Economic Stimulus Starts with Private Sector Job Growth

Suddenly everything old is new again. This saying usually applies to the fashion industry, but today we are digging up old economic theories, dusting them off, and re-applying them.

Today, as in the 1930s and 1970s, government spending is passed off as economic stimulus. Proponents for increased public sector spending tout empty bromides like "the multiplier effect" or "investing in the future." They back these up by asserting that not to move forward would result in economic collapse.

Now that the federal stimulus package is in place, and analysts are finally reading what Congress approved (even if Congress didn't read it before voting), state policymakers are kicking around their own versions of "economic stimulus."

The state legislature has already passed, and the Governor signed, legislation that increases unemployment insurance benefits by $45 for the rest of the year (in addition to increasing the weekly minimum: a twofer). Lawmakers are drawing down part of our $4 billion unemployment insurance trust fund to pay for this.

Even though this approach does not directly and immediately result in a tax increase to employers (since employers are the ones who pay the UI premiums) this is a bit of a gamble. The reason we have a substantial return is because employers have been over-taxed. If this recession lasts too long, UI premiums may have to increase. Such an event would make it even more difficult to hire workers.

There is a risk in increasing government spending--via deficit spending--in order to build new public buildings and calling it economic stimulus.

Any true Keynesian would recognize that the famous economist was no fan of deficit spending as we understand it today. He did advocate for public spending to offset recessions but he posited that investments need to be made without deficits. Or, if deficits could not be avoided, each investment should be able to repay its cost over the long run, such as tolling a new bridge to pay back construction costs. It is arguable whether any of the proposed public projects will ever pay for themselves.

Proponents of big government will claim that "investments" must be made in areas such as green technology and green jobs. But what business is it of government to invest in these areas? We all saw the folly of mandating biofuels. It contributed to higher worldwide food prices, farmers planting on marginal land and encouraged a system that negated the promised environmental benefits.

Does the fact that we are in bad economic times mean that we must let the government throw money into an untested, unverified and highly speculative industry? What happens if these efforts fail, as biofuels did? Taxpayers will be stuck holding the bag yet again.

What happens to green areas that the private sector was already investing in? Why should the private sector continue to fund any green initiatives when there's a chance the government will step in with funds, but then it doesn't? This could decimate some good projects that would have actually helped the environment and created new jobs.

One area where Keynes was right is that it is difficult for governments to get the timing right for any type of public works project. Policymaking lags behind any recessionary cycle and temporary public works spending has little effect on actually growing the economy. Our economy is too large and too complex to be stimulated by a few construction projects or "targeted investments."

Public works projects are often big, expensive, and slow to begin and even slower to conclude. And when finally finished the state has a bridge, or a building, or a school, and it might look nice and shiny, but there is also the new debt piled on top of the debt government had already incurred in the past.

Policymakers should instead focus on ways to grow the private sector. Tax cuts are already off the table in our state this session but policymakers should make running a profitable business easier by reforming our burdensome regulatory system. Government spending should be cut down to core levels, so Washington businesses contemplating relocation or expansion will be confident their taxes won't skyrocket.

Returning to the old ways of big government spending will not help the thousands of recently laid off Washington employees get back to work. Policymakers need to invest in ideas that result in private sector job growth. This will lead to the higher levels of production and consumption that will help end the recession.