Unexpectedly Intriguing!
January 28, 2008

Getting set to apply 'stimulus'... Now that we've taken on a Nobel-prize winner's take on what should be in an economic stimulus package, and double-underlined why government-legislated economic stimulus packages are always too late to be genuinely effective, we thought we might consider what should be on the Congress' list of things to do for the next time when the economy takes a turn for the worse.

In fact, we'll do more than that. We'll also tell you what might keep the handful of things we're about to suggest from working! Did Joseph Stiglitz do that for you? Heck no! We do economics with two hands around here, the way it's meant to be done, so you don't have to go trolling for those fancy journal peer reviews or snarky critiques on anonymously written blogs. Or maybe at least on other anonymously written blogs!

Political Calculations' Guide to Fiscal Stimulus
Our Suggestion Why It Should Be Done Why it May Not Work
Arrange the economic stimulus in advance with data-driven triggers to put into effect. We already know what an economic stimulus package looks like: tax cuts or rebates for individuals, increases in unemployment insurance, food stamp and other welfare benefits that benefit those who experience economic distress, such as additional resources for retraining displaced workers, etc. We also have a pretty good handle on what events often precede or coincide with recessions: extended yield curve inversions, declining stock dividends, etc. The combination of these things means that we can have the basic parts of any economic stimulus package go into effect automatically without requiring a single additional act of Congress. We might increase spending unnecessarily in the case of false alarms. A fiscal stimulus package on autopilot may not address unique concerns that apply to the economic conditions of the day, such as the actual size and seriousness of the pending recession. Bureaucratic government agencies may not be capable of implementing changes rapidly enough to be effective. Some politicians and bureaucratic agencies would have the negative incentive to prolong a recession, as they might provide increased funding for politician or lobbyist-preferred programs and recipients.
Focus fiscal policies on removing obstacles preventing the Federal Reserve from being able to take stronger action sooner. A good example for 2008 is inflation. Here, the Fed is constrained by how much it can cut interest rates by the high rate of inflation in the economy. The government could help reduce inflation by curtailing the fiscal policies that exist that contribute to creating higher levels of inflation, such as ethanol subsidies. These subsidies have created higher costs for both raw crops and have generally increased the cost of food products. An interesting side benefit is that the savings from cutting such inflationary subsidy programs could be redirected to fund the automatic economic stimulus programs without adding to a potential fiscal crisis on top of a worsening economy. The government doesn't subsidize anything because it's a good idea that will provide substantial benefits for the country's population. Instead, politicians seek to subsidize the very special interests of those who fund their political campaigns. Those campaign contributors are the kind of people who are often incapable of recognizing the economically destructive nature of having the government fund their self interest, while the politicians are often the kind of people who care more about their power base and ego than acting in the best interest of those they pretend to represent. That both are the kinds of people who deserve to be the designated losers in this situation is absolutely lost upon them and they'll do everything they can to undermine any such desubsidation.
Make government go faster to support new businesses and expanding businesses. Government can do a lot to speed up the process of licensing new businesses and to accelerate any regulatory review associated with expanding existing businesses. The government can do both at relatively low cost by having the government bureaucrats responsible for processing these activities work longer hours in the short term and by adding additional resources ranging from more people to automation technology to increase the productivity of government bureaucrats performing these tasks in the medium to long term. The high rate of unionization of government employees guarantees that union leaders will attempt to prevent both longer hours in the short term and higher productivity gained through automating the work of government employees as both measures would fail to increase the amount of dues they receive from the workers they "represent." See previous example for a description of the rent-seeking dynamics. They will support adding more people, but new people take time to train and become truly effective, making this aspect the least likely to achieve the aim of accelerating the business expansion needed to counteract a deepening recession.
Make government go way faster to support businesses going out of business. When a business goes out of business, it can take months if not years to unwind all the claims of the parties associated with the business, even if its going out of business has nothing to do with the state of the economy. That's time in which the resources owned by the business are tied up and cannot really be redirected into other new productive economic activity. If the economy is entering a period in which higher rates of businesses can be expected to go out of business, accelerating the process of closing businesses and bankruptcy proceedings can only a good thing, which the government can achieve by devoting additional resources to support these activities. Conflicts among the parties involved in the closing of a business or a bankruptcy may drag out the proceedings independently of any action the government takes to speed the process. The rate of businesses closing or closing by going through bankruptcy proceedings can be politically sensitive. Politicians may have a perverse incentive to delay the process of closing a business to keep the numbers low to be able to claim things aren't as bad as they might appear if the process were capable of moving more quickly to meet the true needs of business.

The last point regarding the politically sensitive reporting of the number of business closings is similar to how politicians and bureaucrats in countries with universal health care programs champion the high utilization rates and "efficiency" with which certain medical procedures are performed. In reality, this situation represents the illusion of efficiency since these apparently high rates really only exist because the health care system has a major shortage of people or equipment needed to perform these procedures and is actually incapable of meeting the nation's true health care needs. See: Cuba, Canada, United Kingdom, etc....

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