Economic Stimulus or Economic Boomerang?
by Matt Geraghty, Charting The Economy | January 27, 2009
PrintWe are all familiar with how a boomerang works. It is a weapon of great power when used properly. However, when
thrown carelessly it can turn on you. Instead of hitting its target it comes back to harm you. In this regard, the
economic stimulus package is like a boomerang. If implemented properly, it may be a powerful weapon in fighting the
current financial crisis. If implemented carelessly, it will make a victim of us.
The economic stimulus package is essentially an enormous debt offering by the U.S. Government with the goal of using
the money to create value in the economy. We need to remember that the simple act of transferring money from the
Government to citizens or civil projects does not, in itself, create any value. In fact, if the money is used wastefully, it
will actually destroy long-term wealth in the U.S. In this case, it will not be a solution to our economic crisis, but a new
financial burden. Without strong measures to ensure that the stimulus is used for value-creating programs it will most
certainly only result in a short-term boost to economic growth. We will then be left with more debt, and little to show for
it. The value of the economic stimulus package will depend on how the money is used and managed.
To create wealth, projects must produce more long-term benefit than cost. In order to ensure this happens, the
following, at a minimum, should be in place: 1) all work must be bid out through a request for proposal (RFP) process,
2) all projects must pass a net present value (NPV) cost/benefit test, 3) detailed project/financial reporting and
oversight should be centralized at a high level to promote success, and 4) there should be complete transparency in
the process. By following these steps, we can help ensure that we do not become victims of an economic boomerang.
Just Say “No” to No-Bid Contracts
The first step toward a successful stimulus program is to require that all projects are put through a competitive bidding
process. This step will reward contractors that provide quality and value. When done properly, the RFP process
should dictate that individual contractors are held: 1) to strict time schedules, 2) high quality standards, and 3) tight
budgets. No programs should be funded without a bidding process.
Under the last Administration and Congress, no-bid contracts were used to rush money into action. In my opinion, this
was ridiculous. A bidding process does not have to take a large amount of time. Most contractors are willing to go out
of their way to hit bidding deadlines, especially when billions of dollars are at stake. Using no-bid contracts was a bad
way to fund the Iraq War and the Hurricane Katrina cleanup. Their use does not promote speed, but corruption and
waste.
In addition, we must not use the model from round one of the TARP distribution. In this case, Congress gave the
Treasury authority to distribute money to banks with minimal reporting, tracking, and measurement parameters in
place. Again, this was done to speed up the process. If waste is our goal, then this is a great method.
The government stimulus program must guarantee that a bidding process is followed before money is committed to any
project. Sacrificing this process for speed is not a valid excuse. It will only lead to waste. Just say “no” to no-bid
contracts.
Creating Value – The NPV Test
Next, all programs/projects need to pass an NPV cost/benefit test prior to funding. This process, based on accepted
bids, may be the easiest way to ensure the stimulus money is used successfully. By using the NPV test as a baseline
for project approval, only those projects that create more value than costs should be funded. This analysis can also
help ensure that projects with the highest return (more economic benefit) are funded and prioritized first.
Let’s take an example. The infamous bridge to nowhere comes to mind. Spending money on similar projects will
absolutely have near term benefit. These projects will put people back to work, they will inject money into the economy,
and they will create demand for goods and services. However, in the long term we will be left with assets that produce
little lasting benefit. This type of project would never pass a simple NPV test. Investing in a proverbial bridge to
nowhere will actually destroy wealth.
In addition, we need to resist the hype of flashy new programs. I come from the high tech world, and have seen first
hand the temptation to spend money on fancy projects based on hype as opposed to financial returns. The internet
bubble of the early part of this decade was littered with companies that were funded based on hype. The Government
will have a strong temptation to get caught up in the hype of green energy, electric cars, and electronic health records
to name a few. All of which sound great, and are things I strongly support. The issue is to differentiate between the
projects in these areas that create value and those that are just hype.
An NPV cost/benefit analysis of each project, based on accepted bids, must be used to safeguard against the long
term destruction of wealth. By using the NPV test as a baseline for project approval, only projects that create more
value than cost should be funded.
Strong Oversight and Reporting
Strong oversight and reporting is essential to the success of the stimulus package. Much of the money will likely be
given to federal and state agencies to distribute to such things as education, social benefits programs, and public
works projects. In order to promote effective use of the money, detailed reporting and oversight should be centralized
at a high level. At a minimum each project should be measured for quality, timeliness, and cost. To achieve this, a
centralized oversight committee should receive regular quality reports, project schedules, and budget reviews.
Additional money could then be directed toward the states and agencies that show the greatest success.
Transparency
There must be complete transparency with regard to how the Government stimulus money is used. The easiest way to
do this is to have all the information that is collected, through the process I have outlined above, centralized in one
online database. The public should then be given access through a website to this information at the project level.
Information on such things as the bidding process, awarded contracts, schedules, quality reports, and budget
variances should be easily available. Basically, the public should be able to see the same information that is being
produced for the oversight committees. There should be minimal exceptions (e.g. information containing trade secrets
or items of national security may be exempt). The Government must provide complete transparency in order to
promote accountability and gain public trust.
Conclusion
Without the proper safeguards in place, the economic stimulus package will lead to larger economic problems in the
long term. If a project does not produce more benefit over time than cost, it will destroy wealth and should not be
approved. An NPV analysis of each project, based on accepted bids, can help ensure success and give priority to
those projects producing the most economic benefit. Then, once a project is approved, it should be measured.
Detailed financial reporting and reviews are critical to success. Finally, these reports must be made public to promote
transparency and accountability. This is really simple business, but something that our Government seemed to have
forgotten in recent years.
So, when we implement the economic stimulus package, let’s not turn it into a misused boomerang. Under the House
plan, we are talking about an $825 billion stimulus package with $550 billion going toward new spending (the rest is tax
breaks). The cost of getting this wrong is enormous. If we do, we may find ourselves a victim of an economic
boomerang.
Copyright © 2009 Matt Geraghty
Editorial Archive
contact information
Matt Geraghty | Boulder, CO USA | Email | Website
The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
