So, maybe you’ve heard: the economy looks like it might be headed for the tank. You may have also noticed that there’s an election this year. That means it must be time for a stimulus package on Capitol Hill. No one up there wants to head into reelection with rising unemployment, a rash of foreclosures, and falling incomes on their hands, without at least looking like they’re doing something about it. So there’s a rush on the Hill to get a “stimulus package” out the door to help boost the economy ASAP.

Cynicism aside, I think this is a good thing. People are suffering, and if the government can do something about it, why shouldn’t they? It sometimes seems like heresy these days, but I tend to think it’s what we pay them to do.

The problem is that some of the stimulus proposals floating around, including ones by our green friends (see Josh Dorner’s post for example), are not very good stimulus policies. It’s not that any of these ideas are bad. Most of them are downright good. Excellent, even. The problem is that almost none of them can be remotely classified as stimulus.

Here’s the problem, or at least one of them: Since World War II, the average recession has lasted just 11 months. Add the fact that it takes a fair bit of time (anywhere from 3 to 6 months) before we even recognize that we’re in a recession. Add still more time to decide what to do about it, and more time on top of that for whatever we decide to do to actually have an effect, and you see the problem. Even for the quickest policy approach, we could be solidly 7 months into an 11 month recession before we can have any impact.

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There is a very short window for policy to stimulate the economy. If we don’t act fast enough, the policy won’t take effect soon enough to help anyone. If we’re late enough, the policy ends up hitting the economy when it’s on the upswing, and instead of smoothing out the business cycle, we end up contributing to it.

In the 2001 recession, we sent out checks to taxpayers as part of a stimulus package. This is about as fast as the government can move money through a new program, and it took two full months for the checks to arrive in the mail. Anything much slower than that, and the game will be all but over.

The other problem is that there’s a limited number of things we can do to get people to spend more money quickly. People and businesses tend to spend based their long-term expected income. They borrow and save to smooth out the bumps. Giving people a short burst of income doesn’t change their long-term picture much, and it doesn’t create new spending in the short run, when we need it.

The exception is people who can’t borrow. People with no savings to draw on and limited access to credit can’t spend more in the short-run, even if they think they’ll make lots more in the future. Targeting stimulus at low-income households that fall into this category can create new spending in the short-run.  Of course, such “liquidity constrained” people tend to be the ones hurt most by recessions in the first place, so targeting them for stimulus makes even more sense.

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For stimulus to work, we need to get cash as fast as we can into the hands of people and businesses that would spend it right away if they had it, and who would spend less otherwise. We’re looking for additions to or extensions of existing programs that have all the pieces in place to get money out the door quickly to low income households. Any new program that needs new administrative infrastructure, no mater how good a program it might be, will almost certainly come too late.

It’s a pretty high threshold to meet, and we shouldn’t be surprised that most green proposals fall short. Most other proposals do too.

Things like tax credits for more efficient homes and appliances fail the test for a couple of related reasons. The biggest problem is that they shift consumption, from buying inefficient equipment to more efficient equipment. They tend not to generate new consumption, which is what we need. Anyone in the market for a high end home or appliance is not liquidity constrained, almost by definition.

Otherwise good ideas, like the Green Jobs Bill or Clean Renewable Energy Bonds (CREBs), take too long to ramp up. Any program like these that requires the government to issue grant guidelines, receive applications and to approve those that qualify take too long from the time the bill can get passed until the money hits the ground.

The Production Tax Credit (PTC) for renewable energy should be extended as soon as possible. We’ve all heard how the renewable energy sector is lurching from boom to bust, and is on it’s way to bust again. The wind industry is facing 75,000 layoffs if the PTC is not extended. It’s patently absurd that while mature technologies like nuclear and oil continue to receive massive subsidies year in and year out, that newer, cleaner, and smarter technologies like wind and solar live hand to mouth.

But even renewing the PTC is suspect as stimulus policy. The problem, of course, is that if we stop using renewable electricity, we’ll start using more of other types of electricity, so we may end up replacing all those lost renewable jobs with other ones in the traditional energy sector, and it might just be a wash from an economic perspective.

The Investment Tax Credit for building new renewable generation is another great idea that’s going by the wayside. There is no question but that it should be renewed, just not under the rouse of calling it stimulus. There’s actually a perverse incentive to let the ITC expire for stimulative reasons: If builders knew that the tax credit for building in new renewable energy facilities was going to expire at the end of the year as planned, they would have the incentive to rush to get new projects underway sooner rather than later, with more short run stimulative impact then if we extend it.

I’m a green economist, but an economist nonetheless. It’s not called the dismal science for nothing. And while almost all of the “green stimulus” ideas I’ve seen are good ideas on their own, they stretch credibility when they’re thrown into the mix as stimulus policy.

Economists are obsessed with allocating limited resources. There are two here that worry me. First is how much money we can throw at this recession to help pull out of it. The more money we spend on good ideas that don’t help, the less we’ll have to spend on legitimate stimulus, and the longer people will be out of work.

The other is simple credibility and political capital. We have some momentum now, but there are still plenty of people and politicians out there who would like to dismiss us as treehuggers: all heart and no head. I worry that we (as a movement) run the risk of sounding rather silly. There’s a heated debate going on about how to avoid people losing their jobs and homes, choosing between food and heat, and renewing prescriptions or cutting pills in half. If we jump out from behind a tree and yell “windmills!” as the solution for every problem, we strain our credibility.

I see this a lot with the Bush administration calling for tax cuts for the rich as the solution to budget deficits and surpluses, to a sagging economy and one in danger of overheating. We should and do call them on it every time it happens, but if we want to be right, we have to be better than them, or we loose our right to moral outrage. And what’s a green without moral outrage?

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