With our economy continuing its dispiriting downward spiral, there is much talk about a needed fiscal stimulus from the federal government - as well there should be. The logic behind this is that federal spending is needed to stimulate the economy in a period of slack demand. With consumer spending at low ebb, investment in everything from housing to physical plant non-existent, and export markets in the tank, government is viewed as "spender of last resort."
The Bush Administration attempted a fiscal stimulus earlier in 2008 by issuing rebate checks to taxpayers, amounting to several hundred dollars. While it is nice to receive a few bucks from Uncle Sam, Bush's plan was ill-conceived, short lived and ineffective.
Some of that money was used to purchase goods manufactured abroad, which does nothing to stimulate our domestic economy. And some of it was used to pay down household debt. Now there is nothing wrong with paying down household debt, thereby strengthening household balance sheets. C'mon, I'm Swiss - I'm all for saving and reducing debt. But an additional few hundred dollars in increased household equity is far short of what it takes to stimulate our economy, at least in the short run. And as the great economist, John Maynard Keynes, observed, "In the long run, we're all dead."
The Bush Administration stimulus plan failed to meet three criteria for an effective fiscal stimulus program. These criteria for effective stimulus include: 1. It should provide ongoing effective demand for goods and services including, and especially, labor. 2. It should generate a multiplier effect to stimulate demand for related goods and services. 3. It should be spent for projects that improve the productivity of our economy.
A massive program for rebuilding our nation's physical infrastructure - roads, bridges and commuter rail lines - meets these criteria. Let's take a closer look at just how such a program would meet these criteria and be more effective than rebate checks to individuals.
Ongoing demand for goods and services: Construction and repair of roads, bridges and rail lines creates demand for basic materials such as cement, steel and lumber. It creates immediate demand for domestic labor in engineering and construction. It takes construction equipment made by firms such as Caterpillar and Deere that generate good manufacturing jobs. A rebate check creates no such domestic demand.
A multiplier effect: Demand for basic materials creates related demand for labor to produce these materials, and transportation to move them from source to end-use. Increased labor income from construction, manufacturing of equipment, and production of materials creates further demand for goods and services that families need and use. This money is re-circulated in local and regional economies. The entire economy begins to become energized instead of spiraling downward. In contrast, a rebate check creates no such multiplier effect, especially if it is used to purchase goods made in China.
Increased economic productivity: A more efficient highway and rail system promotes safety and reduces costs. Separate lanes for trucks on our most heavily traveled interstate highways would promote safety, as would safe bridges. (Recall the recent fiasco in the Twin Cities with the collapsed bridge.) High-speed commuter trains would relieve highway congestion and conserve energy resources. Rebate checks yield no such economic and social benefits.
Of course, a stimulus plan should promote projects that should be done anyway, some of which already are on the drawing board and have been delayed. Bridges to nowhere should be avoided.
A stimulus plan such as this, proposed by President-elect Obama, is a win-win situation. With our anemic economy, prices of basic raw materials are down. Construction in a period of slack demand not only takes advantage of low basic material costs, but also stimulates the economy by employing labor when the economy desperately needs to provide good jobs with resulting multiplier effect.
Can the nation afford it? What this nation cannot afford is to let this economy continue on its downward spiral. Just as it took government spending, unfortunately on wartime goods, to finally get us out of the Great Depression of the '30s, so it will take government spending to get us out of this recession and, hopefully, prevent a severe depression.
Although there is a lag between plan approval, authorization and appropriation by Congress, and actual construction, the mere assurance that such stimulus is on the way would be a start toward renewing much-needed confidence in the viability of this economy.
Obama is right to push for such a plan. And Congress should authorize and appropriate the funds post haste.
- John Waelti is former Professor of Applied Economics, University of Minnesota; and former Head, Department of Agricultural Economics, New Mexico State University. He lives in Monroe and can be reached at jjwaelti@charter.net.
The Bush Administration attempted a fiscal stimulus earlier in 2008 by issuing rebate checks to taxpayers, amounting to several hundred dollars. While it is nice to receive a few bucks from Uncle Sam, Bush's plan was ill-conceived, short lived and ineffective.
Some of that money was used to purchase goods manufactured abroad, which does nothing to stimulate our domestic economy. And some of it was used to pay down household debt. Now there is nothing wrong with paying down household debt, thereby strengthening household balance sheets. C'mon, I'm Swiss - I'm all for saving and reducing debt. But an additional few hundred dollars in increased household equity is far short of what it takes to stimulate our economy, at least in the short run. And as the great economist, John Maynard Keynes, observed, "In the long run, we're all dead."
The Bush Administration stimulus plan failed to meet three criteria for an effective fiscal stimulus program. These criteria for effective stimulus include: 1. It should provide ongoing effective demand for goods and services including, and especially, labor. 2. It should generate a multiplier effect to stimulate demand for related goods and services. 3. It should be spent for projects that improve the productivity of our economy.
A massive program for rebuilding our nation's physical infrastructure - roads, bridges and commuter rail lines - meets these criteria. Let's take a closer look at just how such a program would meet these criteria and be more effective than rebate checks to individuals.
Ongoing demand for goods and services: Construction and repair of roads, bridges and rail lines creates demand for basic materials such as cement, steel and lumber. It creates immediate demand for domestic labor in engineering and construction. It takes construction equipment made by firms such as Caterpillar and Deere that generate good manufacturing jobs. A rebate check creates no such domestic demand.
A multiplier effect: Demand for basic materials creates related demand for labor to produce these materials, and transportation to move them from source to end-use. Increased labor income from construction, manufacturing of equipment, and production of materials creates further demand for goods and services that families need and use. This money is re-circulated in local and regional economies. The entire economy begins to become energized instead of spiraling downward. In contrast, a rebate check creates no such multiplier effect, especially if it is used to purchase goods made in China.
Increased economic productivity: A more efficient highway and rail system promotes safety and reduces costs. Separate lanes for trucks on our most heavily traveled interstate highways would promote safety, as would safe bridges. (Recall the recent fiasco in the Twin Cities with the collapsed bridge.) High-speed commuter trains would relieve highway congestion and conserve energy resources. Rebate checks yield no such economic and social benefits.
Of course, a stimulus plan should promote projects that should be done anyway, some of which already are on the drawing board and have been delayed. Bridges to nowhere should be avoided.
A stimulus plan such as this, proposed by President-elect Obama, is a win-win situation. With our anemic economy, prices of basic raw materials are down. Construction in a period of slack demand not only takes advantage of low basic material costs, but also stimulates the economy by employing labor when the economy desperately needs to provide good jobs with resulting multiplier effect.
Can the nation afford it? What this nation cannot afford is to let this economy continue on its downward spiral. Just as it took government spending, unfortunately on wartime goods, to finally get us out of the Great Depression of the '30s, so it will take government spending to get us out of this recession and, hopefully, prevent a severe depression.
Although there is a lag between plan approval, authorization and appropriation by Congress, and actual construction, the mere assurance that such stimulus is on the way would be a start toward renewing much-needed confidence in the viability of this economy.
Obama is right to push for such a plan. And Congress should authorize and appropriate the funds post haste.
- John Waelti is former Professor of Applied Economics, University of Minnesota; and former Head, Department of Agricultural Economics, New Mexico State University. He lives in Monroe and can be reached at jjwaelti@charter.net.
