Monday, February 09, 2009

Government investment vs. government consumption 

Angus has this quite right, in both praise and damnation of Paul Krugman.
It seems to me there are three major components to the bill: Shoveling dough to Congressional Democrat's pals, implementing Obama's rebuild America vision, and the stimulus.

Now all these can be seen as interlinked; as Obama pointed out stimulus = spending, but philosophically I think they are different.

#1 is business as usual and probably would have increased anyway just given the new political power alignment. It's just pretty convenient for the Dems to lump it into a "save the world" bill and be done with it. Plus once it's in the budget, it's the new baseline. #2 should be done carefully and slowly on a cost benefit basis, not on a which is ready to go sooner basis. The rush will cause a lot of money to be wasted. And even shovel ready projects take a fair amount of time to complete. #3 should be done in a serious way. Tax rate cuts, not rebates. No further subsidies for housing, in the short term the best thing is for the Government to buy stuff they can take immediate delivery of (and possibly even somehow use).

...Finally, I think it's a tactical mistake by the Republicans to insist on cuts/modifications to the bill. If it works, they aren't going to get any credit at all. If it doesn't they could well get blamed for having been too stingy.
Angus does not really want a bill, just that if you're doing it, do it right. I would differ slightly from Angus in that I prefer to see more government investment to government consumption. Here's an article about the difference, below is a graph of the two at the federal level.Source. Investment should provide some return. A big piece of government investment is in defense goods; based on this information from the House bill, there is precious little stimulus from defense.