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The package stimulates the economy by spending today what might otherwise be spent in the future.

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.