Understanding What Economic Stimulus Means

When you watch the news these days, you see and hear a lot of people arguing about what will or won’t Stimulate the Economy. As far as I can see, most of these people don’t get it. Barack Obama gets it, because he has a Big Picture approach to the problems we’re facing. Unfortunately, he’s not saying what he needs to say so that other people can get it.

It isn’t only money, and it isn’t only jobs. What we have to stimulate is the whole economy. What does that mean? That means we have to take actions that are going to result in the whole economic system running more efficiently, more effectively, and more cheaply, so that the businesses of the country have a good shot at continuing to make progress after the Stimulus funds run out.

Let’s consider how this works. When you improve a highway, you put construction people to work. Those construction people can then go out and spend their earnings buying things. The stores that sell those things and the companies that make those things can then afford to keep their own employees on the payroll, because the orders are coming in. When those employees keep their jobs, they keep money flowing into the economy to help other stores and businesses. In addition to all this, every person who’s employed puts money into the government through taxes, and puts more money into government by no longer needing financial support through unemployment insurance payments and food stamps. And so on.

But that’s just the surface of the situation. We started with improving a highway. When that improvement is finished, traffic flows will be improved. The road should be safer, and should be able to move more vehicles faster. Faster transport lowers the cost of moving goods for business, freeing up more money for hiring employees (!) or even reducing prices (which would allow our newly employed road-builders to spend their dollars on a wider range of goods).

If the plan is well-designed, by the time the construction projects are completed — and that will be a long time — the economy will be building up again and workers will be needed for other construction projects, such as erecting business offices or manufacturing premises.

One reason this works is because the Stimulus plan is not limited to improving highways. There is the redesign and rebuilding of the energy grid, to improve its capacity to carry energy produced by alternative technology to the places where that energy is needed. An upgraded grid will be more efficient and will help reduce the cost of power down the line. In an information age, a stable electric system will be critical to expanding business.

Significant, organized expansion of our communications system, improving broadband access, is another important step to make sure American businesses remain competitive in an age when China and India are making great strides in technology.

Sure, all of this is infrastructure work that will require a large number of workers, but it doesn’t stop stimulating the economy when the construction is over. It will stimulate economic growth for years to come.

But let’s not stop there. What else can the government do to improve the business climate? For one thing, it can support the adequate training of our future work force, our future managers, our future businessmen, our future engineers and technologists. How? By improving the schools, both in terms of the physical buildings and in terms of what those buildings contain — good teachers and administrators, developing good students. Refusing to spend money on education because it “doesn’t stimulate the economy” is like refusing to buy quality ingredients for a restaurant and then wondering why the food doesn’t attract customers.

What about the computerization of medical records? Eliminating the wasteful expense of maintaining paper-based record systems in our medical facilities will reduce the overhead passed on to the patients. This in turn cuts into the amount of insurance needed, which should lower premiums. Where does that savings go? Right back into the economy. Not only is the hospital running more efficiently and handling internal and external information demands more rapidly (thus saving lives and reducing medical complications as a marvelous bonus), it is also saving money and allowing more money to flow where it really is needed.

Are there other systems that the government could beef up in order to enhance the smooth running of business? Of course. The post office is threatening to cut back service because it can’t meet all its expenses. Will slowing the flow of the mail be good for America’s business? And if keeping the mail moving is a basic need of the economy, why are we asking those who send first class mail to bear most of the cost? Shouldn’t this be subsidised by the taxpayer in the long term, in the best interests of the citizenry as a whole?

And what about Amtrak? America is a big country, and there’s a lot of empty space between population centers in the West. Who should pay for people to move from place to place? As long as we don’t treat our rail service seriously as a form of mass transit, we’re encouraging people to buy private transport and burn foreign-source fossil fuels to move from place to place. Will it stimulate the economy to improve our rail system, both for passenger travel and for freight movement as well? You can be sure of it.

The cost of moving goods by rail is far less per mile than other forms of transport, but all we’ve done to encourage the use of rail is talk about it. The service on Amtrak, compared to train service in Europe and Japan, is a joke. The improvement of the rail system has to go beyond merely straightening a few rails. We need to add lines, so Amtrak and freight trains can use them simultaneously. We need to improve service, so using trains is more satisfactory. We need to increase service, so it’s actually available when people need it. We need to recognize that a government subsidy may be needed in order to make this vital economic element of our system workable.

The same thing is true of mass transit systems in our urban areas. If we really want people to leave their cars out of the central cities (thus reducing fuel use, relieving congestion, and eliminating need for expanded parking), we have to make it more satisfactory to ride the bus. This means more routes, more frequent travel and lower fares. Will the bus service pay for itself? Probably not, but why should it? When we look at what our economy is gaining by providing this service below cost, it more than pays for itself in savings.

This is one of the major problems that we have faced when talking about the Stimulus Package. People think about the major element involved in the package, and how that stimulates the economy — like the hiring of construction workers — but they forget to go beyond that and see the incredible array of side effects. People don’t think about the interrelated nature of all of these actions and how every little boost given by one program is multiplied by boosts coming in from every other direction as well. People don’t look at the Big Picture, and don’t ask the Big Question:

How can we spend our money so that it really stimulates the economy — and how can we measure whether the economy is stimulated?

There are a few key premises that have to be kept in mind.
• First, giving tax breaks to people who have lost their jobs and so don’t pay taxes does those people little good.
• Second, giving money to people who already have money is not going to get that money into the economy. It is the lower-earning worker who is guaranteed to put his money back into the economy, while the higher-earning worker can simply save his extra earnings against the time when he feels it safe to invest again. Hiring three workers at $30,000 each will do more for the economy than hiring one person at $90,000, partly because it takes two more people off the unemployment rolls!
• Third, spending money in endeavors that are labor-intensive is more effective than spending it on expensive equipment — unless that equipment is going to provide long-term savings that will make the economy run significantly more smoothly. Cost effectiveness has to be examined carefully. A prime example of non-stimulating spending is the buying of expensive weapons systems, which are used once and destroyed in the process of use. Sure, a few people work in the weapons factories, but when you look at how effectively the spending of money on weapons has improved our economy (especially when you consider how effective those weapons have been, per dollar spent, on achieving the purpose for which they were made), you can only sigh.
• Fourth, the government needs to focus on providing the services necessary to keep business moving effectively. Infrastructure is more than such physical things as roads, bridges, and high-power lines. It is also services like the mail, education, health care, and mass transit. There are many functions that government performs that have become serious bottlenecks to progress — the FDA doesn’t have enough inspectors to thoroughly check our food, and bad meat and produce are reaching our stores as a result. Recalls are an incredible waste of everyone’s money, and are brought on by the “savings” of reducing inspection staffs. The same is true of our Air Traffic Control system, other regulatory agencies, our court systems, and so on. The impact on the economy of all these poorly operating, glacially-moving systems is incredible, and all that’s really needed is a little manpower. Why don’t we have this manpower already? Because too many people think that government involvement is “Socialism”. Well, you can’t have it both ways. Either the governnment provides the services the country needs, or the entire country and its economy suffer.

In the final analysis, the stimulus that works is the stimulus that pumps as much money into the economy (as opposed to under people’s mattresses) as possible, gets as many people off of unproductive government funding (like unemployment and food stamps) as possible, and simultaneously improves for as long as possible the efficiency of the system in which business works. No project that does all of these things is “Pork”, and that’s all there is to it.