From all appearances, fiscal stimulus in the form of massive government expenditures would seem to be the unanimous choice to cure whatever ails the economy. One has to search far and wide to find any dissenting opinions or even thoughtful discussion about the advisability of going all in on the concept. Fortunately, Lawrence Lindsey has offered a few cautionary thoughts.

Writing in The Weekly Standard, Lindsey offers three tests, if you will, for measuring the efficacy of any stimulus program. His three criteria are: 

Three criteria are crucial for evaluating fiscal stimulus packages. First, does the program target the weakness in the economy that caused the recession, or is it largely peripheral? Second, are the funds going to be spent in a timely fashion? Third, does the program fundamentally strengthen the economy going forward into the expansion phase? A look at the economy’s current circumstances suggests that a large fiscal stimulus is needed, but a badly designed one will, in the words of an old song, merely leave America “another day older and deeper in debt.”

Lindsey identifies the causes of the crisis as essentially a problem with the financial health of the financial sector and the consumer. He asserts that the problems of the financial sector are being addressed sometimes well and sometimes not so well by current programs. As for the consumer, he suggests that in order to rebuild savings, the consumer will cut back on consumption and that this will cost the economy roughly $750 billion over the next two years. How to replace that number then is the question and the means we choose to use should be evaluated according to his criteria.

Programs that are targeted at transferring funds to the states from the federal government mostly fail Lindsey’s tests. They do little to attack the weakness behind the recession, specifically the consumers balance sheet. They don’t put money into the consumers hands in other words.

They aren’t timely. The phrase of the day is “shovel ready” but by definition, “shovel ready” describes a program that is about to be funded by the states to begin with. Therefore, any transfer of funds to the states for these programs simply substitutes federal money for state money that would likely have been spent on the projects.

As to whether or not the transfer of money will strengthen the economy once it reaches the expansion phase, the answer may be yes and may also be no. If the money is truly spent on productivity enhancing projects, then the answer is absolutely it will help the economy once it is expanding again. The problem, which Lindsey identifies well, is that in many cases the programs that the states want funded are of marginal benefit. If they weren’t a high priority for the states before federal dollars came along it is a pretty good bet that they were of questionable value so the expenditure of stimulus funds on them is probably of little value to the economy.

Lindsey goes on to suggest a tax cut that has been discussed here and elsewhere. Specifically, a reduction of the payroll tax by 50%. Such a cut would go directly to the consumer thus satisfying the first criteria. It would also be timely, since it would take effect immediately and being permanent, it would be of continuing value during the expansion phase. By lowering the cost of labor, it would also tend to encourage hiring.

Eventually, any stimulus plan has to be paid off. Lindsey suggests that a carbon tax would be the best way to eventually generate the funds to offset the lost revenue from the cut in the payroll tax.

I would like to think that Lindsey’s ideas would get at least a hearing. They most likely will not. The political power inherent in a stimulus plan of the order that is being contemplated is too tantalizing to the governing class. It is seen as a once in a lifetime opportunity to advance certain agendas and that opportunity is not going to be passed up no matter how inefficient it might be in addressing the economy’s problems.

In the end, I suspect that we will do something along the lines that Lindsey suggests. But not before we have spent a good part of our treasure.

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