It is sobering to read the transcript of Treasury Secretary Henry Paulson's press conference this week. Stimulus is mentioned, but there is not a word about who will step forward to borrow the money to make jobs and restore growth to the U.S. and World economy. This tells us where we are in this crisis. Paulson and most but not all of the World's economic leaders are still working feverishly to "stop the bleeding," trying to prevent the collapse from getting worse. They have not gotten to the point of planning how to bring the economies will be helped to grow again.
The first task, and Paulson is right about this, has been to shore up the financial system, commercial and investment banks and financial companies like AIG. The second, as Paulson also again makes clear, will be to limit the contraction of the sources of consumer credit -- credit card, auto and educational loans -- so that consumer spending (while certain to drop sharply) does not completely evaporate. These first two steps are where the $700 billion that Congress voted a few weeks back will likely go. Soon, however, leaders will have to take the next step, which is to spell out what they mean when they talk vaguely about stimulus that creates employment. Leaders like PM Gordon Brown of the UK are beginning to push for a coordinated international stimulus package, but it is not clear what this means, especially to the American Congress, which is very focused on the immediate and politically imperative questions of extending unemployment insurance, helping the states, and providing another bailout for the American nameplate auto companies.
Thinking about stimulus requires us to understand what has happened. The bottom line is that consumers and businesses have lost trillions of dollars in housing and other investments. These assets were the collateral for borrowing and spending that drove consumer spending and much private business investment and they are gone. This means that consumers and businesses can not be the drivers of recovery and growth as they have been in the post-World War II era. The driver -- the new stimulus for growth and job creation -- will have to be long delayed and overdue public investment. Soon, leaders in all countries will have to develop the specifics of stimulus packages and how they will be financed.
In this area, the President-elect Obama campaign certainly has set the table for discussion very well. The candidate identified areas for investment -- the environment, alternative energy, conservation, healthcare, education, a modernized transportation infrastructure -- but he was less clear about who he believes will step forward to do the borrowing and building in these areas, so let's look at this question.
The way I see it, in order to spend massive amounts of money on infrastructure to create jobs and make the economy grow, someone has to be able to borrow money to pay private contractors whose employees will restart the job machine. One option, but not a politically attractive one, is to have the federal government borrow directly for environmental, energy, healthcare, bridges and highways, and similar infrastructure needs, parceling out borrowed money to expanded federal agencies that would spend it, or perhaps to state and local governments. For the most part, this is what was done during the early New Deal and what prevented the New Deal programs from growing fast enough and large enough to be as effective as they could have been in creating jobs. The principal, but not the only problem with this direct approach is that it depends too much and too obviously on budget deficits that are already huge and that will engender fierce political resistance. I doubt, therefore, that direct government borrowing to finance a huge infrastructure-oriented stimulus program will be a satisfactory option.
A more politically palatable approach would be to create a large number of authorities, smaller versions of the Tennessee Valley Authority if you will, as well as a multitude of regional and state authorities or corporations. These authorities would be structured to be able to borrow money from the financial institutions that Paulson and the financial leaders in other countries are rebuilding, repaying the loans from sinking funds financed by tax receipts, tolls, and a variety of other revenue sources. These infrastructure authorities would focus as the President-elect suggested on energy, the environment, transportation, healthcare, and education. Given the book I wrote a few years ago (The Competition Solution) about the benefits of competition, I certainly think there should be tough competition between these new authorities and corporations to keep costs down and drive innovation and efficiency.
In summary, the key to restarting growth after the banking and credit systems have been stabilized will be investment in infrastructure, not consumer spending. To make this happen, we need to create entities that will borrow the money to invest in these projects. New authorities will have to do the job. Many other huge questions will need to be dealt with in encouraging these investments like how to finance alternative fuels and fuel efficient vehicles, factories, and homes at a time when oil and natural gas prices are falling. But we need to get to the longer term stimulus issue quickly because otherwise this is going to be a very long, deep, and painful worldwide recession.