Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Two Key Economic Lessons in One BillHoosiers face trade-offs and opportunity costs in the wake of SEA1.

Time to Fix Economic Development PolicyAllocating tax dollars to land development won’t cause economic growth.

The Unanticipated Effects of SB1Businesses, governments and households may all feel the effects.

The Stupidest of PoliciesThis whipsawing of tariff rates has unnerved financial markets, which on Wednesday, were toying with a liquidity crisis.

View archives

Top Tags

jobs and employment 261
economics 201
state and local government 188
education 186
economic development 171
indiana 171
budget and spending 145
taxes 144
law and public policy 142
workforce and human capital 139
Browse all tags
Reporter / Admin Login

February 2, 2009

Proposed Fiscal Stimulus Package has Costs

The proposed fiscal stimulus package just passed by the House of Representatives is the single largest one- time stimulus ever, in the whole history of the world. I support the effort – in part – but whatever your feelings, it is worth trying to understand it. 

As I’ve written before, for the stimulus to influence this recession, it has to happen quickly, as in before the leaves return to the trees in Indiana. Very little of the proposed spending in the House plan will do this. Indeed, virtually nothing but the tax cut will affect the domestic economy before the end of summer. This will almost certainly be past the trough of the recession, and so contribute minimally to the recovery. 

The economy is not bad enough, yet, for us to risk erring dramatically. I continue to hear great depression comparisons, but here in Indiana it will take something like 40 more months of  job losses like those of November (the worst month so far) for us to have the great depression unemployment rates. A miscue on timing and we can have Jimmy Carter level inflation in 2010.

The stimulus package is designed to help the economy in two ways. Money spent on infrastructure will have an effect on future productivity by improving mobility, communications and education. That impact might justify the type of spending, but not the spending itself. Under the most ideal circumstances every dollar of new infrastructure spending will yield a penny or two in improved productivity each year for a short while. That assumes no more ‘bridges to nowhere’ will be tucked away in the package, a silly assumption. 

The second way the package stimulates the economy is by spending today what might otherwise be spent in the future. That’s all there is to it. There’s no magic government spending multiplier or free lunch associated with expenditures of this sort. We simply accelerate future investment for the sake of today. A mistake here is a sure way to turn a dollar of federal spending into 30 cents of economic growth. 

This type of accelerated spending now isn’t necessarily a bad idea, but it all depends heavily upon what we buy. Since we’re going to have to borrow the money, the benefits of spending the money now should be greater than the benefit of waiting (since we have also to pay interest). Too much spending on any one thing will drive up prices (like asphalt). 

President Obama will have to count heavily on the states, two thirds of whom are in dire financial straights with a handful in real crisis. Rarely has Federal government policy relied so much on the Governors. Expeditious and clever spending on roads, infrastructure and in the half dozen states where it is possible, a tax cut, will determine the success of the stimulus plan. 

Mr. Obama risks much, for failure in choosing fast and effective spending will crumble any hopes for real domestic spending for the next four to eight years.

Link to this commentary: https://commentaries.cberdata.org/77/proposed-fiscal-stimulus-package-has-costs

Tags: stimulus, pres. obama administration


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close