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Better ways to spend $700 billion of your money

2008-11-20

This is a response to a post on Blogging Stocks that advocates a broad consumer stimulus package on the order of $3-5 trillion.

Something tickles the economic funnybone when the cure-all for economic woes is to convince consumers to spend more. If they won’t spend more, give them money to spend! Problem solved!

Spending more is what got us into this mess in the first place — carrying the biggest mortgage you can fit into the family budget, carry the biggest credit card bill that you can, buy the most expensive car if you can handle the auto loan.

This frivolous spending is what caused housing prices to spiral out of control and has caused consumer spending to exceed consumer income for several years running.

It is laughable to think that this will lead to modest growth with low volatility. The solution is the same as its always been — to produce durable goods that are in demand all over the world, control costs, and sell them for a competitive price. The Fed can help with this task by keeping liquidity high, but they can’t solve the basic problem.

Keynes always played up the demand component of the economy, but he also realized that the only real solutions involved putting people to work and building out heavy-duty infrastructure that would serve as the foundation of the manufacturing economy for decades. We’re not going to right ourselves and continue on a steady economic climb by serving ourselves double lattes or getting a good deal on a flat panel at Wal-mart.

Think of the kind of public works projects we could build with $700 billion in bailout money — the kind of projects that would reduce the cost of business and create an innovation economy that would bring benefits for decades. Nuclear power, high efficiency electric transmission, improved roadways, support for university research and education.

I mean, just the NIH and the NSF have a combined budget of less than $35 billion per year. And we can’t think of a better way to spend $700 billion?

The Federal Reserve and the government should take reasonable measures to maintain liquidity and allow American business to continue to do business. Sometimes that will involve injections of cash or loans. But it’s unclear to me how propping up home prices or saving the bacon of their friends on Wall Street is going to do that. Spending money on basic infrastructure and innovation will solve problems, not handing over cash to banks or giving stimulus checks to individuals.

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