Wednesday, January 28, 2009

A fiscal piñata?

A visual image my brother described from a childhood party he attended four decades ago had been seared into my mind, and it immediately resurfaced when I read Jeff Sach's Financial Times commentary on the fiscal stimulus bill:

The most obvious problem with the stimulus package is that it has been turned into a fiscal piñata – with a mad scramble for candy on the floor. We seem all too eager to rectify a generation of a nation saving too little by saving even less – this time through expanding government borrowing. First it was former US Federal Reserve chairman Alan Greenspan’s bubble, then Wall Street’s, and now – in the third act – it will be Washington’s.

I was born and raised in Washington DC, and my family lived in what was then a neighborhood of inexpensive row-houses. Our immediate neighbors were mostly low-level clerical employees of government agencies, embassies, or they worked in area small businesses or non-profit agencies. My own father was a librarian, who worked at the time in a very modestly paid job as a researcher for the American Legion, a veteran's advocacy group.

But some of the children who attended the same schools as my brothers and sisters and I lived in a mansion only a few miles away.

In particular, the children of the longtime Nicaraguan Ambassador Sevilla Sacasa sent his children to the same school we attended. They arrived every day in a chauffeured limousine. My brothers and sister and I walked to school, and we were all duly impressed by the limousine, the chauffeur, and the huge mansion in which the family lived. We had no idea at the time where the money to support the family's lifestyle originated. (The ambassador's ties to the notorious Somoza dictatorship dynasty in Nicaragua maintained him in lavish style in his ambassadorship for many decades, from 1943 until the regime eventually fell in 1979.)

None of the children were in my grade, so I did not know them personally, but one of my brothers was in the same class with one of the Sevilla Sacasa children, who invited his entire class to a party at his house. (Our class sizes were huge by modern standards, 56 students per classroom! Nobody else had enough room in their house to contemplate inviting the entire class.)

I had seen the outside of their mansion many times, and was curious and eager to hear my brother's report about the party when he returned afterwards. What struck me the most was his account of the pinata at the party.

We knew about piñatas, of course, the Hispanic traditional bull-shaped papier-mache creature filled with penny candy that blindfolded children would take turns hitting with bats to break open. Once it did break open, the contents would spill out onto the floor and there would be a mad scramble of children to gather it all up.

But something was different about the Sevila Sacasa pinata, something we'd never imagined. When it burst, it showered dollar bills all over the ground instead of candy. This was astonishing and unprecedented to all the party guests. (To give you an idea of the purchasing power of a dollar bill in the early 1960s, you could buy a single-scoop ice cream cone for a nickel back then, or a double-scoop for a dime! A large candy bar was also a nickel.)

As I said, the visual imagery of the money piñata my brother described back in the early 1960s is still seared into my impressionable childhood mind. That image returned immediately when I read Jeff Sach's reference to the "fiscal piñata" in the stimulus bill, with lobbyists hovering like children at the party hoping to scramble for whatever they can.

I certainly hope there will be an orderly rational process of allocating the money to good public purposes, but the perceived urgency of the need for fiscal stimulus suggests that there will not be much time for rational cost-benefit analysis for public spending.

Apparently I'm not alone in my concerns about the rush to public spending. And we are not just talking about traditional conservatives or Republicans. Jeff Sachs, the author of the fiscal pinata article quoted above is generally considered to be a liberal-thinking economist. The Washington Post reports in Democrats among Stimulus Critics .

In testimony before the House Budget Committee yesterday, Alice M. Rivlin, who was President Bill Clinton's budget director, suggested splitting the plan, implementing its immediate stimulus components now and taking more time to plan the longer-term transformative spending to make sure it is done right.

"Such a long-term investment program should not be put together hastily and lumped in with the anti-recession package. The elements of the investment program must be carefully planned and will not create many jobs right away," said Rivlin, a fellow at the Brookings Institution. The risk, she said, is that "money will be wasted because the investment elements were not carefully crafted."

One important argument for the use of tax cuts rather than public project spending is that, even as complex as the tax code is, it's at least somewhat easier for the public at large to understand who benefits from the "fiscal piñata" proceeds, and to get at least some sense of the horizontal and vertical equity aspects of the proposal.

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