What Constitutes 'Worthy' Stimulus Spending?

Today I spoke with a reporter about the “Christmas wish list” of “ready-to-go” state and local spending projects presented by the U.S. Conference of Mayors. She pointed to some projects on the list that have received lots of criticism from policymakers, for their seemingly dubious qualifications as “good stimulus”–such as a particular project in an Ohio city to get prostitutes off the streets. But the reporter was asking me if the criticism of these projects was warranted from an economic standpoint. What makes the prostitutes’ program or the polar bear exhibit a bad idea, economically, compared with other projects that sound more reasonable (justified, substantial, serious, and moral?)–such as, for example, mass transit, highway, and ”green infrastructure” projects?

My quick response was that there’s not necessarily a strong correlation between what seems “worthy” from a moral or “smell test” (or “first blush“) perspective, and what is really “worthy” (i.e., worth it) from an economic perspective. For example, in the case of the prostitutes project, I flippantly responded that the economic worthiness of the project depends on whether they might hire any laid off autoworkers to chase those prostitutes! (Hmmm….)

But seriously (I went on), a key question for all of this state and local spending billed as “stimulus” is whether and how quickly these initiatives can create or save jobs. Is there a good matchup between the weakness in the local job market and the new labor demand that would be associated with the spending project? And better yet, in the process of creating these new jobs (quickly), is there also good on-the-job training that would be provided, so that even after some of these jobs might go away, workers would be left in a better position in terms of their longer-term employment prospects?

For example, I have been wondering about what the Detroit area might come up with for their laid off autoworkers. Would it be possible to come up with “stimulus” spending that helps Detroit with both short-term jobs and longer-term “transformation” toward producing green (more sustainable) technologies? As I look on the list of Detroit-area projects submitted by the mayors, I’m not sure I see very much of that longer-term vision, but I think in evaluating the worthiness of these projects we have to at least pay attention to the “bang per buck” measures–such as the (inverse of the) cost of the projects per job created (and the quality of the jobs and who would get those jobs)–and hope that the jobs claims in the report aren’t wildly exaggerated (although I worry why wouldn’t they be?).

Disclosure: None

Comments

[Steven Hansen:]

there are two reasons for stimulus, short term pump to get economy going (interstate highway repair) or something that has a delayed effect but will keep on giving stimulus (research on batteries).

you need to do a little of both, but more of the later. i really do not think short term stimulus will have much effect.

2008 Dec 31 03:30 AM

[Nick Gogerty:]

the risk of bad stimulus is useless construction projects such as occurred in japan. Inflated a sector of the economy only makes it more politically difficult to remove the "stimulus" later. Ideally stimulus spending has positive economic externalities that extend to the current and future taxpayer bases. Education, appropriate infrastructure such as mass transit or transmission and renewable energy are great examples of this.

2008 Dec 31 09:26 AM

[Guero:]

I guess I would define "bad" stimulus as something that would spend money in anything prostitute-related.

Seriously, maybe any "stimulus" that is considered should center around positioning our society as more competitive....ie training in technology, loans/grants for business startups, etc. You might as well light money on fire when you start funding highways to nowhere.

2008 Dec 31 10:55 AM

[VintonCounty:]

Calling these government spending programs stimulating is fraudulent. Governments must first take money from citizens, which is negative stimulus. Citizens will get greater value from the money than will the government, because people spend their own money more carefully. So the so-called government stimulus schemes, to the extent they involve spending, make us poorer.

Jan 04 02:43 AM

[Ralph Musgrave:]

Dianne Rogers claims at the end of her article that “bang per buck” (i.e. “jobs created per $m of government spending”) is important. Prof Joseph Stiglitz agrees with her. E.g. see Financial Times article by Stiglitz at www.ft.com/cms/s/0/a78...

I strongly disagree with Rogers and Stiglitz. “Job creation” is an example of what economists call and “intermediate objective”: that is, something that sounds worthy, but is not always closely related to the basic purpose of economic activity: creating work for those who want it, and maximising output per head (within environmental constraints). Intermediate objectives are generally frowned on in economics.

A classic example of the harm that comes from targeting “job creation” occurred in Japan: the so called “bridges to nowhere”. The attraction of civil engineering projects and other forms of government spending is that more jobs are created per $ of government spending than is the case with tax cuts. This lead to some totally pointless civil engineering projects in Japan: “bridges to nowhere”.

Another reason for the irrelevance of “bang per buck” is that the bucks absorbed by a civil engineering project are a measure of real resources consumed (labour, concrete, etc). In contrast, printing money and handing it out to citizens cost virtually nothing. One is comparing chalk to cheese here.

I therefore favour printing whatever amount of money is needed to get households spending again, and if that is $10,000 per household, then so be it. If market forces are operating properly, that will automatically bring about the optimum number of “bridges”. This printed money may well prove inflationary in two years time. But if that is the case, governments will have to claw back the money (e.g. increase taxes). Strangely enough Stiglitz has long advocated money printing as the cure for Japan. He now seems to be contradicting himself.

Jan 15 05:38 PM