The Spin   1 comment

So, let’s talk (not at all briefly) about the stimulus package.

No, let’s not discuss the particulars of what is going where (yet).  Let’s talk about the principle of the thing.  Here’s the pie-in-the-sky version of the theory: if the economy is lagging, people are put out of work.  When people are put out of work, they stop spending money, which in turn makes the economy lag more.  More people are put out of work, and the cycle repeats.

There are lots of different theories about what, if anything, is the right thing to do when this sort of cycle starts moving.  One is to reduce the costs of doing business and working, so that businesses are less likely to put people out of work and workers are more likely to spend (tax cuts).  One is to inject funds into the economy, which creates demand for goods and services and thus makes it less likely that business will *need* to put people out of work (take future tax revenue and spend it now).

There are lots of arguments for and against both strategies.  I happen to think both are necessary, and lean somewhat towards the second strategy, but I have a caveat: I have no problem with debt financing, as long as your debt financing is mostly going towards future productivity gains.  Businesses do this all the time… they take out a big loan, use the loan to build a new, more efficient factory, and take the gains in productivity and use that to pay off the loan plus giving a little sugar to the investors.  Sound business practice, for the most part.  A government-sized economy isn’t a business, so there are other contributing factors involved here (the immediacy of liquidity is a huge factor, so just putting some money in for short-term gains isn’t bad, for example)… but on the whole, anyone who is really a moderate economist is going to be happy with this sort of approach.

Now, regardless of whether or not you think giving large chucks of change out is the better or worse strategy, you’ll probably agree that once it has been decided to give out large chunks of change, you want to take some reasonable measures to make sure that you’re getting some future productivity gains out of a majority of that money.  This is a two-edged problem, though… the more work you spend auditing the money, the greater the cost is of managing the funds, and therefore fewer funds are available for people to actually do anything productive.  I’m a security wonk, and I love auditing, but when it comes to auditing people-processes instead of automated processes, there are huge costs involved.  Anyone who has worked with federal grants and the NSF knows how many strings come attached to federal money.

In the practical case of the stimulus funds, then, there is a powerful incentive to use existing constructs to divvy up that money – split the funds up using existing government agencies and processes.  Nobody, Republican or Democrat, wants to build an entirely new bureaucracy to manage this money.  The advantage here is obvious; you dog-ear funds for general purposes, give them to the agencies that manage those general purposes, and let them split the money up using the formulas and processes that they already have in place.  The disadvantage is that the money you’re giving the agency to manage is well outside its normal operational mode.  So they’re going to disburse those funds as best as they can, but you’re going to get some inefficiencies involved.

This is a classic top-down vs. bottom-up organizational structure problem.  I know, generally, that transportation projects desperately need funds.  I know that, generally, the Department of Transportation has a mechanism in place to take funds and give them out to state and local governments to work on transportation projects.  I know that, specifically, those mechanisms aren’t built to handle the 100 billion dollars I’m about to give them, and in consequence that means that some of those funds are going to wind up in the wrong bucket.  Some formula sitting on some computer somewhere in the DoT is going to split up my 100 billion dollars and give some complicated formula’s percentage share to N different awardees.  Some of those awardees are therefore going to get a LOT more money than they need, because their needs were relative to the DoT’s funds *prior* to the injection of the 100 billion dollars.

Here’s where criticism of large government projects has a very valid point, particularly in short term crisis like this stimulus package.  We have, for the sake of illustration, 100 different awardees… and some subset of those 100 are going to get funds they don’t need, and some subset of those 100 are going to get less funds than they need, and only a minority are going to get the funds that they actually need.  This is inefficient (note: not necessarily wasteful, though).  On the other hand, we don’t have the time or the inclination to rebuild our formulas at the DoT to account for all the changes, because those formulas are very, very, very difficult to set up correctly in the first place, and optimizing them for this new chunk of change is probably not going to be much better than going with what we have.

So, what to do?

Here’s where your true conservative thinker is going to say, “Well, markets are efficient for this sort of thing, so we’ll let a market handle the problem.”  And that, interestingly, is exactly what is happening.

A few area cities have found an alternate way to use their federal stimulus money: selling it to other cities for cash.

Metropolitan Transportation Authority has allocated a minimum of $500,000 in federal stimulus funds to each of the 88 cities in the county for transportation-related projects. Unincorporated areas will benefit, too.

Several smaller cities, some without shovel-ready projects, are making deals with others to sell or swap such funds and replenish their general funds.

“The best way to see this is as a huge windfall for us because we do have the flexibility of using the general fund money now,” city manager Shauna Clark of La Habra Heights said.

The city of Bradbury, with a population of roughly 1,000, is working on a deal to sell its $500,000 share of federal funding doled out by the MTA to the city of Torrance for $315,000 in cash for its general fund, according to Torrance officials.

Torrance, which was allocated $2.9 million by the MTA, plans to use the extra funds for a variety of street improvement projects, including a major reconstruction and expansion of Crenshaw Boulevard, one of the city’s main thoroughfares, said city manager LeRoy Jackson.

Here is the best of all worlds, if you ask me.  Transportation funds are needed by many cities.  Non-infrastructural funds are needed by some cities.  Rather than spend time and effort building a bureaucracy to determine where the funds are supposed to go, you leverage existing organizations to handle the grunt work and you empower the endpoints (the cities) to haggle between themselves to get the funds to the right place.  Everybody wins.  The money that you have dog-eared for infrastructure projects not only winds up going entirely to infrastructure projects, but other money is freed up and spent on immediate needs – money that otherwise would have sat somewhere waiting for something to do.  There is actually more liquidity in the economic system than there would be if you actually disbursed the funds entirely correctly to begin with.

Bradbury gets $315,000 that helps it avoid budget cuts (which would probably result in layoffs, something we’re trying to avoid), which is good.  Torrance gets $500,000 more to pay for its infrastructure project than they were allocated, which is good.  We, the people, didn’t have to pay for huge changes at the DoT to handle this negotiation, which is great.

So, a successful enterprise for all, right?  We leverage the advantages of markets, we invest in reducing future costs, and we do it all without having to spend too much optimizing the whole thing.  Here’s where conservative thinkers can participate in liberal economic policy: pointing out where their systems can optimize, reduce inefficiencies, incentivize economically advantageous behavior,  and reduce waste.  This should be trumpeted as a classic example of leveraging bipartisan ideology.

Oh, wait, no… we forgot about how in this country nothing can be touted as a success unless it’s entirely owned by one polarized ideology.

This could be a problem, especially for watchdog Republicans. The stimulus wasn’t meant to fix city budget problems, the money was for shovel ready project to help infrastructure and create jobs.

The stimulus money actually went to shovel-ready projects… and it had, as a byproduct, the advantage of also helping fix city budget problems… by leveraging a marketZach Behrens (who may or may not actually be a bean-head but certainly wrote this sentence badly) is probably right in one sense, though.  We can expect this story to wind up somewhere on Drudge or on the airwaves on a “conservative” talk program as an example of how “big government is bad”.

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Posted March 10, 2009 by padraic2112 in politics, rants

One response to “The Spin

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  1. Spin is a really nice title for this.

    How happy are you, if you are a resident or own a company doing infrastructure work in neighboring cities of Carson or Compton. First, how convenient that a more affluent city to begin with gets this deal. Free market determined that $500k was worth only $315k! Most likely you’ll find either a personal tie if not a direct finanacial involvement between the companies and the politicos involved. That’s where the “free market” doesn’t belong. Unfortunately, political influence is for sale off ledger and this is the reason government officials on both sides only advoacate bigger government. So yeah, the republicans will be upset, but only when they aren’t in control of the siphon and spend cycle!

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