Wednesday, December 24, 2008

State Governments Belly Up to the Bar

Like at least one former Reagan aide, I don't doubt that, with a bunch of caveats, government spending in the private sector can create some demand side help and promote certain policy objectives. I'm not agreeing that it's a good idea, but that empirically you can do it.

But waaaay more troubling to me is whether or not giving state governments 1 trillion dollars with this plan is a good idea.

1 TRILLION DOLLARS. That's a thousand billion. To state governments, which, as I noted in this post have not been especially good balancing their budgets during economic prosperity. Now Robert Kuttner says that the interest on a trillion bucks would "only" be 2.5% which is relatively cheap and shows the markets don't anticipate inflation.

2.5% annually on 1 trillion bucks is still 25 FRIGGIN BILLION DOLLARS in the first year. That's not my idea of cheap unless we are going to generate a lot more than 25 billion in economic growth minus the "carrying charges" that the 10 most corrupt state governments are going to charge.

So let me ask a question here. Setting aside the corruption issue, why does the thought of transferring a lot of the stimulus package to the states worry me? Well two reasons. First, a lot of states are facing huge deficits as I've noted before. And those deficits are partially the result of really bad politically motivated spending like this political jobs bank in California for unemployed state legislators.

Second, as Steve Erie's excellent book Rainbow's End shows, New Deal spending programs were captured by political machines throughout the country and used reward the friends of the powerful - not exactly the kind of stimulus you want. So it's actually a bit worse than just giving the money directly to Dick Cheney's old employer because some of it will probably get stolen by state politicians first.

Libertarians are just naively whining about the wasteful spending. That's a waste of intellectual resources because the government is going to do something. Fish gotta swim..... Conservatives seem to understand that some big stimulus package is coming, but want to put pressure on Obama to make some hard choices.

Frankly, I think the idea of an income tax holiday is both the best way to address the problems associated with passing the money through the hands of corrupt politicians before it gets sent to the companies that donate the most money to government officials...........which means we almost certainly won't get it.


  1. Even if we assume the premise that government spending can help on the demand side, it is still ridiculously inefficient to take money from some via an arcane and expensive process to then, in turn, give it to another via and arcane and expensive process all why declaring that this net loss at a couple of junctures will somehow produce an improved outcome. Taking 20% to collect and then spending 20% to deliver doesn't leaving anyone with more.

  2. Agreed - but the inefficiency is a given in my mind because the political process is not stopping. I don't think I made the point it was an improved outcome, but rather was trying to compare three scenarios and go with least worse. Blago and his like, direct transfer to politically connected businesses or a tax rebate......not a hard choice really.