Sunday, January 11, 2009

Stimulus Spending

The thing to look out for with any stimulus package, especially one of the magnitude in which the Obama administration is planning, is wasteful spending. Such a plan will do doubt be full of pork barrel spending, which will do nothing to make us better off. A great op-ed in the NY Times this morning discussed this.

If you hire your neighbor for $100 to dig a hole in your backyard and then fill it up, and he hires you to do the same in his yard, the government statisticians report that things are improving. The economy has created two jobs, and the G.D.P. rises by $200. But it is unlikely that, having wasted all that time digging and filling, either of you is better off.

People don’t usually spend their money buying things they don’t want or need, so for private transactions, this kind of inefficient spending is not much of a problem. But the same cannot always be said of the government. If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics but little increase in economic well-being.

One has to wonder if what we need is a tax cut, not an increase in government spending (which is really a tax increase, since all government spending is taxation).