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"If you give a mouse a cookie..." The bailout-stimulus dialectic and the role of biomedical research
Dr. David Guzick, M.D., Ph.D.
November 21, 2008
You may recall that the children's story, “If you give a mouse a cookie…” by Laura Numeroff, is a circle story. First the mouse wants milk, then a straw, and then a series of things that eventually lead back to the cookie.
What about the $4 trillion dollars that the federal government has now earmarked for bailing out some of our broken industries—first commercial banks, investment banks and insurance companies, and now perhaps automakers and other manufacturers? If taxpayers pour money into a broken system, do we spend the money only to end up in the same place?
The idea of “stimulus” for our troubled economy sounds better than “bailout,” as the former implies a trajectory out of the recession, while the latter suggests a certain risk of circling back to our current sorry state. But there is a dialectical tension between the two concepts. An industry bailout may indeed not be a matter of throwing good money after bad, but rather one of tiding over a troubled industry while the current business cycle makes its way out of recession. And an infusion of funds into specified industries or the economy as a whole is only a stimulus if it leads to a sustained multiplier effect that ultimately adds more to the economy than the dollars used initially to stimulate it. Thus, bailout is not always bad and stimulus is not always good: the “right” bailout may ultimately contribute to economic recovery while the “wrong” stimulus may simply represent a current expense without much downstream revenue.
Our nation's leaders must be careful here. Adding more dollars to the economy without the multiplier effect runs the risk of downstream recession, currency devaluation and a weaker nation. The Federal Reserve balance had grown slowly for the past five years—$0.740 trillion on January 1, 2003, $0.943 trillion on Jan 2, 2008, and $0.946 trillion on September 3, 2008—but then increased dramatically in the past few months to $2.25 trillion on November 12, 2008. For now, there is little concern about inflation because of the widespread severe reduction in demand, but such extraordinary increases in the Federal Reserve balance must ultimately be funded, with a significant potential for inflation and currency devaluation down the road. Current total government debt recently topped $10 trillion, for which the government pays an average interest rate of 4% (i.e., about $400 billion per year). Because of the dramatic increase in Federal Reserve funds, it seems inevitable that the government will have to pay a higher rate of interest for investors (largely, other countries) to buy its long-term bonds. Given this environment, it is not surprising that during October, the first month of the federal government's fiscal year, the U.S. budget deficit ballooned a record $237 billion. This growth in the deficit is four-fold greater than the increase that occurred in October, 2007, and represents more than half of the planned budget deficit for the entire 2008 fiscal year.
So how do we get out of this mess? Bailout or stimulus? The Troubled Assets Relief Program (TARP) would appear to fall into the bailout category, in that it was designed to stabilize the banking system by government purchase of troubled (“toxic”) assets. However, the Treasury Department could never quite figure out how these assets would be priced or how to dispose of them once priced. Like a quarterback calling an audible after the intended play did not set up well at the line of scrimmage, Treasury Secretary Paulson changed course: the first $290 billion allotment under TARP has so far been allocated for bank equity infusions, and an equity infusion into insurer American International Group. Thus far, the plan has worked in the sense that we at least still have a banking system, and hopefully future regulatory oversight will improve the plan's impact on credit availability throughout the economy. To the extent that such banks and insurers use these funds to pay corporate dividends and executive bonuses, and/or add to reserves for future acquisitions, they are not achieving the bailout goal of thawing the credit markets by infusing investment capital into the economy.
What about corporate bailouts such as General Motors? President Obama's transition team has signaled plans for substantial loans to U.S. automakers to build fuel efficient cars, as well as other potential assistance to stabilize finances. As I write this newsletter, the “big three” automakers are testifying to Congress and asking for a bridge loan. The reception to this idea by the lame-duck Congress, however, has been quite chilly. Economists are divided about whether a bailout for U.S. automakers is preferable, in terms of job retention and the restructuring needed for a viable business model, to a bankruptcy process like that used by airlines, steel companies, and countless others. Further, if the auto industry receives bridge loans or other federal assistance, do we then protect Circuit City, Sun or other firms that are now announcing layoffs? We will all have to leave this one to the politicians and the economists, but it's safe to say that domestic automakers will not be the savior for the economy's current and future woes.
The potential for economic stimuli to reverse the recession also faces significant hurdles. In recessions that have occurred over the past few decades, the federal funds rate was higher, so the standard fiscal response to a weak economy—a cut in the federal funds rate—was still available. Currently, the effective federal funds rate has averaged less than 0.3 percent, leaving little to cut any further.
President-elect Obama proposed several stimulus packages during his campaign, and most recently has suggested a stimulus package of about $200 billion focused on tax cuts for middle-income families and seniors, a foreclosure moratorium, extension of unemployment benefits, and a public works program emphasizing "green collar" jobs to develop environmentally friendly energy sources.
While these actions may indeed be important in the portfolio of economic stimuli, let us not forget the advantages of including a significant increase for biomedical research in the mix. During his campaign, President-elect Obama released an 11-page "plan for science and innovation" that outlined aggressive investments in science and technology, including a doubling of funding over ten years at the National Institutes of Health (NIH). From the very practical standpoint of providing a sustained economic stimulus, such a plan makes good sense, and would be even more powerful if the doubling plan were accelerated.
Although it is very difficult to estimate the return on investment from public funding of biomedical research, Edwin Mansfield reported a 28% rate of return in a detailed (but dated) analysis (Res Policy 1991;20:1-12). More recently, in a study titled “In Your Own Backyard” from Families USA, the national organization for health care consumers, measurable benefits of NIH research awards to all 50 states were estimated. In 2007, the NIH awarded almost $23 billion in research grants and contracts. According to Families USA, this funding created more than 350,000 new jobs nationwide, generated more than $18 billion in wages from those new jobs, and spurred more than $50 billion in business activity in the states.
There are other benefits to increasing NIH funding as part of an overall federal stimulus package: the funds are distributed to a variety of localities throughout the country, without the inefficiencies of political earmarks; a merit system for awarding funds to the best applications is already in place; through the Bayh-Dole amendment, incentives exist for the development of commercializable discoveries; and there are beneficial downstream effects on the population's health, longevity and productivity.
In 1994, Bernadine Healy, M.D., former Director of NIH, wrote: “As a society, we must not allow … transitory economic hardship to blind us to the promise of tomorrow's medicine. The only way to ensure that the next generation of physicians will be practicing 21st-century medicine in the years to come is to secure the future of the NIH today.” (NEJM 1994;330:1493-98) Updating this idea, a secure future for NIH will not only ensure the excellence of the next generation of physicians, but will generate knowledge that will contribute to a robust economy by improving productivity through improvements in health, and by sustaining the U.S. as a global leader in commercializable new medical treatments and technologies.
As a nation, let's try to avoid circle-story bailouts and focus on stimuli with substantial multiplier effects. The economy will need an acute, meaningful, short-term stimulus, but increased extramural funding for NIH should be an important component of the longer-term national stimulus package.
Meliora,
David S. Guzick, MD, PhD
Dean, School of Medicine and Dentistry
University of Rochester
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