of the counter-cyclical principle. I’m not going to say more about it here, because it’s not the primary point of this article. Rather, my focus here is the degree to which the ARRA represents a good investment on its corresponding debt load. If there’s interest, I can expand on counter-cyclical Keynesian economics in a future article.
The timing of taking on debt is often overlooked, but very important. With interest rates at historic lows, this is actually a pretty good time totake on debt, assuming you have a choice over when to do so. Long-term debt (such as 30-year notes) is good to issue when rates are especially low, and right now it’s sitting in the mid-2% range.
In examining the categories of ARRA expenditures, I did a few things. First, I looked at the categories as defined in the bill itself. Then I looked at the more specific descriptions of the targets of the funds. In some cases, I moved funds to other categories. For example, funding for low-income housing was spread across a few categories, so I consolidated those. After that, I put the money into broad categories of my own creation that quickly became apparent to me when looking at the targets of the money. Those categories (in decreasing order of size), along with their definitions, are as follows:
- Long-term Investment (27%): These funds go toward areas that are likely to generate minimal economic benefit for several years, but are in areas that are good bets for significant economic benefit over the long haul.
- Tax Breaks (23%): This is the representation of tax revenues that otherwise would have been collected.
- Gap Closure (20%):This is money that goes to states to close budget gaps arising from the combination of lower tax receipts and a greater burden on government services, both of which arose from the recession.
- Safety Net (13%): This includes welfare, , and the like. It appears from what I can gather that nearly all of this money, other than the extended unemployment benefits, is intended to address the larger burden on government services caused by the recession.
- Maintenance (12%): This is money that covers maintenance on existing government infrastructure.
- Cash Infusions (5%): 60% of this is a one-time Social Security payout. It is, in essence, the equivalent to the individual tax credit in the same bill. The remaining 40% consists of things like the homebuyer credit and car sales tax deductiion.
While this adds up to 100%, there’s an additional 1% (due to rounding errors) that went to what looked like pure pork.
I’ll sidebar a little bit here about the 73% of the bill that is not devoted to long-term investments, and then return to the long-term investments.The overall breakdown of the bill is representative of the typical sausage-making that happens in Congress. Almost all of these expenditures are defensible in stand-alone spending bills, for various reasons.
The 23% devoted to tax breaks, plus the 5% of cash infusions, was “sweetener,” mostly about marketing. Obama campaigned on the promise to cut taxes to 95% of the population as part of his economic plan, and a full 18% of the bill (79% of the tax reduction) is devoted to this. Because the money comes with no strings attached, its impact on the economy is unfocused. The upshot is that the bulk of the $140B spent here (according to several reports I read) went to individuals’ debt reduction. While individual debt reduction is probably good for the economy in the long run, its impact in the short run is minimal at best.
Much the same can be said for the pork, which thankfully was a very small percentage of the bill. It’s expenditure, and typically pork goes to paying somebody to perform some sort of work, which has a small stimulative impact on the economy. This, plus the tax breaks, are essentially the cost overhead of getting support for the bill.
Then 12% for maintenance is a stretch for this bill. Maintenance, as a rule, should come from general fund expenditures, and should have been properly covered by current tax revenues. In that respect, this is “bad debt.” On the other hand, these are maintenance expenditures that have been put off for a number of years, and a sudden infusion of cash for these projects will have stimulative effects. Also, depending on the level of deterioration being corrected, the impact can be similar to that of new infrastructure. Finally, the excess construction capacity in the US today presents an opportunity for good value in performing this maintenance now. Ultimately, the greatest benefit that arises from these maintenance expenditures is marketing. Most of these projects get to have big signs in front of them, telling the public that the project is being paid for out of ARRA funds, “putting Americans to work.” In other words, this is largely the marketing that appears after the bill has been signed, while the tax breaks and pork are the marketing that gets the bill passed in the first place.
The 20% slated for gap closure, plus the 13% in safety net, is essentially spending from a defensive posture. That is, this money is intended to stop the death spiral of people getting mired in poverty, who no longer can afford to buy basic necessities, and therefore essentially exit the economy altogether. It is this death spiral that led to shantytowns in the 1930s, so the defensive spending to stop this is essential. It’s much harder to tell whether this is the correct amount of money needed to stop it. Hopefully, the answer came from people with far more data and time than I have. The death spiral did stop shortly after these funds began to flow and the economy stabilized, which suggests that it was successful, though in the absence of a true control the causal relationship cannot be proven.
Back to the primary point, there’s 27% of the bill devoted to long-term investments, the most interesting part of ARRA from the perspective of the “good debt” principle. Let’s look at those expenditures more closely.
31% of the long-term investments go to what I call transportation. Unlike the traditional notion of transportation as movement of physical goods, I am including the movement of electricity and data as well, since they are all roughly equivalent today, insofar as they are all directly involved in the movement of valuable “stuff” as part of commerce. Historically, transportation infrastructure investments by government are typically in areas where private investment would shy away, for various reasons. Where a single private industry is the primary beneficiary of a particular transportation mechanism, government investment is less needed, as in the case of fuel pipelines and some parts of the electrical transmission system. But in cross-industry transportation, government expenditures have a well-established track record of substantial positive long-term impact on the economy. Witness, for example, the railroads, interstate highway system, and the Internet.
The next largest investment category, at 22%, is education. I excluded the money that is slated for gap closure from this category. What’s left is basically college subsidies (in the form of grants and tax credits), job training, and education targeted at those with disabilities. The firstt wo are good areas for economic improvement, as they have a high correlation with income growth and/or protection from income erosion. I don’t know enough about the third to comment on its effectiveness. What is most important in the first two is the extent to which these dollars are spent on people who otherwise would not have received this education. subsidies that are targeted to low-income people are going to have a better correlation than those that are not. Both of the college subsidies meet this criterion by having income caps. The job training is targeted at those who are recently unemployed, which is far from a bad choice, though its return is not likely to be as good as the college subsidies.
19% of investments goes to oil dependency reduction. It’s about a 40/60 split between subsidizing energy efficiency and subsidizing non-petroleum energy technology investments. The former has easily-understood, but modest, returns on the investment. The latter is made up of bigger bets with unknown degree and time of payoff. It’s certainly worth doing, because the petroleum path is unsustainable, but it’s hard to tell which are the right bets to make, and Congress is lacking in the expertise necessary to intelligently make those determinations. Something like the Ansari X Prize would be a great way of combining government funding with the Darwinistic power of free enterprise to achieve the goals quickly and efficiently. I find this approach appealing, though unlikely.
Another 13% targets reduction in healthcare costs, through investments in information technology. As with the technology investments in , the payoff on the bets is uncertain, and it’s hard to draw a connection between this investment and an improved economy, at least when compared to the transportation or oil dependency investments.
The last significant investment category is natural resources, at 8% of investment dollars. Nearly of this is either directly or indirectly about making more water available for home and farm use. In many ways, this is a similar investment to transportation. Shortages of water are resulting in pressures on commerce, whether fishing, farming, or technology, all of which are water-intensive. This investment, therefore, is aimed at reducing growing frictions in commerce, and should pay off handsomely.
The remaining 7% of investment goes mostly to building safety-net government facilities. This might have some pork in it; it’s hard to tell. If so, then the bill has a total of 2% pork, rather than the 1% I outlined above. If it’s not pork, then it has a value that’s marginally greater than pork. That is, it is in the worst category of investments in that it probably has little or no return on the investment.
So over three quarters of the investment money is almost certain to have a good rate of return, based on historical evidence. Not too shabby, especially for a bill as large as this one.
In summary, the bill is divided into four primary categories: sweeteners to get the public and members of Congress to like the bill, infrastructure maintenance that had been deferred, defense against a death spiral of devaluation as people exit the economy, and long-term investment in infrastructure to stimulate the economy.
Is this a good use of the money? For about 60% of it, I believe the answer is “yes.” But I’m not pleased that so much of this bill was devoted to a series of one-time tax credits and deferred maintenance. As I mentioned in my previous article, these expenditures are not good places to spend the proceeds from debt. Obviously, politics drove this 40% ($316 B dollars!) of the bill. Could the bill have been passed with less expensive marketing? It’s easy for me to sit here as an armchair quarterback and say that it could, but I’m much more an economist than a politician. What do you think?
And, now that I’ve broken the bill down in various ways, I have a couple of questions for you. First, assuming that we are going to add $790B to the national debt, where would you have spent the proceeds, and why? Second, assuming you could choose how much debt to add, as well as where to spend it, how much debt would you have added, where would you have spent it, and why?