Hank Paulson likes to insist that the hundreds of billions of dollars his Treasury Department has handed out to banks is an investment program rather than a spending program. The difference, for the Treasury Secretary, seems to be that he expects the government will see a positive return on the investment.
Steve Randy Waldman says that this is bunk. Of course it’s a spending program. What’s more, it’s a spending program subsidizing past consumption.
All of the iffy securities that are weighing down the banking system represents money already spent on real projects or consumption. When the government purchases a security, it is taking the place of the party that originally fronted money for that expenditure. Every penny of government “investment” is retroactive expenditure on housing, real-estate, consumer credit, whatever.
If a government were to borrow funds in order to build a new stadium, we’d call that an “expenditure”, even if we fully expect use fees and incremental tax revenues to eventually turn a profit for the fisc. Politicians supporting the project would call it an “investment”, quite justifiably. But the project would still count as government spending.
If a private party builds the same stadium, and then is reimbursed by the government in exchange for rights to future revenue, that doesn’t change the economic substance of the transaction at all. But in the second case, the government would buy “paper” — it would enter into a contract trading current government funds for future revenues. That “security” doesn’t make the transaction any more or less an investment than if the government had purchased the stadium itself.
So, in economic substance, the government is currently spending through a financial time machine on the exurban subdivisions and auto loans of several years past. We are retroactively turning in the entire mid-decade “boom” into a gigantic Keynesian stimulus project.
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