Thursday, February 18, 2010

Tax cuts vs. spending

In seeking to stimulate the economy, Congress must choose between two fiscal tools: tax cuts and government spending. While there are arguments on both sides which are steeped in economic theory, I would submit there are some very practical objections which caution against the use of increased public sector expenditures.

The first is that government spending is not as simple as flipping a switch or turning a spigot. Government involves substantial red tape, much of it designed to prevent the abuse of taxpayer money. Other forms of spending, such as infrastructure, require substantial amounts of time by their very nature; a bridge has to be designed, its location determined, environmental impact statements made, public feedback obtained, etc. Government is rarely described as either quick or nimble even in the best of circumstances, and far more often seen as slow and plodding.

Two stories this week illustrate the slow-moving nature of government. The first is from ABC News on the stimulus weatherization program:
A $5 billion federal weatherization program intended to save energy and create jobs has done little of either, according to a new report obtained by ABC News on the one-year anniversary of President Obama's American Reinvestment and Recovery Act.

Only 9,100 homes had been weatherized nationwide as of Dec. 31, according to the new report by the Government Accountability Office, to be released Thursday.

The Department of Energy, which runs the program, said it actually weatherized more than 22,000 homes last year with Recovery Act funds. Either way, it's a far cry from the 593,000 that the government plans to complete during the course of the Recovery Act, which runs through March 2012.
And then there's this piece from The Washington Post:
Officials argue that plenty of punch is yet to come as money works its way through the pipeline for infrastructure, such as road construction, and other projects.

"We're just now starting to see the infrastructure kick in and lead to job creation," said David Wyss, chief economist at Standard & Poor's. " 'Shovel-ready' doesn't always mean shovel-ready."

This year, spending will shift to investments in infrastructure, energy-efficiency upgrades, broadband and other areas. It is this spending that has been slow to ramp up. Of the $226 billion that was put toward these investments, only $31 billion has been spent.

The result, officials say, is going to be a major surge in this spending in coming months. Although only $3 billion in investments was spent per month on average last year, officials expect that rate to more than double, to $7 billion per month, from now until June.

Of the $20 billion for health technology upgrades, only $1 billion has been allocated, and none has been spent. Most of the $4.5 billion for "smart grid" upgrades has been allocated, but none has been spent. Similarly, virtually none of the $8 billion for high-speed rail and $7.2 billion for broadband expansion has been spent, though the administration recently announced which areas would be getting the money.
Thus, if the goal is to get money out the door quickly, government spending -- particularly on infrastructure -- seems a rather poor way of going about it.

As previously stated, red tape in the process isn't for nothing, and is designed to prevent fraud, waste and abuse of public dollars. Handing out bags of money for spending without accountability is a recipe for disaster. Even with all of the oversight in place, however, episodes of stimulus fraud and waste have undoubtedly taken place as illustrated by this episode:
Kentucky construction magnate Leonard Lawson is on trial this week in Lexington federal court for allegedly bribing the state's Transportation secretary during the past decade to win big highway and road projects. But that didn't stop Lawson family companies from winning $24-million dollars in federal Recovery Act contracts!

Though Leonard Lawson pled not guilty, companies with ties to Lawson should have been suspended from bidding for stimulus work within 45 days of his indictment on bribery, theft and obstruction of justice charges, according to a Department of Transportation rule. But, it took the Transportation Department 10-months to act -- after the Lawson firms had won the contracts.
And there's this:
Who is Jeremy Daniel Phillips?

He's the mystery man listed as having approved allegedly fraudulent documents a Roseville, Calif., contractor used to win $3.5 million worth of federal stimulus-funded contracts to install water meters for the city of Sacramento.
The story goes on to say that the FBI estimates fraud losses will amount to 7-10 percent of the stimulus money allocated, which means anywhere from $60-$86 billion.

Tax cuts, meanwhile, suffer from none of these problems. The money shows up in the worker's next paycheck, is not susceptible to fraud and is spent (or put in the bank, which contributes to the pool of savings available for investment) in a fashion that most benefits the taxpayer rather than government and politicians -- which likely explains why so many prefer government spending.

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