The so-called stimulus package working its way through the Washington sausage factory (Bismarck said you don't want to see how laws or sausages are made) is drawing criticism for its heavy reliance on social spending. Although some critics are decrying any spending at all--as opposed to tax cuts--let's give at least rhetorical credit to President Obama who said the other evening, "So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is?"
Let's stipulate that injecting more money into the economy is a good thing. Let's further stipulate that it can't all be tax cuts. The question then becomes, what kind of spending?
It's interesting how new events teach new terminology. A few weeks or months ago, I had never heard of "shovel ready." But now, critics of the bill are attacking the lack of shovel ready projects. Why doesn't the bill include more bridges, roads, and dams ready to go now when our economy most needs it? Former LA Times columnist, Bill Boyarsky, even said that if you don't have a dam, nobody is going to write a song like Woody Guthrie did for the Grand Coulee Dam: "Your power is turning our darkness to dawn. So roll on, Columbia, roll on."
Boyarsky added he couldn't imagine Bruce Springsteen writing a song about computerizing medical records.
Speaking of medical records, a later day Luddite on the ever-reliable Fox News lamented the loss of jobs for all those file keepers currently doing it by hand. But the fact that mechanization creates more jobs than it destroys--how soon they forget the industrial revolution--is one of the morals of this story.
In fact, the available evidence indicates that spending on social programs does more good for the economy that spending on those shovel ready programs.
Maybe someone will sing the electronic office. After all, Walt Whitman did "sing the body electric."
These points are underlined by a report, "Japan's Big-Works Stimulus Is Lesson," (New York Times, February 5, 2009) that underlined the unstimulating effects of multiple bridges to nowhere.
Back in the late 1980s, Japan saw the collapse of its own real-estate bubble, and went on to spend trillions for physical infrastructure with very little to show for it in terms of economic stimulation. Of course, Japan's infrastructure was in much better shape than ours--all those bullet trains--so road and bridge building created temporary jobs but two bridges to the same sparsely populated island did have a lasting effect.
Economists did discover that you get significantly more bang for the buck on social program spending than bridges--particularly in an already developed economy. The Times article quoted Toshihiro Ihori, an economics professor at the University of Tokyo: "It is not enough just to hire workers to dig holes and then fill them in again. One lesson from Japan is that public works get the best results when they create something useful for the future."
(I won't even suggest that shovel ready programs discriminate against women--fast becoming the majority of the workforce--since they are more likely to be working in social services than construction.)
According to the Times article, a non-profit study group--the Japan Institute for Local Government--found that every trillion yen ($112 billion) spent on social programs--including eldercare--added 1.64 trillion in yen in Gross Domestic Product growth. Financing for education had an even bigger bang for the buck. Every trillion yen generated 1.74 trillion yen in GDP growth. In contrast, every trillion yen on physical infrastructure yielded a growth multiplier of only 1.37.
Tax cuts fare even worse overall. A study by Moody's Economy.com, "The Economic Impact of the American Recovery and Reinvestment Act," by Mark Zandi, (January 21, 2009) confirms the Japanese experience. Permanent tax cuts--such as extending the Bush income tax cuts--actually have a negative effect. For every tax cut dollar, only 31 cents are added to GDP. One hundred billion dollars in tax cuts--according to the Moody simulation--would generate a bit more than 200,000 jobs.
In contrast, spending has a multiplier effect. The Moody simulation does not directly look at social spending such as increases in health care or education spending, but infrastructure spending, as in Japan has a positive effect--1.50 dollars of GDP for every dollar spent, and more than 1 million jobs for every $100 billion in expenditures. But social spending in the form extending unemployment insurance and increasing food stamps has even greater effects.
Increased income support is the most effective stimulus. Middle-class and affluent people tend to use found money to save or pay down debt, while the unemployed or the poor will spend any extra money immediately.
Spending on the elderly in the form of increased Social Security or Medicare benefits would have similar effects on the economy.
Infrastructure spending on aspects of the economy that have nothing to do with shovels--eldercare, healthcare, and education--is also of great if not greater potential.
The Times article notes that while "infrastructure spending may yield strong results for developing nations, creating jobs in higher-paying knowledge-based services like health care and education can bring larger benefits to advanced economies like Japan, with its aging population."
In the U.S., my baby boomer generation remains the most numerous of all age groups. Just as our entry into schools and later colleges stimulated a great boom in education spending, so too will our entry into nursing homes stimulate a great boom in eldercare spending.
As Takehiko Hobo, a Japanese professor of public finance put it, "In hindsight, Japan should have built public works that address the problems it faces today, like aging, energy and food sources. This obsession with building roads is a holdover from an earlier era."
Lowering taxes has a kind of instinctive appeal. More money in your pocket. And it is easy to deride spending on education for careers in expanding industries such as eldercare. But the reality might be that a bridge may in fact be a bridge to nowhere, while the elderly are the bridge to a more prosperous future.
Meanwhile, I'm thinking up lyrics for that song about those electronic medical records. "Roll on IBM roll on."
