Bob Cropf

Missouri’s stake in the stimulus

In Keynesianism, stimulus on February 28, 2009 at 12:26 PM

What Obama’s Economic Stimulus Package will mean for Missourians

Below is an article, which I just sent off to the St Louis Beacon, an online news publication.

Last month, Congress passed and President Obama signed into law a historic economic stimulus package that will spend $787 billion in the hopes of pulling the US out of the recession. The package has several parts. It will spend $260 billion over ten years to assist families with their taxes, buying a first-time home, paying college tuitions, extension of unemployment benefits and car purchases. More than $80 billion has been set aside to modernize infrastructure including transportation, federal buildings and water projects.Nearly $130 billion will be spent on expanding health care including boosting benefits for laid-off workers and to assist states with their Medicaid payments. Education receives more than $100 billion, with funds set aside for direct payments to local school districts and billions of dollars for school modernization, Pell Grants and special ed programs. The rest of the package is devoted to helping alternative energy production ($22 billion), investments in scientific research ($18 billion) and small business ($54 billion). These are all nationwide totals; what does the package mean for Missouri residents?

A new report issued by the non-partisan Missouri Budget Project estimates that the Economic Recovery Act will primarily help low- and middle-income Missouri families. The report also says the Act will help stimulate the state’s faltering economy.

The Missouri Budget Project’s analysis of the stimulus package has estimated that the state will recieve more than $4.3 billion over the next two years. This amount will be divided into three components: 1) state services, allocated by the Missouri General Assembly, 2) education, a direct transfer to local school districts, and 3) families, a direct subsidy to households hit hardest by the recession. Within each of these components, the spending stacks up this way:

1. State Services (more for health care including a Temporary Increase in the Federal Matching Rate in Medicaid, an increase in highway and public transit funding, more funds for the state to help pay for public safety, law enforcement, services for the elderly and the disabled, as well as money for Child Care services.)
2. Education (growth in spending on Title I, Education Block Grant funds and K-12 and Higher Ed funding)
3. Families (increases in Unemployment Insurance Benefits, funding for Emergency Shelters, and more money for Food Stamps.)

Not only will the billions in anticipated spending directly help Missouri families, the infusion of federal money into the state’s flagging economy will provide a much needed boost. As consumer spending dips, business profits drop off and state government revenues decline, which results in falling demand for goods and services starting the destructive cycle up again. Federal funds will produce a multiplier effect, in other words, for each new dollar invested in the state, a significant amount of new economic activity is expected.

Perhaps the best way to explain the multiplier effect of federal spending is to illustrate with an example. Imagine a currently unemployed construction worker who, as a result of the package’s infrastructure spending, is put back to work on a public transit project. With the wages earned, the worker can make a down payment on a new house, buy groceries and otherwise spend money that would go to stimulating the state’s economy, producing more jobs, more spending and more state revenues.

In sum, the Missouri Budget Project calculates that the multiplier effect will produce a $7.7 billion increase in the Gross State Product, will create 98,000 new jobs, and add $275 million to Missouri’s state revenues over the next two years.

Of course, in a plan of this magnitude there are always skeptics. The chief arguments against the package include more government spending will not end the recession and consumer, not government, spending is the way to get the economy back on track. In the case of the first one, critics assert that much of the government spending in the stimulus package will not have an immediate effect (e.g., infrastructure projects). Therefore, by the time money on these projects is spent, the economic recovery will be well underway. However, this argument assumes the typical long “start-up” times of most capital projects and ignores the fact that in many states there is already a back-log of “shovel ready” infrastructure projects, which have had to be shelved because of the states’ inability to finance them on their own and the recent federal cut-backs in funding. Furthermore, helping to rebuild the nation’s infrastructure, is a long over-due investment in our economic future. Not only does it generate new jobs by the millions, it also ensures economic growth in the years ahead.

The second argument assumes that the multiplier effect for government spending is less than one for privately-generated consumer demand. An example of this can be found in the following blog, Organizations and Markets , by four free-market economists. In a recent post, one of the authors says:

Of course, if GDP is adjusted for quality, the multipler [sic] is most likely negative, as resource allocation is directed by government officials, not consumer demands.

According to this perspective, only the production and consumption of iPods, cars, and similar private goods rather than public goods such as bridges, schools, roads, and libraries, results in “quality adjusted” GDP. Presumably, the author would take issue with Bureau of Economic Analysis of the U.S. Department of Commerce, which estimates additional economic activity that results from investments in different sectors in the $1.58 to $2.08 range. However, as the above quote indicates, free-market economics automatically discounts the possibility that public investments can have a positive effect even before the evidence is in.

It would certainly not be in the best interests of the state if the legislature were to follow the lead of the governors of some states and refuse federal money for some programs. Fortunately, Gov Jay Nixon shows every indication that he wants every federal dollar that the state is entitled to.

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