Deep Currents

Leverage is a dirty word these days, since most of the world had never heard of it until it became public knowledge that our banks were gorging on it. But as Obama considers how to allocate his stimulus package, I’d like to invite you to take a step back and consider the basic idea from physics of using a fulcrum to get a powerful shove out of a small push. There are a number of ideas being tossed around about how the government could best spend a trillion or so to get the economy back on its feet, ranging from transit infrastructure to defense spending to clean energy. Regardless of whether that will actually have an impact on the credit markets, I think it’s fairly obvious that we’ll get the best value for our tax dollars if they’re spent in areas of the economy where they could have a multiplier effect by opening up new areas of economic growth.

Where can you find that? Technology innovation for the short term and new infrastructure for the long term. If the government just pays American companies to do things that they would be doing anyways, the stimulus amounts to frog-marching the American public down to the shopping mall, handing them last year’s tax dollars, and telling everyone to spend it all on whatever strikes their fancy. That would be a tragic waste of effort. The real potential of the stimulus lies in funding projects that will open up new areas of growth and the best example for the short term is clean energy technology. Cleantech of every kind needs a boost in demand in order for the technology to become fully scalable, and government spending could provide cleantech firms with the funds they need to become cost-competitive with other sources of energy. In the long term, Obama’s project to roll out broadband to rural America could also have a tremendous impact, opening up the opportunity for tens of millions of workers to find work in the information economy without relocating to a city. Defense spending, which Feldstein advocates in the Wall Street Journal, would primarily amount to providing demand for military contractors to provide their usual products for the armed forces. Unless we’re talking about upping the funding for DARPA (not a bad idea in itself), giving the military a shopping trip to the defense-contractor mall isn’t going to get us the best value for our trillions of tax-collected dollars. 

Written: December 25th, 2008