Ethics of Stimulating the Economy

How to exercise fiscal restraint when the object is to spend?

The United States and Western Europe are currently trying to stimulate their depressed economies through government spending. These stimulus packages have generated a great deal of professional debate regarding their effectiveness. Even some famous fiscal conservatives such as Martin Feldstein have come to favor stimulus, but there are also still many stimulus skeptics. However, beyond the narrow economic questions, economic stimulus presents some perplexing ethical questions.

The central problem of stimulating the economy is that spending money becomes an end in itself. If spending money is in itself bad, but the things money can buy are good, then the political process can do a fair job of balancing the costs and benefits of spending. You try and spend money only on those things that are most worthwhile, or at any rate most favored by voters.

But if spending money is itself good, then the term “wasteful project” may not be pejorative. In 1975, US Senator William Proxmire introduced the ironic “Golden Fleece award” to draw attention to government-sponsored programs which he thought were an obvious waste of taxpayer money. But in a stimulus program nothing is obviously wasteful. Consider the following proposal from John Maynard Keynes, the father of the “priming the pump” theory that merely spending money can jump-start a stalled economy:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

The obvious immediate danger is that accountability is thrown to the winds for the duration of the stimulus program. This occurs for many reasons. The one we just mentioned is that accountability is no longer central to the original reason for spending the money, as it is in normal times. The second reason is that accountability itself costs money. In theory you could spend large swathes of the stimulus package on an army of accountants and lawyers, but the problem is that this would not be creating jobs since few of these people are unemployed. In the end, the means, motive and opportunity for oversight are compromised, and publicly money is wasted.

The second problem, more serious in my opinion, is that standards of accountability are compromised in the longer term. Human beings are creatures of habit; if they get used to a spendthrift government and a reality where the financial success of business is based on marketing yourself to bureaucrats instead of marketing yourself to customers, you risk mortgaging not only your financial future (paying back the government debt created by the stimulus outlays) but also your ethical future.

It is encouraging that incoming US Treasury Secretary Timothy Geithner announced Tuesday a set of policies meant to restrict the influence of politicians and lobbyists in the allotment process. This includes limiting the amount of contact Treasury officials have with politicians and lobbyists, and creating transparency by requiring reporting of any such contacts. The goal is to make sure that every business applying for stimulus package money is considered on an equal basis, based on the criteria set out by policy makers.

Polonius tells Hamlet in Shakespeare’s play, “Borrowing dulls the edge of husbandry,” and it is equally true that stimulus packages dull the edge of spending accountability. This doesn’t inherently militate against a stimulus package, but it is one more factor to be considered in deciding whether to have one and how big it should be. Certainly it favors guidelines of the type Geithner has announced; the US taxpayer must be hoping that they will keep caprice and waste to a minimum.