Time for a Stimulus Package?

When thinking about a stimulus package, what most people forget is the impact of substitution. For example, if the government were to buy school lunches for every single student in America, what will happen to spending on school lunches? It is true that the government will spend more, but as a result, the private sector will spend less. This huge offset will in turn result in very little or possibly no net “stimulus” at all.

Second, as we have seen in the past three years, a bill has not been passed without being padded with ample pork. With all of the well-intended (effective or not) stimulus spending will come earmarks for pet projects. This will not stimulate the economy; but rather, will simply burn money.

And so historically what undercuts most stimulus packages in this country and in others are the substitution effect and the pork effect. In the 1990s the Japanese spent unprecedented sums in stimulus packages that did absolutely nothing except increase their national debt. Most projects were pork and the rest were offset by a decline in consumer spending.

In the U.S., the most productive targets for a stimulus package are infrastructure projects – where the consumer substitution effect is minimized. However, the problems with infrastructure spending are twofold. First, infrastructure projects take time, and second, long timelines inevitably degenerate into pork projects. When you really want to have a meaningful impact on infrastructure – building much-needed bridges, repairing damaged tunnels, road widening, etc. – nothing is spent in the first year or two. The real money will not get spent until three or four years into true infrastructure programs when planning and analyses are complete. Therefore, what unfortunately happens is that the legitimate infrastructure projects get pushed aside and the pork projects with shorter timeframes compete for immediate funding.

The preceding was an excerpt from Capital Markets Update: Is This the Worst Ever Yet?, the latest NAI Global white paper from Chief Economist Dr. Peter Linneman. The full white paper can be downloaded at www.naiglobal.com/Publications.