Flying Pink Unicorns

The time for a massive stimulus package is now. I know I have advocated this before, but I have a few new things to say.

Congress should pass, forthwith, a massive stimulus package. Something like $400 billion over 3 years. Bigger would be fine with me. Budget deficits be damned. The fact that some of it would be wasted on bridges to nowhere be damned. We desperately need a huge stimulus package, and FAST. And HUGE. And our nation's infrastructure can easily absorb this kind of spending without gigantic waste. Train service can be improved. Subways in the cities. Ports can be deepened and widened. Pipelines from Alaska can be built. Oil can be drilled for. Highways and bridges can be built and, more importantly, MAINTAINED. Bridge and highway maintenance isn't glamorous. No ribbon cutting ceremonies. But it is highly useful. Windmills and solar panels can be built. Money can be lent/given to states, so they don't need to cut spending and raise taxes to balance their budgets.

In states where it isn't a good idea to spend big bucks on train services, because the states are too big and too sparsely populated (the huge red states in the West), more money can simply be given to the states/their citizens. Where huge money can usefully be spent (big cities like New York, existing highway and rail systems, the Boston to Washington Corridor, New Orleans, the Everglades possibly, health care for the uninsured (!)), more money should be spent and less money given to the states/their citizens. The key is for the federal government to run an absolutely massive deficit for the next three years. This is now necessary, both as depression insurance, and a really good idea unto itself. Yes, the dollar would fall as a result of this, which has downsides. But it would put hundreds of thousands of workers, many in construction, back to work. The housing depression has left a handy dandy skilled pool of surplus labor waiting to put their hardhats back on and get back to building. But instead of building houses that the free market doesn't really demand outside of the now dead bubble, they can build and repair useful roads and bridges. And yes, inevitably some bridges to nowhere. Wasting money is simply not a big concern right now.

The huge financial rescue "bailout" package passed last week will take time to implement, and then more time to do any good. Probably months. We are currently in a very steep recession, probably the worst one since 1945. I don't know how long it will last. Perhaps only till the end of this year, perhaps a whole lot longer. What I do know is that we are in a deep recession and the markets are in full fledged panic about the whole thing. The fed has (with my full support) cut interest rates already, to 2%. This has not helped and will not until banks start lending again. So lowering rates further, which has been advocated, and which Bernanke hinted at today, is a hugely bad idea. It removes some key ammunition at a time when it is virtually guaranteed to do no good at all and perhaps harm (via what would be a newly tanking dollar). DON'T CUT RATES NOW BEN. Wait until the cuts would work, i.e. when the Treasury has bought a lot of the toxic assets, banks have begun lending again and the economy needs the stimulus. If these factors don't come together, keep rates at 2%. Plenty low enough.

But a massive stimulus package needs nothing from anyone to begin having an effect. No bank lending is needed. All that is needed is the political will. Allocate the money on a per capita basis, rigidly. Its not perfectly fair, because the huge non-populous states get screwed a bit that way, but once you tinker with the formula you have the mother of all political foodfights. Give the states a ton of input on how the money is spent. If the governor wants to favor a particular region she needs for her reelection, fine. Just spend the damn money, with as much of it as possible going to construction, because that creates jobs, almost immediately. Well, in this day and age of strict environmental regulation, soon. Repairs should begin creating jobs much faster. And direct aid to states will prevent job losses, almost as good. And prevent tax increases, which keeps money in people's pockets. Not as good as new spending, which is much more stimulative in the short run, but still better than the people not having the money.

Our economy is in a genuine crisis. The federal government has taken hugely decisive action to fix things. Time will tell if the actions taken, the bailouts, takeovers, and toxic asset purchases are the right fix, and are sufficient. But one more huge set of actions needs to be taken to finish the job, and that is a massive Keynesian style stimulus. I'm just not worried about all this being overdone. If it turns out that there is a quick vigorous recovery beginning next year (very unlikely in my opinion) and the stimulus turns out to be way too much of a good thing, you can cut spending elsewhere, eliminate additional tranches of money to states perhaps. Or the fed can shoot interest rates upward to slow the suddenly galloping economy. These seem very remote worries right now.