Good, better, best: spending stimulus funds wisely in Northern New York

There is a river of money flowing outward from Washington, D.C., as the Obama administration tries to stimulate demand and pull our economy out of recession.

Everyone seems to have an opinion on the viability and advisability of this idea, but that is not what this column is about. I want to talk about what we do with that money, regardless of the politics of budgets and stimulation.

Like it or not, stimulus money is coming, and some of it is coming our way. Local governments and not-for-profits are already lining up with ideas for how the money should be spent. When I recently asked for suggestions by readers on the subject, I got a couple of thoughtful responses.

Deciding how to spend the money is complex.

Governments and not-for-profit agencies tend to want the money to go into their budgets — to fund the things they already do or to limit the impact of reduced tax revenues or donations. This makes perfect sense from their standpoints and isn't necessarily bad, but it may leave us nothing to show for our money in future years.

How do we decide what is the best way to spend stimulus money?

It is possible to compare the ability of different spending choices to stimulate our economy.

When a dollar is spent, it "ripples" through the economy, creating more spending and economic activity in its wake. Some spending choices ripple farther and create more local economic benefits than do others.

Economists measure these effects using numbers called multipliers. Multipliers estimate the degree to which a dollar spent will create more dollars, more taxes and more jobs in a region.

Interestingly, the concept of economic multipliers was first described by the economist John Maynard Keynes — the same guy whose theories are the basis for the stimulus package itself.

The things that make money ripple farther in an economy are local inputs — local labor, resources, services, etc. The more local content an activity has, the more economic impact it can have.

Think of a gas station, for example. When you buy $20 worth of gas, most of the cost of that fuel quickly leaves the region when the service station owner pays for his next load of gasoline. We don't produce gasoline in the north country, so the only part of your $20 that ripples very far is the small portion used to pay the service station's attendants or the profits a local owner takes home.

Spend a night in a local hotel, however, and most of your money goes into labor costs. Those hotel employees then take that money and spend it at other local businesses, causing it to ripple.

To get maximum stimulation, we should spend money where it ripples farthest.

If we look at multipliers developed by the federal government's Bureau of Economic Analysis, we can quickly see which areas will ripple more than others.

Among the worst choices for stimulus spending would be manufacturing.

Heavy manufacturing has typical multipliers in the range of 1.2 to 1.5. For every dollar spent in that industry in the north country, another 20 cents to 50 cents is generated in additional economic activity. This does not mean that manufacturing is a bad investment, just that it will not stimulate our economy as forcefully as some other choices.

Many of the most common suggestions for stimulus money seem to involve construction. People think we should build new structures, repair and maintain the ones we have, and convert as many buildings as possible to be more energy-efficient.

When we look at multipliers, that doesn't look like a bad idea. The average multiplier for construction in the north country is a respectable 1.6 to 1.7. Construction is labor-intensive, and every $1 million spent on building or repair projects will create an estimated 13 jobs.

While this spending and these jobs will last only as long as the construction work itself, the results of that work will be with us for many years.

New and more energy-efficient government buildings will mean lower operating costs later — and lower taxes. Repaired roads and bridges will mean lower operating costs for area businesses, as will other renovated or new infrastructure — sewers, water systems and telecommunications and power networks.

This means we gain the returns on these stimulus investments long after the money itself has been spent.

If we want to find an industry that has really great multipliers, however, we need to look at regional agriculture. Agriculture multipliers are in the range of 2.0 and greater — higher than almost any other choice we could make.

Even food manufacturing industries have higher multipliers than do other manufacturing sectors. This is because many of the primary inputs to the industry — labor, sunlight, soil and water — all come from local sources.

If we could expand agricultural production in the region, it would create more new jobs than virtually any other choice.

Of course, expanding agricultural production would take more than stimulus money. Agricultural markets are weak, and demand is down for most products, including dairy and corn. It doesn't help to produce more if you can't sell products profitably.

Because farms are private businesses and there is already a host of government loan programs available to farmers, there are not always obvious ways to invest more government money into agriculture.

What we need, along with the money, is new ideas, new products and new ways to market. Things like biomass production for energy or farmstead production of cheeses, meats, and vegetables. We need new distribution networks and marketing programs.

It is not always clear how stimulus money could help with those things, but now is the time to put ideas on the table. If you have any thoughts on the subject, I would like to hear them.

It is not certain that the stimulus plan will accomplish its goal, nor is it clear what will happen if it does not. Whatever we do, someone will always be able to argue that we should have done something else.

When that money does arrive in Northern New York, it is absolutely clear what we should do — spend it.

Regardless of our individual political positions on the stimulus package, the north country will be better off if we spend our share of the money. If we don't, someone else will certainly spend our share and we will get the negative impacts with none of the potential positives.

Let's spend, but smartly.

Greg Gardner is an associate professor of business at SUNY Potsdam. His column on business issues in the north country is published monthly in Money Matters.