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December 19, 2008

How An Economist Spends $500 Billion

Catherine New
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The incoming Obama administration is reportedly considering a spending package for as much as $850 billion. If you’re wondering where the money will come from, the Fed announced on December 16 that it would print as much money as it needed to in order to battle the deepening financial downturn. The New York Times’s Economix blog asked a number of economists how they would spend the money, using $500 billion as a ballpark figure. Professor Jospeh Stiglitz said:

Right now there’s going to be a major shortfall in revenues for states on the order of a magnitude of $100 or $150 billion per year. This means they may cut back on expenditures, which would be like a negative multiplier and lead to a contraction in the economy. The first priority is making sure to fill in the hole, that shortfall in state and local money …

The second thing I would do is that we need stronger unemployment insurance. Unemployment is growing more long-term again, and we don’t know the magnitude of that. I’d put that at the top of the priorities, including help for those who would otherwise lose their home because they’re unemployed, and health insurance for the unemployed. That’s my second priority.

The third, I think, obviously is spending money to try to prevent foreclosures, whether that’s part of TARP, or a successor to TARP. That would be foreclosures among lower-middle-income people … which would help stem the financial crisis.

Then fourth is the remaining part needs to be divided among several categories. One of the critical issues here is how quickly you can gear up various kinds of spending categories. There are two important criteria: The first is the bang for the buck, how much stimulus we get for every dollar we spend. The second is consistency with our long-run vision. That means supporting R.&D., including green R.&D. as well as basic research. That also means infrastructure, and restructuring the economy for higher energy prices. That also means schools. There are a lot of decrepit schools. That means a broad infrastructure deficit.

I would actually scale back military expenditures which do not stimulate the economy as much as some of these other kinds of expenditures. Given the high deficit, we have to be careful how we spend money, given our various financial problems. We should restructure our health care system, our energy system, and our military system.

Photo credit: Andy Melton

Comments

by Eyob Zerihun | August 30, 2009 at 6:00 PM

Stiglitz's view is not only based on ideology. I must say this is very much pragmatic. America needs to wake up to the reality of this new millennium. I believe in a world where emerging economies such as China have enormous surplus, America is only growing artificially. There is need for higher consciousness on deficit. America needs to produce more than it consumes unlike the current trend. It also needs to exploit other markets in developing countries. Africa, for example, is a continent with 900 million consumers that can offer huge opportunities, if America can reposition itself by formulating viable diplomatic and strategic ties and focus on manufacturing and industry rather than services. So I think the stimulus can also be used to support product developments for markets in developing countries. China and India are ahead of America and are investing large some of money in Africa. This will payoff after a decade. America should not just be content on exporting democracy and extreme free market ideals. America needs to be flexible and take advantage even in the not so liberalized markets of developing countries. There are great lessons to be learnt from India and China.

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