The Blog

A Faster, Better Stimulus

Give it all to the states.

11:00 PM, Jan 12, 2009 • By PETER J. HANSEN
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Congress and President-elect Obama are frantically considering how to stimulate the weakening economy, but even with Washington under unified Democratic control, it is proving hard to move quickly.

The obstacle is not solely or primarily the delay in debating and passing a bill. It is not so easy to spend a trillion dollars quickly, even for the federal government. Under all the plans currently being considered, there would be a significant lag between passage of a bill and new money actually hitting the economy.

But there is a faster and better way. The federal government could simply give each of the 50 states a large one-time per capita block grant. It could write each state a check for its number of citizens in the 2000 census times some uniform per capita figure such as $2,000.

This would be more logical and much faster than inviting states and localities to submit public works proposals, which the federal government then decides whether or not to fund. There would be no need for federal officials to determine which projects are "worthy" or "shovel-ready." State officials, who are surely more aware of what is going on in their states, would make that call--and they would not need to start by coming to Washington to plead or lobby for as much as they can get. Indeed, one shudders to think of the wasteful and demoralizing spectacle that will arise if the federal government instead announces that it will give away a trillion dollars to those who most need it. A block grant approach would also avoid creating a powerful federal bureaucracy, which might prove impossible to dismantle once the crisis passes.

How would the states spend the money? That would be up to them, but it is not hard to guess what most of them would do with most of it. They are currently in difficult financial straits, and they do not have access to the federal government's printing press. They are being forced to raise taxes and/or cut spending at the worst possible time. The most effective and fastest stimulus the federal government can deliver to the nation's economy is to forestall these tax increases and spending cuts, which otherwise will begin to take effect early this year--long before any other fiscal stimulus could actually appear.

Insofar as it prevents tax increases, this approach would not so much provide stimulus as prevent tightening. Of course the effect on the economy is the same, but it is much easier to cancel a tax increase than to establish a new spending program--to say nothing of the difficulty of dismantling it once it is no longer needed. However, if Congress and the President think we need an additional positive stimulus, nothing prevents them from considering that too.

Of course one might object to the whole notion of government spending in order to manage or modify the business cycle. I feel some sympathy with this position; in my view Keynes was right regarding economics but wrong regarding morals, which is more important in the long run. (He also neglected the difficulty of timing attempts to manage the business cycle.) Booms and busts come and go, but habits of self-reliance, thrift, and prudence are hard to reconstitute if undermined by government policy. One might also worry about the long-term inflationary effect of expanding the national debt, especially when the retirement of the baby boomers will soon put a tremendous strain on our finances. However, some sort of stimulus is clearly coming, and it seems to me a responsible and conservative approach to try to minimize the harm it causes, above all to those habits of self-reliance, thrift, and prudence.

Someone of different sympathies might object that some states are economically more troubled than others and therefore in need of greater assistance. However, if California gets more because of its weak economy, then other states are arguably being punished for adopting more prudent fiscal policies and creating more business-friendly environments. There is considerable moral hazard, short-term as well as long-term, in deciding to oil the squeakiest wheels--or the most effective lobbyists. Moreover, debating such matters will lead to lengthy and detailed arguments. If we want to get money out there quickly, we're better off choosing one nationwide per capita figure which is large enough to prevent most or all states from having to raise taxes. North Dakota residents won't complain about California being "bailed out at taxpayer expense" if each state receives the same amount per citizen.

Some localities are hurting too. For the most part, however, localities are not struggling as much as states, since they rely primarily on property taxes, which do not vary as much with business activity as sales or income taxes. Moreover, state governments are more or less one kind of entity. Their needs and budgets vary, but not by tremendous amounts (per capita). It is a different story when it comes to localities. Should the federal government give Lexington, Virginia (the small city where I live) and New York City the same amount per capita? That's a difficult question. Perhaps Congress will examine it. Meanwhile, however, if we want to stimulate the economy quickly, let's give the states a uniform per capita chunk of money, and then consider whether other measures are also needed.

Peter J. Hansen is president of Hansen Capital Management, Inc., in Lexington, Virginia.