Monty Brewster’s fiscal stimulus

December 11, 2008

John Kemp Great Debate– John Kemp is a Reuters columnist. The views expressed are his own –

In the 1902 novel “Brewster’s Millions“, the eponymous hero is challenged to spend every cent of his $1 million inherited fortune to win an even larger inheritance of $7 million. Brewster has a year to do it, and under the terms of the will he must obtain good value for the money.

Brewster’s struggle to spend $1 million, sensibly, in a year should serve as a warning for the problems the incoming Obama administration will face saving up to 2 million jobs within two years through the use of a massive fiscal stimulus package.

The exact size and scope of the fiscal stimulus remain unclear, but the transition team has indicated it will include substantial spending on infrastructure, singling out roads, bridges and school repairs.
Estimates vary, but the transition team has indicated it wants to make $25 billion available immediately for construction-related work.

Once tax credits and rate reductions are added in, proposals for the overall package have ranged from $200 billion to $500 billion, with outside analysts pushing for a half-trillion stimulus as the minimum needed to restore growth.

The challenge for the new administration is not the package’s size, but how to disburse the money fast enough.

The government is locked in a race against time. It needs to start spending the money before the massive round of layoffs, production cuts and retrenchment by businesses and households pushes the economy further into a prolonged and self-reinforcing slump.

But even for Washington, legendary for trying to fund the bridge to nowhere, it will be tough to find ways of delivering appropriate, labor-intensive and front-loaded spending that will put money into the hands of businesses and consumers quickly without too much waste.

SPENDING RATHER THAN TAX CUTS

Tax cuts or rebates could deliver money much faster. The Economic Stimulus Act of 2008 passed into law on Feb. 13, 2008. The first rebate checks were mailed out on April 28, and by the end of August 2008 the Treasury had issued 114 million individual payments totaling $93 billion.

The act provided a significant boost to household incomes and some increase in consumer spending over the summer, according to monthly estimates of income and expenditure published by the Bureau of Economic Analysis.

But most economists agree the rebates were not a very efficient way to generate spending increases. Consumer spending rose by much less than the implied rebate amounts over the summer months. A high proportion of the rebates were saved or used to pay down debt rather than spent on goods and services, diminishing the impact.

The effectiveness of any tax-driven stimulus would be even weaker in the current environment. Over-indebted households fearful about widespread job losses are far more likely to save and pay down debt than spend rebates on big-ticket consumer durables.

Direct spending by government rather than tax cuts is therefore probably the only way to mitigate the worst effects of the downturn. The problem is that spending faces long delays at the planning, budget and implementation stages.

It will take months or even years to identify a sufficient number of worthwhile, labor-intensive construction projects and develop new ones.

If spending is channeled through the regular budget process – starting with the president’s proposals and working through a congressional budget resolution, appropriations bills, project appraisals and competitive bidding for the work – contracts are unlikely to be awarded much before the end of 2009 or well into 2010.

Once the contracts are awarded, it could take months for project work to get underway, labor hired and paid. The U.S. Treasury’s Financial Management Service is unlikely to be asked to cut any checks within the next 18 months, and workers are unlikely to see any of the government’s money until the middle of 2010 at the earliest.

Spending would come far too late to forestall recession. In the worst case it might arrive once recovery was already underway, creating inflationary pressures in the medium term, saddling the government with a big debt in the process.

SUPPORTING STATE AND LOCAL GOVERNMENTS

The only quick and effective way to get federal money into the economy quickly is via payments to state and local governments to support and expand their own capital spending programs.

State and cities already have long lists of planned but unfunded capital projects ranging from school building to road maintenance and the construction of mass transit systems.

Not surprisingly, the prospect of a $200-500 billion pot of unallocated money searching for a home is attracting a host of bids like bees to honey.

The National Governors Association (NGA) has identified $37.5 billion of possible infrastructure spending on roads ($19 billion), transit systems ($8.0 billion) and other forms of transport. For the highways, it projects up to 3,000 projects could be under contract within 90 days, with 68 percent of the funds actually spent within two years.

NGA has also identified wastewater schemes ($9 billion), drinking water ($6 billion) and affordable housing ($5 billion) as recipients for federal support in what it terms a “federal-state partnership”.
Not to be outdone, the U.S. Conference of Mayors last week unveiled its own list of 11,000 “ready to go” projects representing investment of $73 billion and capable of producing almost 850,000 jobs in 2009 and 2010, according to its own estimates.

In some instances, the governors’ association and mayors’ conference have asked for a direct infusion of federal funds; in others for the lifting of matching requirements which require local jurisdictions to put up their own money to unlock federal grants.

But more important than the direct effect, channeling federal funding through state and local governments could mitigate the dangerous pro-cyclicality of fiscal policy at this level.

State and local tax bases are less diverse than at federal level and more vulnerable in the event of a downturn. The capacity to finance expenditure by borrowing is also much more constrained, especially at present, with state and local bond markets under pressure and the ability to issue short-term Tax Anticipation Notes (TANs) limited or foreclosed.

Making matters worse, most states have some form of “balanced budget” requirement that will ensure falling revenues are matched by spending cuts, at precisely the time when recovery requires more not less government spending.

State governors project a revenue shortfall of $60 billion in fiscal 2009 and $80 billion for fiscal 2010. Shortfalls will quickly exhaust reserve funds of just $70 billion.

Twenty states have cut $7.6 billion from their fiscal 2009 budgets according to NGA, and more cuts are expected.

The federal government is unlikely to make unconditional block grants or support current spending. But by funding capital projects, it could allow states and cities to divert more of their revenues to support current spending.

The result would be an increase in labor-intensive construction-related work on infrastructure (the sector hardest hit by the downturn so far), and fewer job losses in other areas of state and local activity such as education.

States and cities, rather than grand new federal programs, will probably be the prime engine of recovery.

For previous columns by John Kemp, click here.

9 comments

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You might want to watch that movie again. The challenge his uncle set him was to spend 30 million and not to derive any value from it. He was not supposed to have one cent of “asset” value when he had completed the task. His uncle thought it would be aversion therapy. If Monty had succeeded in completely squandering 30 million dollars, his uncle thought Monty would be so sick of spending money that the 300 million dollar fortune would be secure. He would have cured Monty of the desire to “live large” and spend lavishly. Monty’s most expensive endeavor and the one that produced no residual value was the run for Office as the Mayor of New York City. That burned through most of the 30 million. A seat he resigned.

Your anaalogy has nothing to do with the rest of the article and absolutly nothing to do with the future administrations problems. The Federal Governemnt is more than able to spend 300 billion for nothing. Hume Cronin would be very disappointed in them all. They can burn the thirty million and go right on burning the rest.

I’m all for spending money on roads and highways. Don’t spend money on wind-turbines, residential fuel cell technology, natural gas microturbines, landfill methane extraction systems or anything interesting like that. We wouldn’t want to create jobs in new industries and help America get over its dependence on foreign fuel. Better yet, forget about infrastructure. Give the money to union assembly line works – the frontline of innovation and technological development. Putting on nuts and bolts, stripping wire and turning machines on and off are skills we must have to get us through this crisis.

Posted by Don | Report as abusive

Now that I read the article – you are no doubt right about the long delay of project development and the lag before any real stimulus to the economy is felt. But shouldn’t you be saying – to hold off a “depression”? It is alreay acceoted that the country has been in a recession for more than a year.

The depression is the bottomless hole. Only WWII managed to create the national quasi totalitarian system that was able to kill off surplus males and force the government to take on enormous debt. But it did it at the cost of sacrificing most civil liberties and keeping the civilian population under the constant and heavy hand of government. There was forced conscription into military servive, an active domestic spy network especially around industries with military contracts and a general war mentatlity that cursed anyone with any contradictory opinions. Wasn’t that also the period that gave J Edgar Hoover his greatest boost?

The current wars, and Afghanistan could well scuttle any plans the president elect may have, have been fought with the idea that they are almost automatic, involve only those that choose miltary careers – no draft – the Bush people would have been dead in their tracks if the word draft had been invoked for ether Iraq or Afghanistan, were not supposed to require any sacrifice from the “homeland” other than to spend on consumer goods. It was and is a very perverse sort of war mentatlity. The two wars are almost “war lite”. Not enough people were being killed to really traumatize anyone. Some fluffy and boosterish war coverage was supposed to be enough for a generation – I’m included – that never felt the real horror and distress of war.

We should not forget that the economic slump will be makig millions of potential followers of Al Qaeda or the Taliban and no doubt hundreds of new groups of the disaffected. The US presence in the Middle East is not and never will be welcomed with wide open arms. The regimes of the ME very likely say one thing publicly but will be doing everything they can privately to see to it that we do not suceed in making them all Iraq like protectorates.

You could almsot say the war has finally come home even if the troops haven’t

Paul Rosa,

Now that you have actually read the article, you should admit that your first comment was wrong about the “movie”. The writer of this article, John Kemp, referred to the 1902 novel. You’re referring to a movie (probably the 1985 version with Richard Pryor).

Posted by Mitch T | Report as abusive

Sorry, never heard of the book. I’ll see if I can find on in an old bookstore. But what about the rest of the comments? I hope you don’t think you’ve neutralized them?

While I’m at it – to Dan, why would you avoid wind and turbine power. You don’t have to pay for the fuel? What happens to many world wide attempts to limit CO2? Many countries aren’t listening to contrary arguments anymore. They believe in climate change. Many countries already feel it.

The Senate objection to a quick bailout of the auto industry is a reflection on the part of the Republican side to lower the country’s cost of labor. This country can do little or nothing that can’t be done elsewhere for a fraction of the cost. How long can the US continue as the high end store in the world shopping center (living on large markups of other people goods) in the midst of much cheaper “outlet stores” that sell all the same things? The US is not really at the leading edge of anything anymore and it is due only to the self-induced delusion that it can “rule the world” that keeps us trying to do things as usual.

I hope you don’t think that the rest of the “producing countries” are going to forever be happy waiting until the “Neiman Marcus” of the world regains the ability to sell their goods at the prices necessary to keep the big merchandiser in business with his very high overhead costs? Water tends to seek its own level and I am sure that standards of living have the tendency to adjust to a mean. At least for most of the population. How long can the big economies continue as the froe Gras Geese for all the stuff the developing world is producing?

The developing countries are rapidly forming economies that can bypass the big hog on the block. And many of them are in geographical areas that don’t require massive use of oil. They can use solar, wind, compact and efficient development, geo thermal and most importantly the fact that they are filled with people used to living with a lot less and seem to be a lot smarter. The hungry tend to be keen. And a little money goes a long way with them.

The US way of life has dubious appeal and I am not the only person who can see that many people in the world are more happy to maintain their present social and cultural systems with some human rights improvements (The US has no copyright to those you know) rather than take on debt to pursue the American consumer way of life.

Actually it’s too bad Mr. Kemp isn’t citing the remake, isn’t that what the bailout is supposed to encourage – big spending without worrying about the asset value? We geese need a big gulp and the remake Monty would be a joy to meet right now. The older one would have probably been more like John D. Rockefeller. Want a shiny dime little boys and girls?

Posted by Paul Rosa | Report as abusive

Be honest. Did you start with the 1902 book or did you start with Richard Pryor movie of the same name and work back to the book because it sounded more highbrow?

Posted by Ken | Report as abusive

Found the book on the online books page. Gutenberg press – free editions. Almost the same starting plot line. And the restrictions on Monty Breweter were the same in both versions (just started reading it) He was to have no assets in order to qualify for the second bequest.

Very poor analogy for Obama’s works project. Isn’t that intended to improve the assets of the country? It would not be intended to waste the money of one old millionaire that an even wealthier old man hated.

Too bad the country doesn’t have a few rich relatives about to kick it. We should all be so lucky to be in their posthumus cross fire. Today’s Monty will have to fight tooth and nail for anything from many living, massively wealthy and increasingly tight rich men and women and from even more who aren’t. Few of them seem to have the moral scruples of Monty’s relatives – living or dead.

If our wealthy take to Monty’s wanderings – just a glance at the chapter headings – they may choose to live with the Sheikh.

And all those public work’s funds – whoever gets to spend them – are going to have to be borrowed, aren’t they? It’s cruel to have to read of a man (Uncle Sedgewick) whose wealth is “as sound as Government bonds”. Those weren’t just the good old days, they are almost mythic now.

Posted by paul rosa | Report as abusive

Paul,

You began fairly well, but by your second comment you had meandered all over the place, and your retail analogy is one dimensional. While the notion that America has peaked is quite palpable, to get a good sense of what has made America a succesfull place in the world you need to spend considerable time in other countires, and you will be less sanguine about America’s long term prospects. From an African perspective I have seen a transformational impact on the world emenating out of the U.S. through myriad mechanisms, in economics, politics and culture. Consumerism as well, is not a uniquely American phenomenon, but an extension of wealth accumualtion and liberalism.

Posted by nyongesa | Report as abusive

A lovely, labor-intensive construction project for the entire nation would be that advocated in Van Jones new book, The Green Collar Economy. He say, “We should start now, at the pace of war-time mobilization” to overhaul the aging residential and commercial infrastructure. For this effort, “the main piece of technology in the green economy, is a caulking gun”.

Since it is primarily the poor who live in crumbling homes without energy efficient windows or adequate insulation, this program would alleviate a great deal of suffering–preventable illnesses among the very young and very old, honest work for many marginalized young men and savings in energy costs and greenhouse gas emissions for generations.

Posted by wendy schaefer | Report as abusive