Friday, August 14, 2009

"Stimulus" in theory versus practice in New York. (How are things going in your state?) 

How does an anti-recession government-spending stimulus program work -- in theory and practice?

Rather than trot out abstract analysis I've liked to use an illustrative example using three real-life places I know:

[] The Bronx, where I lived for a bunch of years, with its many areas that are poor, permanently de-industrializing, and so experiencing rising unemployment -- especially right now.

[] "Bullet Hole Road", an aptly named road in a moderately upstate county, within commuting distance of the city, with low state political influence and thus inadequate infrastructure.

[] "Rocky's Road to Nowhere", as it is called by the local citizenry, a four-lane, landscaped, divided highway that runs across rich and influential Westchester County to end literally at the back entrance of a hospital parking lot.

Rocky's Road was built by governor Nelson Rockefeller, and while a divided highway running into the back of a hospital parking lot was never exactly a priority for transport needs, it happily kept local contractors and unions fully employed and other politically influential interests happy. It's been very well maintained ever since! Did I mention it also runs to the Rockefeller Estate? "Politically influential interests"?

Now, here's how a government-spending stimulus works...

In theory: A recession strikes, increasing unemployment. The government then -- in a "timely, targeted and temporary" manner -- allocates money to hire newly unemployed workers from the Bronx and employ them rebuilding Bullet Hole Road and its related community infrastructure.

Stimulus result: The unemployed get productive work and money. The Bullet Hole Road community gains real physical wealth that will provide lasting benefits. Some amount is added to the national debt, but this is offset by the real wealth added to the community. The cost of adding this wealth is low because unemployed workers and contractors are used.

The world becomes a better place! Maybe some Bronxites even move to Bullet Hole Road addresses in the revitalized community and live happily ever after.

In practice: Reported data always lag reality, so the government doesn't realize there's a recession until months after it starts. Several months after that, the politicians finally agree on a deal for a spending stimulus. Several more months after that, the money starts going out. By now the recession is over or mostly over. And when the money finally begins to be actually spent it is directed by the politicians for their own benefit to the interests group that support them -- just as politicians always spend money.

Stimulus result: A year or two after the recession starts, Rocky's Road to Nowhere gets repaved and new landscaping. The people who live in the Bronx and along Bullet Hole Road get squat. Taxpayers get a bill for the high cost of the Rocky's Road redo -- the contractors hired for the work weren't unemployed and had to be bid off of other jobs -- which buys nothing for anybody except votes for politicians. And to pay for all this, the national debt goes up.

And this is why economics textbooks have uniformly warned against using government-spending stimulus policies for at least a generation -- because the stimulus is always late and politically distorted.

Well ... this tale gets smiles from people but then many say: "Yes, but it's just a story. They aren't actually re-landscaping Rocky's Road and maybe they will rebuild Bullet Hole Road. You've only told us a story, it's not real life."

OK, here's real life:

Yesterday arbitrators threw an 11% pay increase over three years to the Transit Workers Union of NYC's Metropolitan Transit Authority. Cost: $600 million, creating a $350 million hole in the MTA's budget. This is not an inflation adjustment, as there is no inflation today it is a real 11% wage increase.

(The arbitrators actually gave back to the union items they had conceded before the arbitration. One of the arbitrators was the head of the union -- let us say it was not a hostile forum for the union. Some suggest "the fix was in" from the start.)

This is the same union whose members already earn on average $64,000 a year (well above median household income for both the city and the nation) and which has work rules such as to let union members collect overtime pay literally while sleeping at home. (Did I mention that this union is a politically influential?)

Meanwhile, the employer Metropolitan Transit Authority is so busted financially that it just had to be bailed out with a fare hike and slew of new taxes imposed on the citizenry -- including a regional payroll tax that hits workers in counties located 80 miles away from the nearest NYC subway station or bus stop.

Well, how does a transit agency that is so broke, and in the midst of the worst recession in 60 years, manage to give workers who are so over generously paid an 11%, $600 million pay increase? The arbitrators said exactly how..

MTA officials warned that the ruling would raise the budget of the cash-poor agency an additional $350 million over three years, which could lead to cuts ...

The arbitration panel said the authority could use federal stimulus funds and money from its capital program to make up any shortfall in its operating budget. [NY Times]

Use the stimulus funds! They are there, so the union can take them. Money is fungible. If the stimulus is going to put money into the MTA's capital construction budget then the MTA can cut its own funding of its construction budget by like amount and send that money to the union. The "day after" budget analysis is that about $350 million of stimulus funds will go to union wages.

For this $350 million...

Stimulus result: No new hiring. No construction or purchases to add to GDP. Workers already getting above-market wages get higher above-market wages. Worst of all for the city's fare-paying transit riders and taxpayers, the new permanently increased union wage level is paid for with a temporary shot of funding. So what will happen when the stimulus funding ends?

And, for national taxpayers, the cost of the stimulus funding that pays for all these "benefits" is added to the national debt.

Government-spending stimulus in action: always late (all of 12% spent so far, with many economists calling the recession over as of the third quarter) and politically distorted.

A motorist enjoys the scenic trip to hospital parking
along Rocky's Road.