"Economic stimulus is bad fiscal policy" OR "Trying to Make Lemonade out of Lemons"

My recent op-ed, commissioned by the Northwest Indiana Times-- and appearing in newspapers across the state...
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How do you respond when people make bad decisions that affect you directly?

Your child lies to you. Your boss implements an oppressive policy. Your president and your Congress pass a "stimulus package" and offer to send you a lot of money to spend.

For Indiana Gov. Mitch Daniels and the Indiana Legislature, the most principled stand might be to refuse the money. On the other hand, if the federal government is going to take billions of dollars from us (in the future, through higher taxes), then perhaps receiving $5 billion or so isn't much of an ethical problem. In any case, it's difficult to imagine politicians refusing money.

The "stimulus package" is almost certainly an unwise public policy -- as Obama walks in the unimpressive footprints of George W. Bush. Borrowing more money to finance current spending undermines the dollar and lowers confidence in the economy (for consumers and foreign investors). And since the proposal is political, even with GOP cuts it is sure to be larded with money to benefit special interests at the expense of the general interest.

Even without those considerations, the stimulus is unlikely to be stimulative.

Fiscal policy is notoriously slow -- will it have its impact before the economy turns upward? -- and it's imprecise. (I love how they pretend to know how large it should be.)

In addition, history does not look favorably on this sort of thing. Beyond the failed attempts at stimulus over the last year or so, Hoover and then FDR used public policies like this to help turn a severe recession into a decade-long depression.

But in promoting the Hoosier economy -- and in our competition with other states and nations -- what should Indiana do if offered the money?

The first thing to note is that the money will probably come with strings attached: some funding for infrastructure, some for education, etc. And with legislation like this, we can confidently predict that lobbying will continue to be the growth industry.

Even so, four principles should be observed:

* Consider the long-run implications of the short-term decisions. Given one-time money, one-time projects make more sense than long-term commitments.

For example, if we're forced to spend 20 percent of the stimulus money on education, then most of it should be devoted to capital projects or other one-time investments. In any case, we already spend more than $10,000 per student. More spending is probably not going to accomplish what we hope.

* If we're talking about infrastructure, then we have to be concerned about quality. We can "create" jobs by paying people to dig holes in the ground and fill them back up -- or building bridges and road improvements for fun. But ideally, new infrastructure will significantly improve the overall economy.

* The funds should be disbursed sooner than later. The problem with this? Politicians might value "sooner" so highly that they sacrifice quality or saddle us with additional long-term problems. Or in general, a rush to judgment is often a sprint into unanticipated problems and an invitation to hand out money to the politically connected.�

* Politicians should consider lowering taxes. Putting more money in the private sector is attractive philosophically and practically. Ideally, the government would reduce marginal tax rates since this encourages productive behavior. But without a reduction in the size of government, this might be difficult to finance with one-time money. One-time tax refunds are fun, but don't do much to stimulate the economy.

We can hope that the federal government will quit trying to manipulate the macro-economy. If it does not, however, we can hope that Indiana's elected officials will do the best they can with the resources that come our way.