Unexpectedly Intriguing!
January 24, 2008

As Deer in the Headlights, So Are the Congressional Leaders of Our Lives.... Calculated Risk has launched a competition to see just what the worst ideas being floated about are with respect to the "economic stimulus" package that politicians in Washington DC are tripping over themselves to assemble so they can show how much they "care" about their re-election people worried about the state of the U.S. economy.

While we think the lead idea that CR has nominated is a strong contender for winning outright, we'd like to enter the economic stimulus ideas of Nobel prize winning economist Joseph Stiglitz, who has recently prescribed a number of policies (HT: Mark Thoma) intended to "stimulate" the economy. We thought we'd summarize Stiglitz' main policy prescriptions in the table below and identify why they might not really qualify as being Nobel-prize winning ideas:

Fiscal Stimulus Suggestion Why It Might Work, According to Stiglitz Why It Will Not Work, Based on Reality
Strengthen unemployment insurance. Money received by those who lose their jobs will be spent immediately. Worthwhile for softening blow of unemployment. Doesn't do anything to grow economy, or get the unemployed back to work at anything approaching their previous level any faster.
Increase funding for crucial local and state government infrastructure projects. Stabilizes total government spending levels, which might otherwise be reduced. Definition of "crucial" ultimately decided by political campaign contributors and lobbyists, such as sports team owners and the developers of light rail systems, who pay for local and state politicians to get elected. Unlikely to do much to grow economy, ever.
More support for state education budgets. "Strengthen economy in short run, promote growth in long run." Not really any different from what's been going on in education since the U.S. Department of Education was established a few decades ago to provide ever-increasing, yet ineffective support for state education budgets. Has anybody noticed any real, sustained improvement in U.S. public schools, in either the short or the long run? Unlikely to achieve aims, ever.
Increase spending to promote energy conservation and lower emissions. "Strengthen economy in short run, promote growth in long run." The reduction in productive activity that comes with economic slowdowns achieves both aims at costs nobody would be willing to pay if they had the choice. Spending more here will only provide economic growth benefits in the long run as it frees up money to be spent elsewhere. In the short run, high costs of technological transition and time needed for implementation will delay economic recovery.
A tax rebate aimed at lower and middle income households. Fast-acting. Very short term effect. Several studies indicate significant portion of money from previous tax rebates or advances used to pay down debt or saved as windfall, not spent. Poor bang for the buck, economic impact not helped by small tax rebate amounts per household. Unlikely to do much to grow economy.
Appropriately designed legislation to allow victims of predatory lending to stay in homes. Stimulate economy. Current 110th U.S. Congress has proven to be singularly incapable of crafting either well-designed legislation or even needed legislation. Or for that matter, timely legislation. Unlikely to achieve desired goal as a result. Doesn't stimulate economy - even if "well-designed," would only maintain status quo, which would be worthwhile for those affected, but only those affected, and would not significantly impact the health of the economy at large.

Maybe we can get a special sub-category for the competition: worst economic stimulus ideas proposed by the most prestigious economist!

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