10 Principles for Counter-cyclical Government Intervention

For nearly six months Congress, the White House, and hundreds of advocacy groups across the ideological spectrum have been trumpeting one government action or another to mitigate the recession and economic chaos that has now engulfed the world.

And the questions have been like these:Should we give loans to banks to improve their liquidity or should we encourage banks to renegotiate loans with borrowers in default on their mortgages?

Should we give the auto companies loans, or should be take an equity position?

Should we fund major infrastructure projects at the federal level or give money to states to assist in their budget shortfalls?

Should we lengthen unemployment insurance benefit periods or provide individual tax cuts?

Should we guarantee investors against loss on corporate bonds or make low interest loans directly to corporations?

When there is nearly universal agreement that the government needs to act, why is there so little agreement on how? Four reasons, I think: 1) for nearly three generations we have never faced an economic situation comparable to today; 2) most of the “solutions” are being advanced by potential beneficiaries of the actions and their political allies; 3) there are multiple, and sometimes conflicting opinions as to what the goals ought to be – job creation? foreclosure mitigation? bankruptcy prevention? increased credit availability? and 4) and probably most importantly, there is no set of underlying principles, independent of political constituencies, upon which those decision should be made.

So a set of principles should be established first, and here is my suggested list:

1. Effectiveness How well does the proposed action meet the specific goal? and does it do so quickly? For example, building new public buildings would meet a goal of job creation, but because of the time lag in preparing plans, getting approvals, bid letting, and the work itself, the recession may well be over before the projects impacts would be felt.

2. Efficiency Is the program either simple to administer or is there an already established framework within which this program would fit? Tax rebates, for example, are extremely efficient – all it takes is for the Treasury to write 150 million checks. Establishing a new, complex Federal program takes months and often years to fully come on line.

3. Long term and Capital This is the difference between borrowing money to buy a house, and putting the electric bill on your credit card. Since in any event proposed Federal interventions will be in the billions of dollars, those dollars should be invested in long term, capital projects, not short term operational expenditures.

4. Jobs and Household Income From both a political and a policy perspective, putting people back to work seems like a priority. Likewise since over two-thirds of the national economy is driven by household spending, increasing household incomes is a parallel priority. But these two priorities aren’t always in alignment. For example, we could have a program of paying for free McDonald’s burgers for everyone. This would create lots of jobs, but since most of them are relatively low paid jobs, not much household income. Alternatively we could subsidize the hiring of additional scientists at nuclear power plants. This would add to household income – because those jobs are well paid – but wouldn’t add many jobs. Building construction in general, and rehabilitation in particular are usually the strongest in combination between numbers of jobs created and amount of household income generated – particularly among those without advanced formal educations.

5. Widely distributed benefits If this were a recession that was just affecting one region of the country, or one industry cluster, this probably wouldn’t be one of the principles. But since this economic downturn is widespread both geographically and to sectors of the economy, the benefits of any intervention program should be wide-spread

6. Catalytic impact If the taxpayers are going to get the most from these multi-billion dollar investments, then the direct recipient of the program should not be the only beneficiary. Expenditures that serve as catalysts for additional investment by the private sector or other levels of public sector entities should be given priority.

7. Leverage of Public Investment As with catalytic impact above, selected projects should serve as a means of leveraging the public dollars. For example, paying for a new federal office building would likely be 100% public investment. On the other hand, giving a tax credit for constructing low income housing would highly leverage the public portion of the investment.

8. Revenue Recovery No one suffers from the delusion that all of the money spent by the federal government over the next year or two will be fully recovered by the Treasury. Programs should be given preference, however, where at least part of the investment is ultimately recovered. There are two elements to this – the likelihood of the revenue recovery and the magnitude of the revenue recovery. In the case of the nationalization of FNMA, for example, the likelihood of some revenue recovery is high, although the magnitude of that recovery is still uncertain. A direct tax rebate, on the other hand, has no likelihood of direct recovery and, therefore, no magnitude. It can be argued, of course, that the revenue recovery of a tax rebate does ultimately come, but indirectly. To the extent that is true it should receive points in catalytic impact, rather than revenue recovery.

9. Public Policy Advancement No massive expenditure of taxpayers’ dollars should be made without that program advancing a specific, identifiable public policy goal. “Increasing rates of homeownership” is, arguably, a public policy goal. “Bailing out an over-aggressive lender” should not be.

10. Sustainable Development If anything should be learned from this world wide economic chaos, it is that our public and private decisions need to be viewed through the lens of sustainable development. And sustainable development is not limited to green building gizmos. Sustainable development has three elements – environmental responsibility, economic responsibility, and social/cultural responsibility. Had corporations, governments, and individuals considered their decisions of the last two decades in the context of those three sets of responsibilities the world would not be in the situation it finds itself today.

So an incentive program for solar panels for Wal-Mart might meet the test of environmental responsibility, but would not for economic or cultural responsibility. Resumption of polluting coal-fired electric plants might meet the test of economic responsibility (at least in the short term) but fail the environmental responsibility test. Hiring PhD musicologists for every elementary school in America might meet the cultural responsibility test, but fail the economic responsibility criteria. Any program to respond to this economic crisis must meet all three of the elements of sustainable development.

Literally hundreds of proposals have emerged – especially since the election – as to what programs ought to be part of the economic recovery plan once a new president and a new Congress is in place. Below are twenty of the most commonly heard ones:

a) Buy toxic assets from banks
b) Lowered interest rates for problem home loans
c) Build new highways and bridges
d) Repair existing highways and bridges
e) Repair existing municipal infrastructure (waterlines, sewers, sidewalks, parking garages)
f) Extend and expand municipal infrastructure
g) Invest in public transportation systems
h) Tax rebates to individuals
i) Lower Capital Gains taxes
j) Incentives for historic preservation
k) Loans to auto industry
l) Equity investment in auto companies
m) Direct take over of financial institutions (banks, insurance companies)
n) Acquisition of parkland, recreation areas, and greenbelts
o) New construction of public buildings
p) Investment in energy efficient technology research
q) College tuition subsidies
r) Job training programs
s) Oil exploration incentives
t) Expanded Job Corps, AmeriCorps, and Peace Corps programs

Using the 10 principles established above it is then possible to rate each of those proposals as to how well those principles are met. I have done so on a five point scale, with 1 being the least fulfilling of the principle and 5 being the most.

Others are certainly welcome to give a different scoring to various programs, but I would be very surprised if those who are both knowledgeable and objective will find significantly different results. I rather arbitrarily picked twenty commonly heard program suggestions, but the grid could be used to evaluate others as well.

The point is not whether my scores (and therefore a suggested list of priorities) is the correct one…or even if the principles I have identified are those that are most germane. It is also possible that there should be weighting given to the different principles.

The purpose of this exercise is that if we are going to be burdening at least two generations of taxpayers with the costs of the decisions made in the next few months, those decisions ought to be made on grounds other than whose lobbyist can make the most phone calls and which union president or talk radio commentator can scream the loudest about who is hurting the most.

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a) Buy toxic assets from banks b) Lowered interest rates for problem home loans c) Build new highways and bridges d) Repair existing highways and bridges e) Repair existing municipal infrastructure (waterline, sewers, sidewalks, parking garages) f) Extend and expand municipal infrastructure g) Invest in public transportation systems h) Tax rebates to individuals i) Lower Capital Gains taxes j) Incentives for historic preservation k) Loans to auto industry l) Equity investment in auto companies m) Direct take over of financial institutions (banks, insurance companies) n) Acquisition of parkland, recreation areas, and greenbelts o) New construction of public buildings p) Investment in energy efficient technology research q) College tuition subsidiesr) Job training programs s) Oil exploration incentives t) Expanded Job Corps, AmeriCorps, Peace Corps programs