Assessing House Stimulus Proposal

(1/19/2009) - On January 15th, the House Appropriations Committee released a summary of the $825 billion stimulus bill they are proposing, which includes $550 billion in new spending and $275 billion in tax cuts over the next two years.  Though the eventual bill would not be ready for Obama to sign on inauguration day as he had planned (they are now aiming for mid-February), some version looks likely to pass.  Before its rushed through the House and Senate, the bill’s contents need to be discussed, so I’m glad the House has released this preliminary summary.

The bill contains $144 billion for energy, transportation and environment related projects.  Some of the funding includes: 

-$32 billion “to transform the nation's energy transmission, distribution, and production systems.”

-$22.6 billion to retrofit and weatherize public and “modest-income” homes to make them more energy efficient. 

-$30 billion for highway and bridge repair/construction.

-$31 billion to “modernize federal and other public infrastructure with investments that lead to long term energy cost savings.”

-$19 billion for clean water, flood control, and environmental restoration.

-$10 billion for mass transit and rail. 

Many commentators have been upset by the small amount of money budgeted for mass transit and rail, compared with the amount for roads and bridges.  And it’s a good thing that people speak out in protest – the government should spend more on mass transit and railroads.  The more people that speak out and take action, the more likely it is that additional funds will be provided in the final version of the bill, and that transit funding will be a higher priority going forth.

At the same time, it is important to put these spending proposals in perspective.  First, spending $10 billion over two years will increase spending on rail and transit by 50%, while the $30 billion represents a 40% increase in funding.  This bill is definitely beginning to shift priorities.

Second, while there are numerous reasons for promoting mass transit/rail, one of the most often cited reasons is that these options reduce greenhouse gas emissions.  Because time is very much of the essence when it comes to global warming, it makes the most sense to pick the lowest hanging fruit, so to speak.  Its not clear to me that mass transit/rail falls is low hanging fruit.  Not only are building renovations easier to begin on a short time scale for purposes of stimulus, but they offer to save energy and reduced greenhouse gas emissions almost immediately, not just 10 years down the line.  If the Federal government can get anywhere close to this kind of return on investment from the $6 billion the stimulus bill sets aside to increase energy efficiency in Federal buildings, this stimulus bill will save tens of billions of dollars over the next few decades, money that could be used to spend on those long-term transit projects. 

But why spend three times as much money on roads than transit/rail?  This bill is, first and foremost, a stimulus bill.  It is not a green energy bill or a railroad bill.  If the economy doesn’t turn around in the next 18 months (or less, depending on how bad it gets), Obama and the Democratic Congress aren’t going to be able to do much else – no cap-and-trade, no universal healthcare, no large funding bills for high-speed rail, etc.  Therefore, it is important that the money we borrow and spend as part of the stimulus help as much as possible.  The truth is that there don’t seem to be all that many transit/rail projects ready to begin construction immediately.  Most of the money that is designated for transit/rail will be spent to purchase buses and equipment needed to improve public transportation services, and repair and improve transit infrastructure.  Hopefully the same will go for the road money.

Yet another reason why it doesn’t make sense to throw a bunch of money at transit quite yet is that there aren’t that many firms in the United States that build railroads, while there are a lot of people building and repairing roads.  If we spend too much money on rail too quickly, the demand for contractors exhausts the supply.  Prices inflate and projects are delayed.  The other side of this dynamic is that you need spending to convince more companies to start bidding on rail projects. 

One way to help get around this problem would be for Obama to publicly launch exploratory committee or something of that nature to plan what the best way to spend a large amount of money – say $120 billion over 10 years – on high-speed rail projects.  Give them 9 months to do their work, plus another 3 months or so to draft and pass the bill.  This should give contractors enough time to prep their bids and for companies that don’t currently build rail (say Granite Construction or Perini Corp.) to recruit some rail engineers or partner with an established European or Japanese company. 

But this wouldn’t be fast enough for the purposes of stimulus.  

Ways to Judge a Stimulus Bill

Watching the meltdown of the financial world (along with my small stock portfolio) and the subsequent actions taken by the Federal Government have been surreal.  Hearing Bush say that he has, “abandoned free market principles to save the free market system,” (its here, at about the 1:00 mark) watching the Fed guarantee $7.7 trillion dollars (and counting) in loans, while taking over an insurance group, two giant loan agencies, and a few banks, has been jaw-dropping.  After all this, and the much more publicized $700 billion TARP bailout, part of me wants to say, “Fuck it, what’s another trillion?” 

However, the less-lazy part of me knows that just because we might have already committed (and perhaps wasted) ungodly amounts of money, it doesn’t mean that we should be spend-thrift with the rest. 

When thinking about government stimulus, there are at least three questions I like to ask:

1)    Will this money provide effective economic stimulus?  That is, how much will the GDP rise as a result of this action?
2)    Will the spending improve lives in ways that GDP cannot measure?
3)    How likely is it that the stimulus will act as an investment that will lead to future increases in tax revenues that will help pay off the debt incurred by the financial stimulus?  Will the stimulus save taxpayers money in other ways? 

Economists disagree about what kind of stimulus has the greatest effect, but they all agree (or at least, all the ones I’ve read agree) that one of the problems with stimulus such as tax cuts is that people save the money instead of spending it.  Sending money who people who need it the most, like lengthening unemployment benefits, expanding food stamp programs, makes it much more likely that the money will actually be spent. 

This is why two of my favorite parts of the stimulus are the $6.2 billion to “help low-income families reduce their energy costs by weatherizing their homes” and $2.5 billion “for a new program to upgrade HUD sponsored low-income housing to increase energy efficiency, including new insulation, windows, and furnaces.”  These projects should lead to substantial reductions in energy use (resulting in fewer greenhouse gas emissions) and save low-income families money for years to come, families that are most likely to spend the savings.  They should also create jobs in the construction industry, which has been particularly hard hit by the housing collapse.  Nearly $9 billion in new spending should also help build a market for further improvements, as it will increase awareness (“You won’t believe it, Marge, but this new insulation saved me 30% on my heating bills this winter!”), and provide incentives for contractors to begin specializing in and promoting these types of improvements. 

Just the Beginning

This bill would not fulfill Obama’s promises when it comes to energy and environmental policy.  It isn’t meant to.  It is a beginning – one that is coming much earlier than it probably would have if the Obama administration had to wait to pass an exclusive energy and environment bill.

Even without the global warming crisis breathing down our necks, the nation needs to update its electrical infrastructure, a.k.a. the grid.  Without an updated grid, it will be impossible to bring renewable power stations, which tend to be located in sparsely populated areas, online.  The stimulus package would provide “$11 billion for research and development, pilot projects, and federal matching funds for the Smart Grid Investment Program,” as well as “$8 billion for loans for renewable energy power generation and transmission projects,” which should give the government enough leverage to make loans of up to $100 billion dollars (with the expectation that at least $92 billion would be paid back). 

Assuming this money is present in the final bill, it will be interesting to see how it gets distributed between transmission and generation projects.  Luckily, the spending should be easy to track on the website Obama and Congress have promised to establish for this purpose. 

Images used under a Creative Commons License from Flickr users tadfad and chelmsfordpubliclibrary.