Stimulus Package or Pork?

The House Appropriations Committee released its proposed economic stimulus package yesterday, which has supposedly been endorsed by President-elect Obama. Much of it is not within my area of expertise, but the parts that are seem very unlikely to promote any economic stimulus.

If spending money is all that is needed to revitalize the economy, then all the government needs to do is dig holes and fill them up. Unfortunately, too much of this stimulus package does little more than that.

I am not convinced that increased federal spending will help at all, but I am convinced that it won’t help unless that spending goes for things that are truly needed. Projects that are not needed or used will not produce any “multiplier effects,” which means the stimulus will be small and short-lived. Projects that are heavily used will produce multiplier effects that not only make the stimulus more effective, they make it last longer.

The best sign of such multipliers is whether people are willing to pay for projects out of user fees. In such cases, the feds might be able to jump-start projects, but the best way would be to offer loans to be repaid out of those user fees, not grants. This will also minimize the long-term effects of deficit spending, which in the long run could dampen any benefits from the initial stimulus.

Here are some line-by-line comments on the proposed package.

“Clean, efficient energy”: The package starts off proposing $32 billion for a “smart electrical grid.” According to George Mason University economist Alex Tabarrok, this may actually be a good idea. But if it is so good, we could do it in the form of loans to be repaid by electric companies out of electrical rates.

“Transform our economy with science and technology” includes $6 billion for broadband internet access. I’ve lived in the boonies for 10 years (two different boonies, in fact), and believe me, you can get broadband anywhere you want it. We don’t need government support to expand it.

“Modernize Roads, Bridges, Transit, and Waterways” includes $30 billion for highways and $10 billion for transit, meaning transit gets 25 percent. That’s an increase from historic levels of federal support to transit, which (since 1991) has been 15 to 20 percent. Yet transit moves only about 1 percent as many people as highways. This $10 billion for transit is a complete waste. Transit fares cover only about a quarter of transit costs, which means we are already spending way too much money on it. Fortunately, the package includes only $1 billion for new rail construction, which limits the damage somewhat — my major concern is that we don’t build a bunch of new rail lines that will impose more deficit spending down the road.

Highway user fees, on the other hand, pay for more than three-quarters of highway costs, and could pay for 100 percent without increasing the costs of transportation by more than 2 percent. So the $30 billion for highways should be in the form of loans, not grants, that would be repaid out of highway user fees. There is no reason why any tax subsidies should be given to highways (or, for that matter, any transportation).

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Another $3.1 billion goes to federal lands for “improvements to visitor facilities, road and trail restoration, preservation of buildings of cultural and historic importance, rehabilitation of abandoned mines and oil fields, and environmental cleanup projects.” Most of this is not going to have any multiplier benefits and should be paid for out of public land user fees (except that Congress won’t let the agencies charge users market rates).

Another $850 million will go to hazardous fuel reductions to stop forest fires. No multiplier effects, virtually no benefits. Most will go to reduce fuels on private lands. Why can’t the private landowners pay for it? Again, this should be loans, not grants, if it should be done at all (which it probably should not).

The package also includes $13.5 billion for various kinds of housing subsidies. I don’t think these will do much.

A lot of the package is oriented toward “green” technologies. For example, it proposes to replace many vehicles in the federal auto fleet with “alternative-fuel vehicles that will save on fuel costs and reduce carbon emissions” and money to renovate federal buildings with a focus “on increasing energy efficiency.” Has anyone done an analysis to find out if these things are cost-effective? I strongly suspect that the energy cost of building new vehicles or reconstructing buildings will outweigh the energy savings.

As previously noted here, tax cuts are likely to do more to stimulate the economy than more deficit spending. So the proposed $275 billion in tax cuts may be more effective than the $550 billion in spending.

I am not familiar enough with the issues to comment on the education, health care, public sector, or most of the other parts of the package. Education is one thing that my user-fee rule might not apply to. But our educational system is so rotten and inefficient that I can’t expect this will do anything other than boost teacher and administrator pay.

In general, it appears to me that every federal agency and interest group that submitted proposals got some of what they asked for. Instead of picking projects that really have a chance of stimulating the economy, whoever put this package together seemed more interested in giving every powerful interest group a piece of the action. As Meagan McArdle says, “Mostly, Democrats took their wish lists, called them “stimulus”, and look set to inflict them on the American people in badly done drag.” I am therefore pretty pessimistic that it will do anything at all.

The good news is that the economy will eventually recover. When it does, there is no doubt that the people who approve this package will take credit for it. We can only hope that some future Milton Friedman will successfully debunk their claim, or at least the parts that are untrue.

One more point: What does it mean that an airplane that “landed” in the Hudson River received at least 20 times as much attention from the major news networks as the proposed stimulus package? No one seems to be phased or even to care that Congress is about to spend more money than it has ever spent before — most of which is likely to be a waste.