More on the stimulus

The NYTimes Economix blog has a great post about the proposed economic stimulus package that explains exactly where all of the spending is going. Here's the pie chart breakdown:

Keep in mind that the bill describes the $550 billion in spending as "thoughtful and carefully targeted priority investments with unprecedented accountability measures built in." Please. Expanding broadband access? Weatherizing modest-income homes? Pell grants? How are these going to stimulate the economy? Also make sure to note the pink "???" category near the top of the graph that represents over $31 billion in spending that the author couldn't find an explanation for -- $31 billion!

Some of these things I understand, at least in theory. Decrepit infrastructure such as roads and bridges can impede commerce and spending money to improve them can help improve growth. Even then we must be careful to recognize that spending labeled as infrastructure isn't automatically beneficial. If you have a small town that has one bridge with light traffic and add a second, what is the marginal benefit? Pretty close to zero. Don't delude yourself that this won't occur. Political considerations will dictate where the money is spent as much as actual need, which usually requires significant time in careful study to determine.

I get the sense that some people view the economy as akin to a giant flywheel, and if you can just spend enough money to generate sufficient momentum that pretty soon the economy will take off on its own and not require any additional spending. This is completely false. Growth has to be built on underlying strength and fundamentals, not just a bunch of money appearing out of nowhere. Not all spending is equal. $1 million spent investing in Microsoft during the early 1990s would help grow the economy infinitely more than the same amount spent building flood control infrastructure in eastern Montana.

The marketplace tends to allocate this money to much better uses than government, which is too hindered both by a lack of knowledge and blinkered by political considerations to determine the best use of money. Remember that every dollar spent by the government is a dollar that has to be removed from another part of the economy to pay for it. Even when borrowed, the money spent on government bonds represents money that can't be devoted to other uses.

I am currently very pessimistic on the economy. It's not that I think the economy is incapable of working out the kinks and getting back on an even keel, it's that I think all of this government interference is preventing it from being given the opportunity to do so.