Stimulus, re-examined

Bjoern Bruegemann, assistant professor of economics, espouses his views on President Obama’s plan to stimulate the national economy. A professor of “Intermediate Economics” this semester, Bruegemann’s interests lie span labor economics, the political economy and international trade.

QHow would you predict the effects of the stimulus package?

AObama’s stimulus package involves some level of uncertainty, and predicting its immediate effects may fall outside the comfort zone of economists. One thing we know for sure is that doing nothing would be much, much worse. However, we do not have very good theories about how to use policy to influence expectations and to increase confidence.

For example, past experience tells us how tax cuts and government expenditure are likely to affect economic expansion; we are on safer ground, trying to predict the influence of the stimulus package on infrastructure. However, this is an unusual time in history, and we cannot be sure how things will turn out this time. In addition to this influence on infrastructure, the stimulus package has an additional kick: The government is trying to change expectations and to restore confidence in economy. The reason we cannot fully predict the influence of the stimulus package is that we do not know how the new policies will influence expectations.

QWhat may be some strengths and weaknesses of the stimulus package?

AFirst of all, it is usually hard to determine whether it is tax cuts or government spending that helps the economy most. The stimulus package aims tries to balance both tax cuts and government spending. This is a reasonable strategy because the two strategies target improvement in different time zones. Tax cuts would also help Obama get the Republicans on board.

One obvious weakness of the stimulus package is that it has the potential to backfire. If people think that the economy is already in bad shape and the government is spending money on useless projects, then the stimulus package will fail to restore confidence. As I said, this is an area outside the comfort zone of economics, and there is a lot of speculation about how people may react.

QHow would you compare Obama’s plan to the previous actions taken to combat the current economic crisis?

APrevious actions were largely aimed at stabilizing the financial systems, which hasn’t succeeded yet, and Obama will continue this effort with the remaining $350 billion of TARP funds. Obama’s recovery package is quite different from what has been tried so far, proposing a large fiscal stimulus consisting of more federal spending, tax cuts and help for the states. In comparison, so far only a small tax rebate has been implemented in 2008.

QDo you think that the stimulus package will succeed in improving the health care system and education? If so, how big of an effect would such improvements have on the economy in general?

AI think the stimulus package provides an opportunity to implement substantial improvements in the health care system, but it will probably take a while to implement these improvements, so as a short term stimulus this will probably not deliver a large bang for the buck.

Bradford Galiette is a first-year student at the School of Management and a 2008 graduate of Jonathan Edwards College. He is the former director of Yale for McCain and a former director

of finance for the News.

How should the Obama administration respond to the slumping economy?

AThe present economic environment demands a swift and concentrated response in order to restore the full potential of our markets, our infrastructure and our workforce. It is gratifying to see that the Obama administration has wasted no time developing a comprehensive stimulus plan with many effective provisions. That being said, several parts of this bill can be reworked in order to spend money where it will most efficiently reverse the current downturn.

QWill tax cuts and fiscal spending address the roots of the economic crisis?

AThe $275 billion allocated to tax cuts by the $825 billion American Recovery and Reinvestment Plan is a clear example of a measure that will help restore market confidence. By granting breaks to all U.S. taxpayers, there will be greater ability to consume and save in this country, two activities that are chiefly responsible for iterative cycles of economic growth. This “multiplier” effect means that a dollar granted as a tax cut has the impact of more than a dollar (often substantially more) in new productive economic activity. On top of this, first-time homebuyers are granted a $7,500 non-repayable tax credit, a benefit that will help make the dream of homeownership possible for millions of young Americans while also restoring liquidity to an otherwise frozen residential real estate market.

Beyond the tax cuts, the bill also affords other spending which will offer sustainable gains to our nation’s economy in the not-too-distant future. Spending for an electric smart grid will help give our nation the infrastructure for its near-term energy needs while also lowering the price of transmitting electricity for many years to come; investing to computerize health records will dramatically lower the administrative overhead of our nation’s health-care system and, more importantly, save thousands of lives that would otherwise be lost due to a mess of proverbial — and sometimes literal — red tape; and job training offered to those who want to acquire the skills demanded by skilled professions will help keep our workforce competitive while also enabling the beneficiaries of this training to better provide for their families. All of these efforts stand to make America a better place while simultaneously helping our economy move forward.

QDoes the plan exhibit proper farsightedness? How could it be improved?

AWhile it is difficult to foresee exactly how the fiscal stimulus package will spend money in areas such as our country’s already sufficient highway, railroad, and water supply systems, it is not at all clear how this spending will help America become meaningfully more productive in the years ahead. There are certainly many worthwhile projects which should be pursued over the next 10 to 20 years that we will hopefully be able to pursue as soon as our economy recovers. But as the intent of this bill is to stimulate economic growth first and foremost, there should be a priority for projects that themselves exhibit future productive potential.

We must not undertake infrastructure development akin to that pursued under the New Deal of the 1930s simply because America is a different place now than it was then; today, we are a more established country and a more advanced economy. The road ahead thus lies not in paved highways but in information highways; not in water pipelines but in innovation pipelines. The sooner the Obama administration and each of us acknowledge this simply reality, the sooner we can focus the stimulus package more fully on those areas most likely to help us emerge from the recession and target a course for continued world leadership in the future.