Murray Weidenbaum
Murray Weidenbaum is the Mallinckrodt Distinguished University Professor at Washington University in St. Louis and also honorary chairman of the Weidenbaum Center on the Economy, Government, and Public Policy.
In this unusual period of deep economic decline, it is helpful to begin with the positive factors first. The Obama Administration's economic stimulus program will succeed in spending an unprecedented amount of money. The federal deficit will reach an all-time high as will the public debt. The federal government will become more involved in the business of the private sector -- and of state and local governments -- than at any time since World War II. This unusual flurry of public sector activity, on balance, is likely to have a positive effect on the over-all level of the American economy in the short run, although not in the long run.
If you have the tenacity to go through the detailed section-by-section analysis of HR1, the American Recovery and Investment Act of 2009, you will find many attractive-sounding items in it. Aids to education, health, science, and technology, infrastructure, and the unemployed are all included along with many other items. Far more striking, however, is what seems to have been lacking in the preparation of that massive document -- any attempt to establish priorities among the host of disparate spending categories.
Although the legislation is popularly referred to as an economic stimulus program, it is useful to note that the Congressional Budget Office expects more of the money to be spent in 2011 and 2012 than in 2009. That is not surprising to anyone who has attempted to analyze the contents of HR1. Everything seems to be equally important -- establishing new long-term disease prevention programs as well as expanding direct aid to the unemployed, fundamentally restructuring the domestic production of energy and alleviating the current cash drain on states and localities, responding to the long-term trend of global warming and moving ahead on "shovel ready" construction projects. Although manufacturing has been the hardest hit part of the real economy, far more money is devoted directly to fisheries.
In the accompanying verbiage, much is made of the need to rebuild the infrastructure of the nation. Yet the list starts off with repair and maintenance funds for the Washington, DC headquarters buildings of the Department of Agriculture. There is no need to pick on USDA, just because it is listed first in alphabetical order. Repair and maintenance projects for many other government buildings in the nation's capital are included in the stimulus bill, although the Washington, DC area is not a place of especially high unemployment.
I will spare the audience any further recital of the supposed high priority projects in the administration's stimulus bill, although the temptation is strong. For example, it takes approximately 55 pages to spell out the detailed conditions for spending the money assigned to medical information technology.
So much of the wasted opportunity to use the $787 billion of the new law in a constructive manner arises from an unnoticed but key administrative decision made by the Obama White House. For reasons that are not particularly compelling, in an unusual burst of professional modesty they delegated the task of developing the specifics of the massive stimulus bill to the Congress. The responsibility wound up with the Committee on Appropriations of the House of Representatives.
Those of us who have had the opportunity to meet with the members of the committee quickly learn that this is a powerful and very knowledgeable group. They and their staffs really know a great deal about the individual programs that they fund. Because of the huge magnitude of the task, the primary work is done at the subcommittee level under the leadership of the subcommittee chair. To my knowledge, there is limited effort on the part of the committee as a whole to change the decisions made by any subcommittee, much less to do battle with a powerful subcommittee leader.
The result of this procedure is that little if any effort seems to have been made through the appropriations process to establish any priorities across the array of government spending programs. After all, if any member of the Commerce subcommittee were to seriously question the recommendations of the Agriculture subcommittee on farm outlays he or she would be exposed to ridicule if not retaliation.
At this late stage, the damage cannot be undone. However, the naivete of the current White House senior people needs to be acknowledged. They did have an alternative, which is what we did at the outset of the Reagan Administration. The President set up a mechanism within the White House to review the spending plans of the various departments. Our job was to recommend substantial changes in priorities, including reductions in specific spending programs. After detailed presidential review, our spending and tax recommendations were submitted to the Congress, where they were of course subject to detailed and tough review. But the starting point on Capitol Hill consisted of the specific recommendations of the new administration. The continuing talent available at the Office of Management and Budget, the Council of Economic Advisers, and other specialized agencies in the White House can be of great help in translating general priorities into specifics.
Thus, the downside of HR1 is that far less will be accomplished than the public expects from the recently enacted massive stimulus bill. It seems that the stimulus bill violates the administration's own mantra of "timely, targeted, and temporary." To put the matter bluntly, the American economy is in a ditch and much of the "stimulus" money is going to the equivalent of repainting the car with a more attractive color. Until the economy can be pulled out of that ditch, it is wishful thinking to expect that the nation will make significant progress on a very wide array of attractive long-term objectives, be they developing new energy sources, responding to the concerns about global warming, improving health care, or reforming the elementary and secondary education system.
The Congressional Budget Office has prepared some preliminary estimates of the spend-out rates of major items in the stimulus package. The results are clearly disappointing. For example, only one-fifth of the $4.7 billion appropriated for broadband technology will be spent in the first two years. The remaining four-fifths will be spent over the next five years. Likewise, less than one-fifth of the $12.5 billion allocated to distance learning, telemedicine, and related programs is expected to be expended by the end of fiscal 2010, it will take another five years to spend the remaining four-fifths of the money. Similarly, less than one-fifth of the $16.8 billion for energy efficiency and renewable energy is estimated to be spent in the first two years. It will take seven more years to spend the remaining four-fifths of the money. Somehow this reminds us of President Lincoln's description of one of his generals as having a bad case of "the slows."
The Congressional Budget Office reminded the Congress of some relevant fundamentals in its testimony to the House Budget Committee earlier this year: the economic effects of fiscal stimulus should occur during the period of economic weakness; programs that rely on new technologies will result in slower spending. CBO also warned that some of the most effective policies for providing short-term stimulus provide little aid to long-term economic growth, and vice versa. Unfortunately, the authors of the stimulus bill ignored this obvious advice.
However, we can forecast confidently that the stimulus bill will stimulate one specific industry -- the production of paperwork. The new law requires the federal departments and agencies receiving the money to send Congress detailed reports on their plans and specific expenditures. Supposedly, that will make up for the lack of public hearings on the details of the law or, alas more accurately, on the lack of detail on how the money will be spent. The mandated paperwork includes a breathtaking variety of monthly, quarterly, semi-annual, and annual reports -- plus a host of one-shot reports on the use of the funds.
Most of those reports are designated to be sent to the Appropriations Committees of the Senate and House of Representatives. What will the committees do with all that detail and trivia? Will the members or their staffs have the time to read the hundreds of boring financial reports scheduled to be sent to them each year that the money is available? Even if they only read a few of the agency reports, how and where will they store the information? Will the data and analysis be retrievable by private researchers or other parts of the government? Sadly, like so much of the substance of the stimulus bill, there is little indication of any effort to analyze the bits and pieces to see if they form a meaningful whole.
There is no need to be partisan on this score. The congressional Republicans should not escape serious criticism. After eight years of constantly achieving new record highs for pork barrel earmarks and other wasteful spending, they have limited credibility when they now belatedly raise concerns over economy and efficiency in government. That negative public attitude was also fostered by the unwillingness of the Republican president to veto any spending bill. In any event, the current minority in the Congress showed no more interest in the need to set priorities and make real choices in the stimulus bill than did the majority. Both parties unfortunately tended to support protectionist "Buy American" provisions which were watered down by White House intervention.
It is also disheartening to recall that, despite the campaign promises to eliminate the wasteful practice of budgetary earmarks, the first appropriation bill to be considered by the Congress-shortly after the enactment of the stimulus bill-contains almost 9,000 new earmarks costing in excess of $3.8 billion.
The necessary changes in financial policy have been erratic in both the Bush and Obama Administrations. In good measure, the limited remaining capacity to respond to a rapidly changing situation in financial markets is a legacy of the inadequacies of the previous administration. It was sad to learn that the initial bank bailout efforts were not used effectively. Apparently much of the funds went to bank holding companies rather than to operating banks. Thus, a large portion of the funds that Congress authorized were not available to encourage bank credit because they were used for different purposes at the holding company level, including acquiring other banks.
Recent experience reminds us that part of the difficulty in trying to develop new economic policies in an incoming administration is the increasing amount of time it takes for prospective new political appointees to pass all the hurdles that have been established to avoid the scandals of the past. Many of the requirements are quite sensible, but some are needlessly bureaucratic. For example, the White House asks for a complete list of the organizations the new appointee has spoken to over, say, the past 10 years, complete with the location and amount of honorarium received. But, subsequently, the Senate asks for the same information, except that the White House wants the date that each speech was given and the Senate the date the appointee got paid for the speech.
In the midst of working almost around the clock to help put together the incoming president's program, often the new appointees have to fly home, at their own expense, to meet the Senate's request. Of course, the two groups should agree on a single reporting requirement. And that's just one example!
Let us turn briefly to a topic that is likely to receive more attention later this year: increased regulation of financial institutions. A few caveats may be useful. Without begging the question, I would like to suggest that the initial response to learning of egregious and illegal financial practice is not to amend the law but to strengthen its enforcement. This point may seem too obvious to warrant repetition. Yet, the sad fact is that those who made this point after the Enron fiasco were ignored by the writers of the Sarbanes-Oxley accounting and financial reporting reforms.
Likewise, reformers should check carefully what is supposedly common knowledge. For example, it turns out that there was limited financial deregulation during the administration of George W. Bush. The most significant new law along these lines was signed by President William Clinton. Even that set of regulatory changes did not figure significantly in the financial debacle that has occurred. Existing regulators did fall down on the job as did the boards of directors of major financial institutions. To add insult to injury, some of the folks who are highly vocal in pushing for more regulation were responsible for some of the most serious shortcomings that occurred.
For example, the Department of Housing and Urban Development and the leadership of the Banking Committees urged Fannie Mae and Freddie Mac to provide more mortgage credit to low-income homebuyers. ACORN, that supposed friend of the poor, was in the vanguard of those urging financial institutions to be more generous in providing credit to people of modest incomes -- who subsequently suffered when they defaulted on the mortgages they were unable to handle. As someone who grew up in rented housing, I can attest to the fact that there is nothing inherently sinful when people of limited financial means rent the homes they live in. Rather, they have more flexibility in responding to changing economic circumstances.
Hopefully, reform efforts to improve financial regulation will place high on the agenda the ultimate phase-out of the giant supposedly "privatized" government-sponsored enterprises. Fannie Mae and Freddie Mac incurred huge liabilities that the federal government had to assume.
New regulatory requirements should focus on, or at least begin with, an emphasis on enhancing the reporting of information by the various institutions that participate in financial markets. This is especially relevant in the case of the "shadow" banks, notably hedge funds and pools of private equity. Better informed private decision-making can obviate the need for more intrusive and burdensome regulatory requirements. Surely, combining or at least coordinating the multiplicity of financial regulators would also be a constructive move.
Outlook
Without making any direct comparisons with the New Deal of the 1930s, it seems clear that the Obama economic program shifts the public/private balance toward the public side and, within the private sector, to the nonprofit portion. Surely, that balance has shifted repeatedly over the years both between and within administrations.
To cite one recent example, Ronald Reagan's presidency represented a shift to the private side of the relationship. Specific steps taken to achieve this result ranged from substantial tax cuts to establishing a regulatory review process that reduced the array of federal regulatory agencies. The policy pendulum is now swinging again.
The Obama Administration is starting off with a rapid expansion of the role of the public sector and the federal government specifically. Aside from the obvious expansion in government spending and credit programs, several individual actions help to set the tone. For example, the American Recovery and Reinvestment Act of 2009 specifically states that no funds can be used to provide assistance to students attending private elementary or secondary schools. The Rural Community Facilities Program is limited to governments, non-profit corporations, and federally-recognized Indian tribes. Although the Rural Business Program is geared to private business, the money will be available through "public bodies, not-for-profit organizations, and recognized Indian Tribal groups."
Grants to "Institutional Entities" for energy sustainability cover institutions of higher education, public school districts, local governments, and municipal utilities. Similarly, the Department of Energy's Institutional Loan Guarantee Program covers the same set of non-business organizations. Despite protestations to the contrary, these are not the actions of an administration friendly to the private enterprise system.
To sum up very quickly, conservatives have a special reason for wishing that the Obama economic stimulus program succeeds. If it does not, the likelihood of another and even larger public expenditure effort would become more likely. *
"He has no enemies, but is intensely disliked by his friends." --Oscar Wilde
