Capital Goods - April 2009

Emotional rescue
By Scott Mooneyham

For those who frequent that strange piece of architecture known as the North Carolina Legislative Building, it would be easy enough to conclude that the $789 billion federal stimulus package is all about saving state government. Recent talk there has revolved around what North Carolina’s share of the stimulus money will do to help close a budget gap believed to be approaching $3 billion. Not including the tax breaks going to individuals and businesses, North Carolina will receive $6 billion during the next three years. About half will end up in the state’s operating budget.

But this money was to boost the economy, right? Does funneling billions into government programs accomplish that? Ask 10 people, and you may get 10 different answers. Ask 10 economists, and you could face the same predicament.

Most economists believe the plan will help stabilize the economy, even if it doesn’t prompt a recovery. Mark Zandi, chief economist for Moody’s Economy.com, wrote recently that he believes the jobless rate nationally will be 2 percentage points lower at the end of 2010 than it would be without the stimulus plan. Closer to home, N.C. State University economist Mike Walden agrees that the federal infusion of money into the state should mitigate the effects of the recession. “It doesn’t take us back to growth, and it doesn’t turn the economy around,” but he expects it will create some much-needed jobs, at least in some sectors. The White House estimates 105,000 jobs will be created in North Carolina by the federal legislation. Walden thinks that number is probably high but says even 70,000 would be significant.

A good chunk of them will be in construction. The state will be pulling down $775 million in highway-construction money. An additional $131 million will go to other transportation projects. Town and city governments in North Carolina will receive $138 million for sewer and water projects. There’s also $136 million for public housing and housing assistance. All ultimately will flow to private contractors.

You can look at those numbers in different ways. North Carolina already is spending almost $3 billion a year to build and maintain roads. That $900 million in new transportation money comes to less than 25% when thrown into the pot, so the stimulus plan hardly will be rebuilding America’s infrastructure, as some supporters claimed early on. But the Federal Highway Administration estimates that every $1 billion in road infrastructure projects creates 35,000 jobs. If one of those jobs is yours or that boost in construction keeps your business running, the effort hardly seems inconsequential.

Some economists, including key Obama adviser Christina Romer, see tax cuts as more effective than government spending at spurring growth. Tax breaks make up more than 30% of the plan and include a range of cuts for individuals and businesses. The signature tax break — the “Making Work Pay” credit — is forecast to put an average of $13 a week in workers’ pockets beginning in June. With North Carolina’s 4.1 million employed, that pumps an additional $53 million a week into the Tar Heel economy. Over the course of a year, that comes to $2.8 billion.

As for the stimulus money moving into existing state-government programs, it too will percolate through the economy. The biggest piece will be $2.35 billion for Medicaid, the health-care program for the poor. Most eventually will make its way into the hands of health-care providers, who buy groceries, cars and homes and reinvest in businesses. Then there’s $722 million for public-school and early education programs, $67.5 million for child-care subsidies and $112.9 million for home weatherization.

Of course, none of this money is free. The federal government, increasing the deficit and national debt, is borrowing it. Some economists, Walden points out, believe government spending accomplishes little because it crowds out consumption and private-sector investment as people put their money into higher-paying treasury bonds the government uses to finance its debt. A few economists think that “crowding out” is complete: Without the stimulus plan, the same amount of private economic activity would have occurred utilizing the same amount of money used to pay for the government plan. Others reject that theory.

Most economists, though, believe the infusion of federal money will help in North Carolina and elsewhere. Government needed to take action even if there was plenty of disagreement about the particulars. “This isn’t your father’s or your grandfather’s recession,” Walden says. But Zandi, the Moody’s economist, wrote that the success or failure of the plan will be determined by what it does to people’s psyches, not their pocketbooks. His words reflect what many people already understand: “Unless the plan helps dissipate the current dark mood of pessimism, it will not stem the economic downturn.”

Scott Mooneyham is the editor of The Insider, www.ncinsider.com.