Stimulus with payback

I recently received a call from Vermont’s congressional representative, Peter Welch. It was a robocall – Mr. Welch doesn’t kibitz with the Minor Heretic. The call invited me to participate in a telephone town hall discussion of economic stimulus and related issues. I couldn’t stay on the line, but I wrote Mr. Welch a letter on the subject. Here is the gist of it:

The most important thing I recommend is to invest in stimulus programs that pay back.

The best example is energy efficiency. Here in Vermont our efficiency utility saves us about $7 for every $1 we invest. Right now we are bleeding cash to oil exporting countries. Industrialized countries in Europe average about 40% lower energy use per person and maintain a standard of living as good as ours or better. We can do that. Even a 10% drop in oil use would save us over $27 billion a year. Add to any direct savings the follow-on savings in declining pollution and resulting health effects. Residential and commercial building retrofits would employ construction workers now being laid off by the housing bust. Those who study the economics of labor will tell you that the energy business is capital intensive, while the infrastructure business is labor intensive. Every million dollars we can redirect from energy expenditures will net us more jobs.

Part of that energy picture is transportation improvements. The present dip in motor fuel prices is a temporary reprieve. Trucking will not be an economical mode of cargo transport ten years from now. We desperately need to upgrade our rail system to replace road based transport for both cargo and people. Regional air transport is dying a slow death, and I’d wager that Burlington Vermont would be among the first to feel the axe when jet fuel prices jump again. It may seem archaic, but the New York State canal system, which extends into Lake Champlain, could move cargo between the Great Lakes and the Hudson River and along the Champlain/Hudson corridor at about 1/8th the energy expenditure of trucking.

Another example is addiction treatment. Law enforcement professionals will tell you that addiction treatment is ten times more cost effective than law enforcement and drug interdiction in lowering crime rates. Addiction treatment would offer dramatic long-term reductions in expenditures for law enforcement, public health, prisons, and public assistance.

Addiction treatment could, in turn, be part of a program of preventative health care. Ask anyone in health care and they will tell you that 90% of the pathologies they see are lifestyle related. It takes labor intensive, ongoing, personalized primary care to work on problems such as smoking, obesity, and poor nutrition.

As long as I am being prescriptive, I’ll offer some action items:

1. Establish an energy efficiency utility in every state, authorized to work on electricity, heating, and transportation.
2. As part of the 50-state efficiency program, establish grants and revolving loan funds to pay for efficiency upgrades. (Financing is a necessary condition for success)
3. As part of the above program, establish training programs for contractors in efficiency retrofitting.
4. Offer railroads a long property tax holiday on rail electrification, double tracking, and upgrades to existing railbeds for passenger service. (This option is essentially revenue positive because it sacrifices low-probability future revenue to expand an industry.)
5. Offer the Big 3 automakers loans to retool closed plants for self-propelled light rail vehicles, buses, and passenger vans.
6. Help municipalities design and build appropriate local transit systems. Public transportation starts at the local level.
7. Revitalize the New York State Barge Canal system with dredging and infrastructure upgrades, including intermodal terminals and financing for the construction of container barges.

8. Establish a national network of affordable/free addiction treatment centers. Treatment should be local, repeatable, and offer follow-up support.

9. Establish a national network of primary care centers, including the support of existing centers, to provide wellness programs, preventative care, and early-stage treatment for illness.

This list is, of course, far from comprehensive. There are plenty of opportunities for what the technical world calls value engineering – finding the least expensive modification that gives the biggest result.

So far the focus has been on supply side solutions in the form of infusions of capital into distressed financial institutions. This is inefficient and ultimately ineffective. We should be using demand side solutions that put money in the hands of ordinary people. Our focus should be the redirection of money from capitol intensive to labor intensive industries, reforming our regressive tax structure, and empowering labor to get its long-overdue bonus for the productivity increases of the past few decades. Take care of Main Street and Wall Street will take care of itself. The reverse is not true.

Another important point to remember when planning stimulus packages is that the financial industry isn’t really an industry. It doesn’t accomplish anything useful in itself, it only enables other industries to provide us with the goods and services we need. As such, any profit it makes is a drag on our real economy. The financial sector has expanded from a service function to an end in itself. It has ballooned into a combination casino and Ponzi scheme. It needs to go back to its socially useful function as a supporter of real industry. That will be a hard fight, because billions of (phony) dollars are at stake. Someone has to start by calling it what it is and pointing out where it should end up.