A Competently Managed Federal Program to Revive the Economy

The economy lost 533,000 jobs in November, raising the official US unemployment rate to 6.7%. When you add to that

The economy lost 533,000 jobs in November, raising the official US unemployment rate to 6.7%. When you add to that the number of people who have given up their job searches or are working part time when they would rather work full time, our real unemployment rate is probably closer to 12.5%. Over the last year the US economy has lost nearly 2 million jobs. This could be the start of a depression, the deepest part of a recession or the mid-point of a bigger, but not catastrophic recession. In my view, government action will determine how much worse the situation becomes.

The shock of the recent employment data comes at a time when government continues to debate how to rescue the economy. The Democrats are unhappy about how the $700 billion stimulus package has been deployed. They want homeowners and the auto industry to receive some benefit from the $350 billion that remains unspent. On the other hand, the lame duck Bush administration is focused on using the bailout funds to ensure the survival of the finance industry and increase the liquidity of the capital market. The resulting federal stalemate seems to be ending with a short-term loan program for American automakers. But as the economy continues to slide, it is becoming clearer that we need to rescue all of them – the finance industry, automakers and homeowners – and this will probably require more money and more taxpayer debt.

Part of the problem, as the Congressional Government Accountability Office (GAO) reported last week, is that the funding for the finance industry has not been properly supervised. Less seems to be getting lent than Congress intended, and there is a growing fear that the Bush administration is managing the bailout with the same lack of skill that they used in Iraq and after Hurricane Katrina. On December 3, citing the GAO report, New York Times’ reporter Diana B Henrique wrote:

"…the Treasury Department still does not have the tools needed to monitor whether the banks that received Treasury investments are keeping their side of the bargain by using the money to expand available credit and address mortgage foreclosures. Nor can it ensure that potential conflicts of interest among its contractors are being adequately disclosed and addressed."

A particular deficiency among the anti-government Bush conservatives who will continue to run the federal government until January 20 is that they never seemed to learn how to operate the complex machinery of the US federal government. They have chased away many of the government’s most competent managers, and in this moment of economic crisis can’t seem to figure out how to use the $700 billion they have demanded to revive the economy. At first they wanted to buy bad debts and clean the balance sheets of the financial industry. Then they decided to buy shares of the firms instead. At the end of November we heard Treasury Secretary Henry Paulson was going to leave half of the fund to the Obama administration, now he is trying to get all of it released and the Democrats are bargaining to include help for homeowners and the auto industry in the $350 billion.

While the Bush administration drew a line in the sand and opposed using the $700 bailout for the auto industry, it signaled flexibility in using the $25 billion in loan guarantees for the development of fuel-efficient cars for the bailout. Initially the Democrats did not want to use the $25 billion authorized as part of last year’s energy bill for the auto bailout, but in the past several days, Speaker Pelosi has relented and now agrees to use those funds as long as the Obama administration replaces them when it come into office.

It is easy to see why the public might be confused with all of this. So one way to read the story is to recognize that the wheels are off as long as the economic news keeps worsening. During the presidential campaign, President-elect Obama tried to keep his new spending proposals under control to prevent the deficit from growing. Now, and for the next couple of years, however, the size of the deficit does not matter. The good news is that the Obama team understands the need to ensure that all of this money we are about to spend be tied to performance indicators and financial controls.

On December 6, Obama’s website posted this message:

"…we need action – and action now. That is why I have asked my economic team to develop an economic recovery plan for both Wall Street and Main Street that will help save or create at least two and a half million jobs, while rebuilding our infrastructure, improving our schools, reducing our dependence on oil, and saving billions of dollars.

We won’t do it the old Washington way. We won’t just throw money at the problem. We’ll measure progress by the reforms we make and the results we achieve — by the jobs we create, by the energy we save, by whether America is more competitive in the world."
Since my actual area of expertise is public management (and certainly not journalism!), I see this last point as particularly critical. We need to use cutting-edge performance-measurement techniques and ensure true accountability as we spend the trillion-plus dollars it will take to revive the economy. This is a tremendous opportunity to invest in the infrastructure that a generation of anti-tax and anti-government politics has allowed to deteriorate. But we need to ensure that every dollar invested pays off. The infrastructure we build must have a multiplier effect on the economy, and we must pick these projects with care. The new infrastructure must also be competently built and maintained. We need to spend money on sophisticated management information and performance management systems, and we must ensure that government contractors are held to strict performance standards.

When we say the government is going to build subways, improve energy efficiency in their buildings and rebuild schools, we don’t actually mean that government employees will be doing that work. The work will be done by private firms under contract to the government. This is not like the New Deal’s Works Progress Administration or Civilian Conservation Corps – during the Great Depression the government hired people and put them directly to work. The spending now being discussed will provide billions of dollars in contracts to private firms. This will resemble the new business that came to private companies when our nation built its interstate highway system and sewage treatment plants.

We need to make sure these huge capital construction projects are undertaken with a minimum of corruption but with a minimum of bureaucratic delay as well. We need a carefully constructed system of incentives and audits to ensure honest and effective contractor performance. State and local governments throughout the United States know how to do this. The past generation of scarcity has taught them how to squeeze water from a stone. Let’s make sure now that the funding spigot has finally opened up that we don’t drown in waste, corruption or bureaucracy. There is a tendency during emergencies to allow performance management and accountability systems to be circumvented (the War in Iraq’s contracting processes, for example). In this day of low-cost communication and information, this is not necessary. We can have both speed and accountability.

Strategically, as the president-elect and the nation’s governor’s seemed to indicate last week, we should start with projects now underway that have been stalled for lack of resources. In New York City, the 2nd Avenue Subway, the new Penn Station and a number of other MTA capital projects should be accelerated. I very much like Obama’s "use it or lose it" declaration. If New York can’t move more quickly than we did at rebuilding Ground Zero, we shouldn’t receive any of these federal monies. As we learned during the Clinton administration with the earned income tax credit – a tax break directed to the working poor – the key to economic stimulus is to provide resources to those capable of spending money quickly.  The economic crisis presents both great danger and great opportunity.  Our newly elected president fully understands this, and that fact gives us reason to be hopeful.

A Competently Managed Federal Program to Revive the Economy