16 Ideas for the Next Stimulus Package

Last Updated Feb 18, 2009 12:56 PM EST

Regular (and voracious) reader Ennyman tipped me to Incentives Matter, an economics blog by the lyrically-named economist Pedro Albuquerque (see Ennyman's interview with Albuquerque). As if on cue, yesterday saw the posting of Albuquerque's 16 directives for the U.S. government should follow to restore the economy with a minimum of long-term negative impact. It's a bit late for this go-round, but since Stimulus II is already being discussed, these ideas will probably come up.

In posting them, I will comment on a few that I think might spark some debate, and perhaps some expansion on his thoughts by Albuquerque himself.

  1. No government action will lack transparency or imply privileges of any kind.
  2. The government will maintain its role as an impartial referee, enforcing the rules of the game and never participating as one of the players.
  3. No shareholder or CEO will be bailed out. Recapitalization of firms will only happen if strictly necessary to avoid systemic failure, and only after all original equity has been wiped out, according to bankruptcy principles.
4. The government will partially or totally recover the cost of recapitalization by auctioning equity of recapitalized firms. No equity of recapitalized firms will remain on the hands of the government.
This one would seem to have the benefit of setting a clear value for bank stocks and other failing firms, toxic assets and all. On the downside, there will not be the chance for taxpayers to earn big profits on the stock if the firms recover.
5. The government will not be allowed to have executive powers in recapitalized firms.
It seems straightforward on the surface. But does it actually suggest that the government should not be able to regulate even firms it has saved? Should the government not have a car czar for Detroit? What about Freddie Mac and Fannie Mae? And how should we represent taxpayers' interests for firms that have been deemed worthy of saving, such as AIG?
6. The government will facilitate the administrative handling of bankruptcy proceedings if necessary, respecting however preexisting contracts

7. The Fed will maintain the goal of keeping inflation low, however with more emphasis on financial stability, even if it comes at the cost of some short-term economic growth or interest rate stability.

8. The Fed will formally commit itself to avoid deflation at all costs.

9. No new government program will be funded. Current government programs that are at risk and are considered essential will be funded if necessary at the cost of increased budget deficits. Their funding will nonetheless obey to standard budgetary priorities and procedures.

10. Fiscal stimulus will operate mostly through permanent or temporary tax cuts that promote consumption and investment.

11. The government will not create obstacles to firms and households that wish to reduce their levels of indebtedness and will not suggest that they should do otherwise.

Numbers 10 and 11 seem contradictory. If the government is not to suggest we increase our debt levels, why should it also promote consumption? Not that we have to buy things on credit, but that does seem to be the pattern here. Also, as much as I feel overburdened by taxes, cutting them seems likely to create more debt for my kids' generation.
12. Reduction of indebtedness will not be done through contractual breaches and rewrites or through excessive inflation.
How about a Jubilee year?
13. Negative income tax benefits or lump-sum transfers will be used as the primary tools to help the poor and unemployed. Terms and benefits of unemployment insurance will not be extended or improved to avoid long-term negative consequences to employment.
The first part of 13 makes good sense. But the idea of constraints on unemployment insurance don't seem to mesh with recent work by Ivan Werning and Robert Shimer (see, for instance, Liquidity and Insurance for the Unemployed).
14. No government action will empower worker or industry unions of any kind.
I'm not sure where he's going with this. Does he want to ban unions? Is he bashing unions for trying to create better lives for their members, especially in the wake of the 1930s? Is he reacting to contracts that now make management look spineless, and blaming the unions for these?
15. No government action will serve as obstacle to free trade.
16. No government officer will suggest that the world will end and the mountains will crumble to the sea, no matter how tempting it may be to do it.
Hear, hear. (But what if it's true?)

Albuquerque concludes by arguing that

If judged by the sixteen directives above, government actions until now have left much to be desired. In reality, most of what the government has been doing is in direct conflict with these directives.
I'm not a government apologist, but I think he needs to spell out what following his directives would achieve. They look a bit Mellon-esque to me. What do you think, BNET?

UPDATE: Pedro has posted a gracious and thorough response on his blog. Or, go to the next page to see the full post.

  • Michael Fitzgerald

    Michael Fitzgerald writes about innovation and other big ideas in business for publications like the New York Times, The Economist, Fast Company, Inc. and CIO. He’s worked as a writer or editor at Red Herring, ZDNet, TechTV and Computerworld, and has received numerous awards as a writer and editor. Most recently, his piece on the hacker collective the l0pht won the 2008 award for best trade piece from the American Society of Journalists and Authors. He was also a 2007 Templeton-Cambridge Journalism Fellow in Science and Religion.