The problems with a fiscal stimulus

Tyler Cowen

TEXT OF STORY

Kai Ryssdal: Whatever the politics of a new stimulus package turn out to be -- and they are going to be big -- there are going to be a lot of questions too. Tax cuts or more spending? Infrastructure or green jobs? Commentator Tyler Cowen says Congress ought to be asking whether there should be a stimulus package at all.


Tyler Cowen: Borrowing and spending more money isn't the way out of a bad economy. Recovery is really about economic production. The phrase "fiscal stimulus" sounds like it will do good things but in reality it's not so simple. First, a lot of project ideas won't put unemployed people to work. Take solar energy, which would be wonderful if it were cheaper. The whole point of solar energy is that the sun does most of the work. A new technology could be invented by scientists, and designed by engineers, but those are exactly the people who already have jobs and are least likely to lose them. Obama also proposed broadband access for everyone, but again, that kind of construction doesn't match the skill set of the current unemployed.

Second, quick projects are usually wasteful projects. Good new projects need to be thought out and planned. The environmental impact study alone can take years. But Obama has told the state governments they will have to "use it or lose it" when it comes to federal grants. The result will be a lot of poorly conceived projects just to capture the money.

The biggest problem with a fiscal stimulus is this: our economic problems stem from having spent too much in the first place. Now that our homes are no longer rising in value every year and America is aging, more saving is in order, not more spending. Recovery will come only when we discover which new and valuable things the economy should produce as it shifts out of real estate and finance. Simply borrowing and doling out more cash doesn't solve that problem.

The Federal government shouldn't just sit still. It's important to help state and local governments preserve their current budgeting and that task will prove hard enough. We're all hoping for an economic revival, but the bitter reality is that we will be very lucky simply to hold even and prevent further declines. Fiscal stimulus won't change that fact.

Ryssdal: Tyler Cowen is a professor of economics at George Mason University.

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