Monday, June 28, 2010

Stimulus spending vs. budget constraint, THE BIG DEBATE

Stimulus or restraint, Krugman vs. Greenspan, everybody against Germany, when the economy, or economies, are at the edge of recovery what is the correct policy. The political pendulum is now in the direction of restraint and avoiding further budget deficits. Will more stimulus lead to a sustained recovery or will more stimulus set the table for dissapation of middle class savings and a big check for the next generation.

The answer is both simple and complicated. Stimulus spending for constructive long term purposes is a big positive. If it's infrastructure spending it's good, and that includes education and health as well as enlightened energy, transportation, bridges, roads, tunnels, and bike lanes. If it's simply funding the states'budget deficits, the debate gets murky. Those budget gaps are in large part due to unsustainable contracts, unfunded contracts, with municipal employees that would ultimately have been an issue in any economy.

Federal and state employees now, on average, make more money than private sector employees. On top of that they have health benefits and pension benefits that are only exceeded by members of Congress. While transparent, the "abuses" are manifest. Here in metro New York, it is accepted and encouraged practice for firemen, police, rail and subway and bus employees, etc., to arrange extreme overtime in their final years of employment such that their pensions are higher than their stated final year's salary. Many can retire after 20 to max 30 years of service. 97% of Long Island Railroad employees retire on disability after 20 years, from a railroad that has one of the best safety records in the country. Teachers have almost immediate tenure and work at their discretion, maybe, big maybe, a majority are great, some are hangers on, some take out their resentments on our children and some do nothing at all. There are no consequences.

The dilemma of Greece, Spain, and Ireland, is soon coming to these shores in a big way. Deficit spending to support state budget gaps, those not related to Medicare and health spending, is a stopgap measure with no long term resolution. The state employee, and federal employee as well, contracts have no basis in economics and are simply a road to ruin unless addressed in a way that unions will fight.

So Krugman or Greenspan, it requires choices and not a one size fits all approach. Is our political system capable enough to deal with this opportunity for discretion?


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