Buddhists stole my clarinet... and I'm still as mad as Hell about it! How did a small-town boy from the Midwest come to such an end? And what's he doing in Rhode Island by way of Chicago, Pittsburgh, and New York? Well, first of all, it's not the end YET! Come back regularly to find out. (Plant your "flag" at the bottom of the page, and leave a comment. Claim a piece of Rhode Island!) My final epitaph? "I've calmed down now."

Friday, November 28, 2008

Stimulus for Skeptics

By DAVID BROOKS
Over the past year, the federal government has poured money into the economy hundreds of billions of dollars at a time. It has also guaranteed investments, loans and deposits worth about $8 trillion. Barry Ritholtz, the author of “Bailout Nation,” points out that this project constitutes the largest infusion in American history.

If you add up just the funds that have already been committed, you get a figure, according to Jim Bianco of Bianco Research, that is larger in today’s dollars than the costs of the Marshall Plan, the Louisiana Purchase, the New Deal, the Korean War, Vietnam and the S.&L. crisis combined.

Is all this money doing any good?

The financial system seems to have stabilized, but bank lending is minimal, home prices keep falling, consumer spending is plummeting, and the economy continues to dive.

It could be we just have to endure some fundamental adjustments. Housing prices have to reach a new level. Consumption has to settle on a new trajectory. Until those fundamental shifts are made, no federal sugar rush is going to restore economic health.

That’s not a recipe for doing nothing. It’s a recipe for skepticism. And it leads to some guiding principles for those designing the $500 billion stimulus plan the next administration seems set on: Don’t just throw more money into the sugar rush. Spend money on projects that will enhance the long-term economic health of the country even without a crisis. Do what you would do anyway, just do it faster.

To understand how the short-term response might serve the country’s long-term economic interest, I called up Michael Porter, the competitiveness guru at Harvard Business School. Porter wrote an outstanding overview of America’s long-term economic challenges in the Oct. 30 issue of BusinessWeek.

Porter wrote that the U.S. economy has historically benefited from several great assets: an unparalleled environment for entrepreneurialism, a tremendous infrastructure for scientific research, the world’s best universities, a strong commitment to competition and free markets, decentralized regional economies, and efficient capital markets.

But, Porter continued, these advantages are starting to erode. The U.S. has an inadequate rate of reinvestment in science and technology. America’s confidence in free markets is waning. Lack of regulatory oversight has undermined capital markets. Universities have not sufficiently increased graduation rates. American workers do not have a credible safety net. Regulations and litigation have inflated the cost of business. Most important, there is no long-term economic strategy to organize responses to these problems.

I asked Porter how this short-term crisis might serve as an opportunity to address those long-term problems. First, he said, the Obama team will have to avoid a few temptations: Don’t just try to throw out money as fast as possible to stimulate demand. Don’t spread the spending around too thinly. Don’t try to save jobs that are going to disappear anyway.

Then he threw out a bunch of ideas that could be part of a stimulus package:

Send federal money to the states, but make sure a lot of it goes to state universities. There’s going to be increased demand for their services at the same time their budgets are cut. We can’t weaken that link in the social mobility chain.

Extend unemployment insurance, but also create vouchers and loans so workers can get the skills they need to move on.

Extend the Cobra period another 12 months to head off a rise in the uninsured during the recession.

Adjust the capital gains rate to give people the incentive to become long-term investors. Right now there’s a tension between the real economy, which is gradual, and the financial system, which is manic. Low rates shouldn’t kick in until an investment is held three to five years.

Accelerate depreciation on energy efficient goods and services. Increase tax credits for energy efficient buildings and appliances.

Porter’s basic message was that President-elect Barack Obama should do nothing in the short term that doesn’t serve a long-term goal.

To which I would add just one idea: Create a network of social entrepreneurship investment banks. These regionally operated semi-public funds would invest in the best local community organizations, so they could bring their ideas to scale.

These funds, first proposed by the group America Forward, would supplement the safety net and employ college grads entering a miserable job market. They’d have a powerful psychological effect on a country that desperately wants to feel mobilized and united.

This is a mental recession as well as an economic one. Solving it means getting more and more people involved in a fundamental rebirth.

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