Sunday, November 9, 2008

The Next Stimulus Package





Some pundits and politicians have called for aid to states to be part of the next stimulus package, since this would fill holes in state budgets and help finance local infrastructure projects that may have been delayed by a lack of funds. At the same time, others have raised concerns that the resulting increases in the federal deficit could spook investors and lead to higher interest rates in the next few years.

If aid to the states is part of the next stimulus package, instead of simply writing checks to the states, the federal government ought to offer to buy an equivalent amount of new general obligation bonds issued by the states. These bonds could be structured with low coupon rates for the first few years, say, 1% above the rate on the U.S. Treasury bonds, with a reset to higher rates after three years. That ought to give the states the funds to cover their budgets and complete infrastructure projects, and give them an incentive to refinance the debt by issuing new bonds to the usual municipal bond investors after the economic downturn ends (with taxes likely higher in a few years, there would be more demand from affluent investors for tax-free municipal bonds). Knowing that the federal government would be repaid in a few years ought to assuage the market for U.S. Treasuries.

The photo above, from the NJ Department of Transportation website, is of part of a recently completed, federally funded $68 million local infrastructure project, the replacement of the Essex Street bridge and the reconstruction of the Route 17/Essex Street interchange.

4 comments:

Robert Samuelson said...

Giving more debt to cash-strapped states to help them out will only make them more deeply in debt.

Only spending cuts at the state level can return them to fiscal health.

Mayor Nutter in Philadlephia cut the city budget drastically in the past week and took a 10% pay cut himself while calling for other city executives to do likewise. He's one smart guy for a Democrat.

A Wharton grad that actually is doing what's needed for his citizens.

DaveinHackensack said...

"Giving more debt to cash-strapped states to help them out will only make them more deeply in debt.

Only spending cuts at the state level can return them to fiscal health.


Unless governments have saved money for it in a rainy day fund, fiscal stimulus generally requires deficit spending. After the economy recovers, spending restraint would be in order to restore fiscal health.

Anonymous said...

I'm really tired of these stimulus ideas. Why not buy a bunch of solar panels and use the electricity to offset oil consumption? Why not use the money to hire a bunch of teachers or build a few new prisons? Why keep giving the money to China via Walmart?

DaveinHackensack said...

"Why keep giving the money to China via Walmart?"

Anon,

One of the advantages of infrastructure spending is that virtually all of the money stays in the U.S.