Stimulus Plan should focus on Investment!!

The debate over the stimulus is starting to get really annoying. While I accept that implementation could be a real challenge, the approach that we should be taking is not that hard to figure out. It is accepted by economists across the spectrum that getting out of a slowdown requires spending. They may differ about how best to do this (Keynesians want government spending and Friedmanites want tax cuts), but spending is a given.

But we are in this mess because every sector of our society has been spending more than it has. The government has a huge deficit due to Iraq, the Bush tax cuts, etc. Banks way overleveraged using CDOs etc. Consumers have maxed out on credit and pulled mythical equity out of overvalued assets to buy flat screen TVs and eat at fancy restaurants.

So the solution should definitely NOT be something that encourages consumption!! Do NOT encourage people to go out and buy another flat screen TV. That’s what got us into this mess. If we need to increase spending, we need to increase investment. Keynesians should be pushing government spending on investments in human capital (education), technological infrastructure (broadband), transportation infrastructure (high speed rail) and looking hard to find the ones with the best returns. Friedmanites should be looking at across the board (no industrial policy allowed) tax cuts that will go towards investment (R&D tax credits, education tax credits).

And because of globalization and our preference not be become protectionist, we should also be finding investments that would naturally be spent here (forcing highway builders to use only US-made steel just causes other countries to retaliate and defeats the whole purpose). Retrofitting buildings to make them more energy efficient could work because it saves money in the long run (it is an investment), a lot goes to labor (which is local), and could build up capabilities in green engineering and technology for the private sector to take advantage of in the future. It can also be launched pretty quickly (if we start with government buildings), which is the other requirement of a good stimulus.

I accept that there are differences of opinion on the details. How to do this quickly, how to get a decent bang for the taxpayers’ bucks, etc are tough decisions. But to focus on investments rather than consumption is so blatantly obvious. I just want to cringe every time I hear a politician or an economist talking about getting money in the consumers’ hands so they can go out and spend. That may alleviate some of the short term pain, but it will make it worse in the long run. And with a higher deficit (that our children and grandchildren will have to pay back) to boot.