Monday, August 3, 2009

Are Stimulus Funds Suffocating Private Sector Economic Activity?

One of the most popular anti-stimulus arguments, typically advanced by fiscal conservatives, holds that Government spending "crowds out" private sector investment. Thus, as the argument goes, government stimulus measures during an economic recession do not really "add" anything to the equation; such spending merely shifts investment dollars from the private to the public sector. Conceptually, this argument makes perfect sense, although it will likely remain sufficiently non-compelling enough to sway the beliefs of an entire half of the political spectrum. In the real world though, certain examples have a way of emerging that may help clarify the practical effect of a federal government that seems to be literally hemorrhaging massive amounts of cash. We would propose that, thanks to our anonymous informant, such an example has arisen.

The story begins with two separate construction projects which will be cleverly referred to as "A" and "B". Each project is backed by a separate company/developer, but both are in geographic proximity to one another. For the purposes of this exercise, the specific location shall be a coastal area of the United States that is characterized by wetlands, a.k.a Waters of the United States, as described in both section 401 (state jurisdiction) and section 404 (federal jurisdiction) of the Clean Water Act(CWA). Due to the existence of the wetland areas, the owners of both A and B will need to obtain a permit from the United States Army Corp of Engineers(ACOE) - the federal agency tasked with monitoring and permitting construction that may (key word) impact the "navigable" waters of the US. Keep in mind that construction may not begin until the ACOE has given it's blessing of approval. Now things get interesting; the ACOE has been formally given a set of criterion for which to judge potential stimulus projects, and has been informally directed to "fast track" projects through it's approval process which will be funded with stimulus dollars.

Project A is just such a project, as it's politically more palatable than Project B. Perhaps Project A will be Section 8 or elderly housing; regardless of it's characteristics though, it has been bumped to the top of the line, and will be given the green light to commence construction shortly.

Project B however, did not receive the stimulus blessing, and will not see a 404 permit any time soon (as in 2 years maybe). With all effort going towards trumpeting the Administration's stimulus plan, the private Project (B) will sit dormant; likely languishing away in irrelevancy.

So yes, the government can in some cases "crowd out" private investment. At least that's what we've heard. Sphere: Related Content

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