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Wednesday, September 14, 2011

Stimulus Spending - The Good, The Bad & The ROI

Nowadays the political dialog about stimulus spending is increasingly polarized. My purpose in this blog is to describe the polarization, and to discuss a third, compromise viewpoint.

On the one hand we have people who seem to believe almost any form of stimulus spending is good. Following Keynesian logic, perhaps even more than Keynes would, they seem to believe all that matters is for the government to inject money into the economy and "prime the pump". As long as enough money is distributed to enough people, the thought is that they will spend the money and generate demand for more goods to be produced by the economy, and this will cause economic growth. If the 2009 $800 billion stimulus package failed to create economic growth, its because not enough money was spent, and the correct solution is to spend more money, even on the same things - eventually that will kick start the economy. They may argue this is good even if the government must borrow the money for stimulus spending, because economic growth will eventually help the government pay off the debt. If there is a concern about the debt, they may argue taxes should be increased on the wealthy, even if that may stop business owners from hiring new employees.

On the other hand we have people who seem to believe every form of stimulus spending is bad. They argue the government can never spend money as efficiently or wisely as private enterprise. The government should never borrow money for stimulus spending and never raise taxes for stimulus spending. Instead the government should cut taxes and spending as much as possible, and let private enterprise operate as freely as possible, to achieve economic growth. The government should only spend money on constitutional responsibilities, such as defense.

I think the truth is not at either extreme: Stimulus spending is not always good or always bad. It can be good, but only if focused on projects that directly produce a return on investment (ROI) beneficial to economic growth. The goal of stimulus spending should not be to "eliminate unemployment", or even to greatly reduce unemployment. The goal should be to provide resources that will enable the economy to grow, so that the free enterprise system will create more jobs naturally.

Here are some examples of government funded projects that generated ROI directly beneficial to economic growth:
  • The Erie Canal.
  • The Panama Canal.
  • The Hoover Dam. 
Each of these were successful, government-funded large-scale projects that directly benefited economic growth and generated return on investment for decades after their completion. This is not to say that all government funded canals or dams have been worthwhile. No doubt, many have not. My point is only that these were examples of worthwhile, successful government-funded projects that greatly benefited the economy. They are cases where government spending was successful.

The ARPANET is another example of a government-funded research project that has benefited economic growth. It was initially funded to make expensive computers more accessible to researchers across geographic distances -- essentially an economic goal to support science. In providing the technology that eventually became the Internet, it led to economic growth far beyond original expectations.

Given these examples, what kinds of government projects can be expected to generate ROI for economic growth, looking forward?

First of all, it's not clear the US budget can support much stimulus spending in present circumstances. However, if we are going to invest stimulus money then it should be used for efficient, conventional large-scale energy production to generate both short-term and long-term self-sustaining jobs, promote economic growth & energy independence. 

Energy is a primary resource needed by our economy, supporting or required by virtually every sector of our economy. Energy prices are a cost component of many other products and services produced by the economy (e.g. in manufacturing, transportation, farming, communication, information processing, etc.) In a separate paper, I discuss the relationship of gasoline prices to unemployment in the crash of 2008 and the years afterward. The US economy would resume strong growth if the government would allow US companies to rapidly increase domestic energy production in oil, natural gas, clean coal and nuclear energy.[1] This would add US jobs in energy and supporting industries such as construction, transportation, manufacturing, engineering, information technology, etc.  It would reduce energy prices, reduce inflation and encourage growth broadly across the US economy. Producing more energy in the US would improve our balance of payments, and greatly strengthen national security.[2]

However, allowing US companies to rapidly increase energy production would not require a federal stimulus. Economic recovery and job growth should still result if the federal government encourages US companies to rapidly increase domestic energy production in oil, natural gas, clean coal and nuclear energy, and addresses regulatory issues as rapidly as possible.

Energy is required to repair and maintain transportation infrastructure. Thus, transportation infrastructure stimulus creates only short-term jobs with increased demand for energy, which worsens the balance of payments if we are overly dependent on foreign energy. (The same argument applies to stimulus for bullet trains.) Infrastructure repair and maintenance should be motivated and funded as a side effect of increased US energy production.

In addition to rapidly developing domestic conventional energy, the US needs to conduct research on future generations of energy technology, that can be expected to provide enormous economic benefits:
  • Safer, cheaper nuclear fission
  • More efficient solar energy
  • Nuclear fusion
The US should conduct this research somehow, to compete economically in future decades. The good news may be that some of the largest corporations may now be able to conduct more of this research, without government funding. Ideally, the market should motivate this research. Otherwise, the government should support it, to whatever level can be afforded.

Finally, economic development of outer space is important to long-term peace and prosperity. Space technology has already created three important economic resources, in satellites for communication, GPS and weather information. The space program should be refocused on economic development of outer space, to generate long-term economic returns. The government should continue encouraging and if possible, sponsor this. Again, the good news is that the market may now be able to motivate this research and some of the largest corporations may be able to invest in it.

NOTES

[1] To achieve energy independence, the US could need to have a limited tariff on imported oil, to ensure that OPEC could not undercut domestic production of oil. Tariff protection would only apply to imported oil sold at prices translating to gasoline at less than, say $2.00 per gallon.

[2] As part of this approach Congress should enact the Open Fuel Standards Act to ensure that US automobiles can run on methanol, which can be made cleanly without subsidies from coal, natural gas, or any kind of biomass (waste, inedible plants, etc.) The US has enough coal to make methanol to power all our autos for 150 years. (Zubrin, Energy Victory, p.25)