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November 11, 2010

Confessions of a Stimulator

I was Vermont's "Stimulus czar", a fascinating position to have after retiring from a career as a high-tech entrepreneur. As Chief Recovery Officer, I had an excellent inside view of the working and non-workings of the Stimulus Bill (formally "American Reinvestment and Recovery Act" or ARRA). Most of the 300 programs which were stapled together to create the $787 billion federal stimulus programs failed; some succeeded; we don't know yet whether others will work or not.

My plan was to be a dollar-a-year man, but it turns out that is a violation of the Fair Labor Standards Act. Ended up getting paid minimum wage and donating it back to the State. Other bureaucratic obstacles weren't as easy to overcome.

As America struggles out of the great recession and finds its place in an irretrievably globalized world, the history of the Stimulus years is a guide to the limits of what government can do – and what government should attempt. When government overreaches, both the economy and the fabric of society suffer. USGovernmentSpending.com estimates that spending by all levels of US government in fiscal year 2010 will be almost 44% of the gross national product! Even if that percentage were to shrink back to pre-Stimulus levels, government can't help having a huge effect on the economy. It's necessary for government to behave differently in a recession than it does during a boom. Government does need to have an economic policy.

Part of the Chief Recovery Officer job was to coordinate Stimulus money awarded directly to the government of the State of Vermont, both to assure that we complied with federal regulations and that we used this one-time money in a way that makes sense. Complying with the regulations was the easy part although sometimes hilariously bureaucratic; so far so good although it still remains to see whether all the money will be spent on time. Using the money well was another story. Although Vermont did better than many other states, too much of the money ended up continuing bloated programs rather than providing a transition to a sustainable future. This was a squandered opportunity, which was only partly the fault of the federal government.

Another part of the job was to help Vermont entities win a large share of the "competitive" Stimulus money available nationally at the discretion of various federal agencies. For example, our electric utilities worked together to apply for money to build a statewide Smart Grid (see What's a Smart Grid and Why Does It Matter?). Our telcos put together excellent applications for broadband money. In the end Vermont received more competitive money per capita than any other state for both broadband and energy. Although almost none of this money has been spent yet, Vermont will probably benefit from these programs.

So it's not sour grapes that makes me doubt whether the broadband and energy programs will be helpful on a national basis – they certainly are not an example of successful counter-cyclical spending since the only money that got spent on them during the recession was for grant writing. Moreover, private investment in these areas, which might have happened even during the recession, dried up as companies waited to see if they (or the competitors) could build with government money. Government grants to business – whether part of Stimulus or not – have turned too much of the creative energy of American business from innovation to grant-grubbing and lobbying.

Another example of a competitive Stimulus program is Race to the Top; it awards grants to innovative school systems. Race to the Top requires teacher accountability for results and state support for charter schools. Again the spending won't be during the recession; but real school reform may result. Vermont didn't apply for Race to the Top funds; we failed to overcome teachers' union resistance to accountability. That's our problem, not the feds.

Since the results of the Stimulus program were a mixed bag, we can learn both from what worked and what didn't as we design American government for the 21st century. Here are the headlines of my experience as Stimulus czar, details to follow:

  1. Stimulus failed to keep the national unemployment rate below 8% as advertised. Overall Stimulus had a negligible effect on the unemployment level, although it certainly saved public sector jobs (at least temporarily) at the expense of private sector employment.
  2. Acceleration of government projects already planned – primarily road paving – did work. The price of asphalt and labor was down in the recession; the taxpayers got necessary work done more cheaply than in better times; and, presumably, government will be able to cut back rather than compete with the private sector in better times. Some people were employed who wouldn't have been otherwise, and they were doing very useful work.
  3. New infrastructure building failed – none of it was done during the recession, only a little will be done nationally in the next few years (although Vermont is an exception in the broadband and Smart Grid areas). Nothing is "shovel ready" in the United States; we've created a wall of regulatory obstacles that make it impossible to do any major project within a reasonable or even predictable period of time. Whether it's tunnels, bridges, railroads, wind turbines, or nuclear plants – we've stymied ourselves. If regulation were made reasonable and predictable, we wouldn't need government money to have a construction boom. Under the current system, not even all the King's men with all the people's money can build anything significant.
  4. Most states were desperately in need of help but didn't use it well. Programs had grown to fit not only boom-time revenue but also expectations of further boom to come. Suddenly revenues crashed and the demand for social services increased. There would have been huge pain in the states without federal help, primarily for Medicaid and education. However, the federal money came with restrictions to assure that services weren't cut. States didn't cut where they could or push back hard enough on federal restrictions. Most states (not Vermont) have now elected legislatures and governors committed to shrinking the size of state government and the dependent-rolls; the process will be much more painful than it could have been if Stimulus had been used to ease the transition instead of to prolong the overspending.
  5. An industrial policy based on government grants and tax credits is an oxymoron at best and a disaster at worst. As an example, tax credits for solar photovoltaic have stimulated the solar industry in China (they don't install solar panels there; they just sell them to us)AND Increased the cost of energy in the US.
  6. During stimulus the government share of the economy grew from 37% to 44%. In 2000, it was only 32.5%. The only time government expenditures have been this high as a percentage of gross national product was at the end of the Second World War. We can and must cut these expenditures in order to grow the economy as a whole.
  7. There are many dedicated and talented people in state government. Overstaffing reduces their effectiveness; they are repeatedly steamrollered by bureaucracy and stubbornly pop back up like cartoon characters to try to do what's right.
  8. The number of people, businesses, and non-profits dependent on government expenditures has also grown. Even with last week's election, these government dependents are a huge political force in both parties. Stimulus has made this problem worse, not better.

The good news is that Americans are building the economic base for their own recovery by reducing expenditures and credit and increasing savings. American businesses – at least some of them – have lots of cash. We can do more than recover; we can be prosperous in a more prosperous world. But we have to remember the limits to what government can do.

Related posts:

Confessions of a Stimulator – Jobs Don’t Count

How Much Stimulus Money Has Reached Vermont?

Stimulus Delayed Is Depressing


How Projects Get Selected for Stimulus Funding


The Stimulus Czar Summit – Part 2


The Stimulus Czar Summit – Part 1


Was the Economic Stimulus Bill a Good Idea?



  (first thoughts on taking the job)


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