Comments on Ray Dalio's post on Monetary Policy 3 and MMT

Ray Dalio's comments are always well researched and interesting. For starters, I think, Principles for navigating Big Debt Crises is must read. (Its free PDF). His recent post on his LinkedIn blog is about Monetary Policy 3.0 and MMT. 

Some fundamental comments about present crisis:

1. QE only creates a space for fiscal response: Central banks and governments alike misunderstood the role of monetary policy in the 2008 financial crisis. The crisis was different than others we have faced since Great Depression. Per my reading of Keynes (which seems to different than Keynesians and neo-Keynesians both), in such crises, the proper response has to be from fiscal side. The monetary policy merely creates space for the fiscal response or accommodates the fiscal response preventing untoward consequences. The response had to be holistic - a coordinated and sustained monetary and fiscal policy response.
2. Fiscal policy amplification mechanism is broken: Broken may be a harsh word, we may choose "has become messy" in its place. The point is, fiscal policy needs an amplification mechanism. When government starts infrastructure spending, it needs some real value-creating sector to take it from there and start driving the economic engine. At present we do not have such "real value-creating sector" that can boost employments and wages generally. In 1980s we had tech, in 2000s we had internet, now we need something. In absence of a big driver, we need many small ones. If such capability is difficult to create in one sector it is quite difficult to create in more than one sectors too. The solution is to let inherent advantages play out.
3. Inherent advantages are muzzled: Inherent advantages have stopped driving international trade since east asian crisis, and at a larger scale with China's entry to WTO. Instead, we have pegged exchange rates (soft/hard/overt/covert), manipulated tariff and non-tariff barriers, and, in general, non-transparent trade policy. Until that is fixed we cannot have trade based on pure competitive advantage.
4. Small business innovations are indefensible: When people talk of China usurping Intellectual property they usually talk about submarine plans etc. But I am talking of something very basic. Check out new funding projects on kickstarter - innovative shoes, innovative bags, innovative pens, anything that takes your fancy. Just search on alibaba or just wait for few months you will see some products like those (invented by kickstarter entrepreneurs) in the market on mass scale. These products are not sold by those companies who invented them on kickstarter or such platforms. This is IP theft that hurts the most. It removes new business competitiveness right at its infancy.
5. Trickle-up always works; trickle down some times: Monetary policy practitioners and academic economists in general prefer trickle down economics. But empirical evidence says reverse is true. Trickle-up works all the time. Thus, when there is a choice of bail out, we must lean to lower strata. (A) It is more fair and just, (B) better optics and (C) right incentives. But MAIN reason it works because it balances the bargaining power of both sides. Bail out the top and they lean on to regulation to prevent or constrict trickle down stifling the economy. Bail out the bottom and lo and behold all the incentives align beautifully.
6. Certainty of employment and wages is the one super-indicator: The best solution to any crisis is to get certainty of employment and wages going, rest follows from that. Today we have almost full employment but it is uncertain. Wage predictability is also uncertain. That's why the lack of demand is so persistent.
7. Interest Rates are like friction: Too much and too little friction are both bad. Sames goes for interest rates too much is bad, too little is ALSO bad.

Some comments about Monetary Policy 3:

1. Debt financed Fiscal spending financed by QE: I don't agree with Ray Dalio that this was pursued after 2008 financial crisis. The fiscal spending was essentially going to the same group who could access the QE funds. Yes, there was fiscal deficit and increased fiscal spending and yes there was QE to finance it. But this is exactly the wrong kind of stimulus as I have written since 2009 itself.
2. Giving $10,000 to one person Vs $100 to 100 persons Vs $1 to 10,000 people: Helicopter money is not easy to design. The behavioral response in each of three cases varies drastically.The range of outcomes possible is mind boggling.
3. Spending conditions interfere political rights: If I am tasked to spend $10,000 can I give it to someone from my family to pay down her loan? Does that amount to spending? Should I buy something? What thing? These questions are difficult to answer, monitor and control. 
4. A little inflation is necessary: People will spend when they can surely afford it (condition above - certainty of employment and wages) and it will get costlier tomorrow. Inflation is important, zero inflation may not be that great.

The examples of Monetary policy 3.0: 

The best part of the analysis is the historical perspective Ray Dalio gives. Sharp readers of this blog will immediately note that there are fundamental differences between the conditions in various situations described and those existing now. That is acceptable difference.

Particularly interesting is the Roosevelt response in 1930s. It still forms the basic template for solution today. However, we are at a slightly different position today than in 1930s. So we have to make more adjustments than Dalio may seem to suggest. [Dalio is NOT suggesting it - it appears simple but it is incredibly complex - politically, fiscally and economically]

In Sum

Do not understand these comments as put down of Ray Dalio (as if he cares what I think!). I admire the man because he is being honest and creating a framework to solve the crisis. Good intentions and honest efforts deserve praise - even if the guy making those efforts is one of the richest.

From my side, I solved this crisis puzzle back in 2009 itself.

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms"

Time Travel effect of Debt

Generally in Time Travel movies the actors go back in time to change some minor thing to alter the future dramatically. Debt does this in reverse.

Debt pulls value from future and alters the present in such a manner that more value is created in the future than estimated.

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

One problem with Indian capital risk return matrix

One problem with Indian corporate and their regulation can be summed up in the chart below.

Ideally a simplistic capital risk return matrix looks like this (click picture for larger version). In the best of places it comes close to this. Note that this is a simplistic depiction.

Ideal Capital Risk-return matrix

In India, it looks like this:

Indian Capital Risk return matrix

This is law enforcement issue as well as information issue. There is lack of regulation on conflict of interest between promoters and investors (small and big), there are many issues related to corporate governance. There is paucity of information to ratings agencies and these days the rating rigour is under a cloud with intense competition.

The chart also tells us why India does not have a deep bond market. Since my days in CRISIL, we have been harping on the improving the depth of bond markets. But so long as the risk-return profile continues there are no incentives for it.

The dispute resolution mechanism is abysmal. It is particularly unwieldy, long winding, costly and infructuous in the end. This has hurt investment in the country. Once this is fixed India will have unprecedented growth in equity and bond investments.

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Interesting Readings May 14 2018 - Development Finance Institutions.

Financing reindustrialization: bring back development banks

Deepak Nayyer talks about capabilities created in Development Financial institutions (DFIs) for longterm lending. 

These DFIs are very important in creating a capability for lending to special investments. India, till 2000, had developed the capabilities to lend to infrastructure, sector-wise capacity creation etc. We need the concentration of skills in one place. This way, special knowledge reduced the risk for lending.

The commercial banks decided to reduce the lending risks by consortium lending. That is a statistical approach to risk mitigation.

Now Deepak Nayyar wants to create a National Development Bank. That I think is a bad idea. Though there may be some merit in creating a network of professionals who can lend to industry and towards infrastructure. These professionals can be monitored using DIN-like number (Director identification number) and their investments performance tracked. These people may be employed with commercial banks but without sign-off from these persons, such loans will not be approved.

Note:

What we are creating is attribution chain. I have discussed the importance of attribution in both of my books - Subverting Capitalism and Democracy and Understanding Firms. Please use the links below to check out the books. 

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 Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Why does Lloyd Blankfein's interview with Fareed Zakaria sounds weird to me?

Fareed Zakaria interviewed Lloyd Blankfein, CEO of Goldman Sachs, for his GPS program. Here is the video. There are so many weird things with this one. But I came away ith a feeling that if Elizabeth Warren were to cross-examine him in Court, Lloyd Blankfein would be toast. But first watch this (transcript of full show here):

The interview basically talks about few key concepts:

1. State of the Economy
2. Accountability of top management of Banks - context of Wells Fargo scam.
3. Closeness with Clintons
4. Why wouldn't Hillary Clinton release the transcripts of the talks at Goldman Sachs

I found many weird things. Let us look at the interview in detail (highlights and in-quote comments are all mine).

I start from first question leaving hi's and hello's out.

ZAKARIA: From your vantage point, what does the economy look like? You know, how strong is growth? Because it still seems steady but tepid. 

BLANKFEIN: Well, it feels steady but tepid. But that being said, it is steady and there are a lot of advantages that the U.S. economy has. So for example, the consumer has deleveraged banks -- the banking system is in excellent shape. If you look at energy, there's a lot of tailwind in the U.S. economy and the fact of the matter is, we went through a big trauma, which included a banking system trauma and it took a while to work itself through. So the answer is, it's tepid but we're definitely growing and it's established, and the latter point is the more significant point. 

This is the first question. Nothing special here. Though as a CEO of Goldman Sachs I would have expected Blankfein to be sharper about his analysis. Instead he comes across as pedestrian.

"Banking is in excellent shape" is the wrong thing to say if you ask me, particularly in the world which wants your head. He could have said Banks are in much better position to support entrepreneurial activity - small businesses and the like, than the time just after the crisis. That will kickstart recovery.

Look at this first part:

ZAKARIA: A lot of people say, though, there's a lot of economic anxiety. People don't feel like these numbers are right, that unemployment is down, but at the same time, you know -- so for some reason, they remain as great sense of economic anxiety, what do you attribute that to? 

BLANKFEIN: Well, I'd say, there's economic anxiety but I'd say there's a more generalize anxiety and a very negative sentiment and I think it's fed and feeds into the political cycle. I have trouble explaining. If you look at the metrics, you talk about unemployment -- unemployment is not just down, we're virtually at full employment.   

Now, you'd say that there's some degree of underemployment or wage (earning) that was always the case. 

I'm not minimizing the consequence to people who should have -- who feel their jobs should be higher paid and legitimately so, and the legitimate issues about minimum wages, but at the end of the day, these problems always existed to some extent. They're less -- people should feel better than they may actually do. I'm not saying they should feel good or there aren't challenges to try to surmount or other objectives to strife for. But the sentiment is a lot worse than the economy.  [Mr. Blankfein, you just trivialized the problems facing normal people across the world who have never felt this way before]

If you knew all the numbers and you are teleported here from two years ago or three years ago and you're told where employment was, where the price of energy was. What the federal deficit was looking like is a percentage of GDP, the strength of the consumer, a lot of other metrics and you heard that. You would think that sentiment would be a lot better than it is today. 

Blankfein sounds like he meant people should stop whining. They are whining for no reason. The people are unhappy because their jobs (a) don't pay them as much as they think they deserve, (b) their jobs cannot be counted on as stable for forseable future, (c) they do not see Government or policy makers doing anything to help the situation AND more importantly (d) they see policy makers going to great lengths in aiding bankers to create more profit through dubious policies when they don't seem to need any help. In this context, Blankfein comes across very insensitive.

Under-employment was always the case? Really? Not correct! It is one thing to argue that the wages were unreasonably high and they have come to normal or that there was over-employment and now it has reverted to mean. But this plain denial. 

To how many did the comment "and I think it's fed and feeds into the political cycle" sounded like he started to blame the US FED and then turned it elsewhere? It did to me. I know it is sly to infer that. But if he wanted to say "anxiety is fed by the political cycle and also feeds the political cycle" then he should have been more clearer. He is CEO of Goldman Sachs, you should speak deliberately and precisely, and more so when you speak to the media. Didn't he get media training? He can't give excuses.

We continue:

ZAKARIA: The one thing that people are sure of still is that they are suspicious of the banks. If you listen to Donald Trump, you know, he varies on lots of different things but the one consistent thing he keeps hitting is that the banks are bad, that they're in cahoots, that they're -- you know, the big banks are part of the group of things he attacks, big media, big government, you know, the Clinton machine, the banks and he always gets wild cheers.   

BLANKFEIN: Well, I think you're being generous. I think it's not suspicious, it's outright accusations and it's not just Donald Trump, you know, frankly. I mean, I don't like telling -- I don't like the fact that I don't like saying it to you but, you know, we're not -- at times, people think of us as, you know, bankers is tone deaf. Believe me, I read the papers everyday and I hear it.  [what are you so stressed about? There is nothing you can't like telling the media that they are unfairly targetted]

Look, variety of reasons. Let me just start out. One of which is, I think, some of the behaviors that have been, you know, highlighted and visited, you know, are real and justify some negative response. And then, other parts of it are just a general -- and I don't want to minimize it so let me pause for a second and say, there has been -- bankers have played an important role in the system, generally, get rewarded for the risks they take. And some of those risks were poorly managed and some of the behaviors were not, you know, recorded as bad behavior. And so, there's a legitimate reaction to that, full stop.
[Ok, Good! That is true - good to admit it.]

Other things also -- let me tell you, bankers are no better at predicting the future than anybody else. And most of what we do are trying to get the future right, trying to make good decisions of how to allocate capital, trying to lend money to people who pay you back, trying to finance winners and not finance losers and guess what, you don't always get it right and you get drawn into the same mistakes and the same confusion that anybody would and everybody does in connection with their efforts to try to figure out what the future is going to be. [This has been debunked, ridiculed so many times cannot believe Blankfein is using this defence.]

So, good to have Blankfein admit that there are bad apples. These bad apples should be punished heavily - in accordance with law. That is where a leader would take it. Blankfein could also say because it is such a complex system ascribing blame is very difficult and it takes time. But Banks don't want bad apples in their system as much as the general public does. 

But then for weird reason, he starts defending bad behaviour. I doubt people think the "bad apples" Blankfein referred to were only people making mistakes. People know you are talking of the cheats. People simply want you to say "we are finding the cheats and sending them to jail". To the lawyer in me, this volunteering of information looks suspicious.

ZAKARIA: One of the criticisms people make about the banks which is playing itself out with this Wells Fargo affair is banks make mistakes. They do bad things. They do things they shouldn't have done and they pay fines in a sense admitting the wrongdoing, whether or not technically they do but nobody at the top gets held accountable. Goldman Sachs has paid fines. Do you think that's a fair criticism? 

BLANKFEIN: I would -- well, let me just say, first of all, I can't own or comment on Wells Fargo situation, you know, I could apply it in abstract. Everyone is looking for someone to hold accountable but sometimes -- the answer is -- look, the short answer is you would like to ascribe malevolence to everything that goes wrong. 

Now there is bad behavior. Someone has cheated or this fraud, well, that's the remedies for that and people go to jail for that. [Para added by me] 

But sometimes, people are just wrong. And they're wrong about things within their area of expertise because I may be in finance and you may be a political scientist but I have views about political science and I may be right, you may have views about where the financial markets are going, you may be right. You just don't know.  

And sometimes, what's going on here is that people are trying to prescribe malevolence for people who were wrong and the evidence that they were simply wrong is look how much money they lost. And at the end of the day, if you still think that their behavior was off, to be punished the way people are saying they should be punished, you still have to find some kind of a criminal intent. 

You know, to this day maybe the law shouldn't be this way. But stupidity is not a crime. Sometimes it's even a defense because if you're merely wrong and you didn't get it right, it's hard to ascribe criminality.

ZAKARIA: But some of the cases -- and again, I know you can't comment about Wells Fargo particularly but there are some cases where it wasn't just being wrong. 

BLANKFEIN: Sure. If there's bad behavior, then bad behavior should be punished. Look, there was nothing -- it was not criminality but there were civil wrongs in Goldman Sachs which we, you know, paid fines with respect to which we paid fines. And so that punishment -- but you're asking something different. You're asking -- 

ZAKARIA: I'm saying that the public sentiment seems to be and you see in the words of Elizabeth Warren which is why the people at the top not held accountable.  

BLANKFEIN: Well, I think people should be held accountable for what they're responsible for. In other words, if somebody has a duty and they didn't fulfill their duty, well, that's a civil wrong.  [Legally correct - but wrong context]

You can fine somebody. The idea, going further and saying there should be criminality, you still have to -- you still have to commit a crime to be a criminal. And to commit a crime, you still have to have some level of intent for what you're doing. So we're talking very abstractly here.  [Legally very smart]

And so I'm not saying look, I'm a citizen, also. Any time there's some malfeasance, I would love to see a head roll, but you have to -- can't -- but once the head starts to roll, it's no longer an abstraction for the person whose shoulders it was on. They have to really have -- there has to be a crime. [Para added here] 

And I -- listen, we were investigated. The people who investigated us, and others, presumably, you know, we were very, very -- a subject of a lot of focus. I would have to say that people looked at a lot of behaviors. And if there was no -- and I'm not talking about myself in particular; [Why did Blankfein want to add this disclaimer] I'm talking about the group -- and the outcome was, was there were people who -- who -- people in the community of people who -- in the enforcement community -- were not going easy. If they failed to bring a case, they felt that there was no case.

This is the part that stumped me. First Blankfein would have done well if he was legal expert. For someone who could't explain why growth is tepid or there is economic anxiety, he breezes through the legal minefield with remarkable ease. He could put a lawyer to shame with his precision. Yes, Mr. Blankfein, people make mistakes and no one in America is against mistakes. 

"People are prescribing malevolence for people" this statement is so ambiguous that it could be a a part of a master confession. It can leave the jury in the "did he or didn't he" zone. Let me clarify what people think. When people see toddler using a semi-automatic gun and kill 20 people, they don't blame the toddler, they blame the parents and the pro-gun lobbies blame the gun manufacturers. So when a whale trader makes $1billion wrong bets, they blame his supervisors and may not necessarily blame him. This is not negligence but criminal negligence and repurcussions are dire - jail. This is not a civil liability but a criminal one. And frankly US Justice Department has dropped the investigations of criminal liability for civil penalties. That looks dubious to people.

Blankfein uses the stupidity argument without being provoked. My ears pricked up when he volunteered that one.

What Blankfein is saying is, in law, called the difference between misfeasance and malfeasance. Misfeasance means a mistake, trying to do the right / acceptable thing but making a mistake leading to a loss. Malfeasance is trying to do the wrong / unacceptable thing and doing it well. Now it may so be that your law and your work are such that they look awfully similar. That is, a mistake while doing normal thing and well-executed bad /wrong thing looks the same. The question then is how to determine which is which. 

Or, it could be so that banks may be trying to do something bad/unacceptable AND made mistake  and thus blew up the system. In this case the liability is not only criminal but also vicarious - i.e. Firm is also liable. The behaviour of Justice Department let the banks off the hook on this major issue. Clearly, banks were doing something unacceptable - Goldman's internal emails themselves said that in so many words while shorting the derivatives.

The thing is if bad behaviour is being displayed repeatedly, you benefit from bad behaviour (get a bonus) when it doesn't explode into a crisis then you are part of the system when it does explode. So you go to jail along with the perp as a co-accused. Now imagine a series of mistakes leading all the way to the top, taking place repeatedly and all those making mistakes are getting rewarded . This is a conspiracy - the burden of proof shifts from prosecution to the accused. How many times will Blankfein say he made a mistake. At the end it will appear he was only making mistakes at Goldman Sachs - wonder why he kept getting all those bonuses.

ZAKARIA: I have to ask you about the relationship of Goldman Sachs to the Clintons. There was a front-page story in the New York Times alleging that there are very close connections, that Goldman Sachs has done all kinds of things, from give money to the Clinton Global Initiative to creating a partnership between the -- your foundation and the State Department when Hillary Clinton was in office, to, of course, holding fund-raisers for both Clintons at various points. 

How do you respond to that charge?  

BLANKFEIN: Well, Hillary Clinton was the -- was our -- was a New York senator. [Trying to avoid the usage of the word "our" ;)] We're largely a -- well, we're certainly a New York- headquartered firm. The -- when -- when Bill Clinton was in office, obviously, he was the president of the United States -- we're one of the larger banks; we have influence in the financial system; of course we engage. We engage with Senator Schumer. We engage with Governor Cuomo.  

I don't know how to -- we could have -- I know that, you know, in the conspiracy world -- theory-driven world in which we live in, you connect data points, but, heck, [hmm?] I have -- I go out and I meet with editors of newspapers. I meet with Republicans, leaders. I -- we -- it's necessary for us to do that. Part of what we do is -- part of our role requires not just that we're committed to [the word Blanfein used was "permitted" to not "committed to]-- our sense of duty requires that we explain the financial system and the ramifications of what official action would be. And of course we engage our political leaders.  [Finally he found the right angle to give the meeetings]

ZAKARIA: But the implication is that there was a tighter connection. Do you -- do you... 

BLANKFEIN: Well, I'll give you -- I'll give you an example of a tighter part of a connection. In the '08 political cycle, I held a fund-raiser for Hillary Clinton. And I could tell you, throughout our firm and other firms, so did a lot of people and so did a lot of people in our firm hold fund-raisers for people running against her. We had no -- I mean, you can -- you can go on and trace it. [No need to trace it but it would have been better to state this upfront] But, listen, if the fact is that we're identified with Hillary Clinton, who, as we say this, you know, the election is coming up and I'm sure this will -- this conversation will survive that moment, but as we sit here now, we don't know who will win the election. But it looks like the odds are favored Hillary Clinton. If the worst thing was that we had a history of having engaged positively with Hillary Clinton, that's not going to annoy me. [Fair point]

ZAKARIA: But do you personally support and admire Hillary Clinton?  

BLANKFEIN: Well, I've -- I'm supportive of Hillary Clinton, and I certainly -- yes, I do -- yes. So, flat out, yes. I do. That doesn't say that I agree with all her policies. I don't. And that doesn't say that I adopt everything that she's done in her political career or has suggested that she might do going forward. [Fair point]

But in terms of, you know, her intelligence, her, I think, her positioning not only in terms of her ideology but what I regard as a certain -- as a pragmatism that I saw demonstrated when she was our senator and in earlier stages of her political career, when she could cross the aisle and engage other people to get things done, I admire that, and it stands out a little today because it's a little -- because it's a little -- that kind of -- that kind of willingness to engage and compromise -- but let's just stop at engage -- that willingness to engage is a scarcer commodity these days. [Again a fair point]

This was a rather innocuous topic. The way Blankfein answers raises suspicion rather than questions themselves. The way to answer it was first admit there is a connection. Personally, raising funds and so forth, then talk about regular interaction with politicians to put forth our understanding of financial system and so on. Blankfein answers weirdly. I felt he was trying to avoid using the word "our" senator - when referring to Hillary. Why? I wonder.

I was surprised by his use of word "permitted". Clearly Fareed did not imply that he cannot meet Clinton. And Fareed probed rightly. So then comes the issue that Blankfein personally held fund-raiser for Hillary. Fareed says both but Blankfein admits only Hillary. Now if I was asked - this relationship would be the first thing to disclose. Also ties between Goldman (the firm) and the Clintons. Blankfein avoided the question on the Clinton foundation and his own foundation.

By the end though he is comfortable talking about general stuff - why I support Hillary and general stuff like that.

ZAKARIA: Why won't she release the transcripts? 

BLANKFEIN: OK, well, you'll have to ask her -- you have to ask her that. I would say -- and the answer is I don't know. [Why so defensive] 

But if it were me in her position, I would have wanted to reveal -- I'm not sure what she's afraid -- you know, these transcripts were her -- somebody who had left office as secretary of state giving a tour of her impressions of the world. They weren't given to Goldman Sachs -- you know, the press talks about Goldman Sachs partners. She spoke at our client meetings. These were meetings with -- with hundreds of people. Believe me, she was not saying -- I didn't think she was saying anything untoward. I don't recall specifically. [Again a hedge - hmm] But nothing that she said would have jarred me that she was going into some impermissible or revealing some secrets. I don't know what secrets she would have had about the financial market that she could have revealed.  [So myopic is Blankfein, doesn't think Hillary may be more smart than he understands]

ZAKARIA: There's a poll out, I think, a couple of months ago. Sixty percent of Americans worry that Hillary Clinton would not be able to properly regulate the financial industry because of her ties to it. What do you say?  

BLANKFEIN: You know, I don't know how to -- I don't know how to -- I'm not sure how to respond to that. People say that. I would say that the financial system today is so much more tightly regulated. The regulators in their seats are so vigilant and so tough and their reputations depend on that toughness. Everyone is -- it's not a place where everybody is disarmed; everybody is armed. And the consequences of any kind of breach are so severe, I think -- I think we've -- I think we've handled that aspect of it. [This is a repeated many times by bankers]

I think -- look at the, you know, it's something I -- you know, frankly, I'm scared to death of mistakes that are made in my organization, and guess what? The world wants me to be scared to death of that and they want me to be vigilant at the end of the day. And they've accomplished their purpose. They have me on edge all the time. [So you weren't vigilant? Weren't scared? And if you have confidence in your risk management systems then why should you be scared?]

My biggest -- I am not -- I don't live in fear that I'll do something wrong. I know I won't. Of course, there are accidents can happen, but I know I'll never do something wrong intentionally. [Again hedging himself] I live in fear that one of my tens of thousands of employees -- and for other people who run big companies, it's hundreds of thousands of employees -- will do something wrong and their bad behavior will be ascribed to me, not simply because I failed to supervise, but in this current milieu, it will be ascribed to me as if I intended that act that was accomplished by somebody in the organization, or even if it's multiple people in the organizations. 

And that's a very -- that's a very hot -- we're talking about an anxious economy. Guess what? You have an anxious industry. And guess -- you know, and I'll say, go further, I'm sure that people are happy that it's that way. [Interesting victim's position he is taking]

These were fairly innocuous questions to which parrotted answers were expected. But Blankfein is unbelievably circumspect. In the entire interview the tone of Fareed Zakaria is quite neutral. Fareed doesn't seem to incite anything. Yet, voluntarily Blankfein is quite shaken up. Why? So if this is the case now, imagine what will happen if Blankfein were to be interrogated (i.e. cross examined) in Court by Elizaebth Warren. She will roast him alive. No before the senate/congress because there he is not obliged to share everything. But in court where adverse inference can be drawn.

I thought for CEO of Goldman Sachs, Lloyd Blankfein did not look one bit of the industry captain he should have been. He looked like a normal trader opining on various things. This opinion I deduce from watching John Mack, CEO Morgan Stanley, in the teeth of the crisis, or Jamie Dimon during his various media interviews since the crisis. He sounds more like a lawyer - which itself makes me suspicious.

Time and again words of Peggy Noonan - protected and unprotected ring in my mind. These people do not have any sense of ground reality. That is both sad and catastrophic.

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Counter intuitive = Low rates / ZIRP/NIRP policies are actually bad for economy

We are told that when interest rates are too low, they are encouraging entrepreneurs to take risk. So we have low interest rate policy LIRP, Zero interest rate policy, ZIRP and negative interest rate policy NIRP.

However, these policies impacts the business models differently. At one end are business models, like infrastructure projects, that cannot add threshold value in the initial years of the venture. The low interest rate regime, allows a valuable gestation period for such business models. Often, government artificially lowers interest rates for such projects. At the other extreme, there are weak business models, those that are viable only in low return scenario. These business models, however, die out once the interest rates start rising. In between, there are experimental and innovative business models. Some of these use the low interest rate period to forge better, more robust models. Such businesses thrive later. Others, however, end up going bust. The role of banks is to identify each of these business models and fund them while appropriately mitigating the risks. 

How low interest rate leads to mal-investment 

A bank takes risk by investing in a venture. Interest rate is also a reward bankers get, for taking the risk. Ideally, even in lower interest rate scenario, those projects with best risk-return trade-off should get financed. 

However, in reality, lower yielding large borrowings backed by reputed corporates get access to financing more easily than new ventures. This means, irrational mega-projects or mal-investments of large corporates get financed at the cost of genuine investments of new ventures. Typically, such irrational mega-projects consume a lot of credit requiring load syndication. This has twin benefits for bankers. 

First, there is a higher degree of comfort in being with the herd. Secondly, bankers do not have to go through credit appraisal of many small entities of questionable risk profile. This makes them assign a lower risk to these projects than appropriate. Intelligent investors will find that this contradicts with the "diversification as risk management" strategy. But being with herd has a stronger lure and is treated as risk mitigation (though wrongly).

Further, at lower interest rates, debt starts being used as an instrument to amplify equity returns. With unchanged return on capital employed, you can have higher return on equity when return on debt reduces. Return on debt is function of interest rates and lower share it claims from the total returns made by the firms. 

Thus the second blow to new ventures comes from crowding out. It implies that even in a low interest rate environment, small businesses and entrepreneurs may not have access to lower cost capital. Therefore this impacts the long-term strength of the economy. 

In high interest rate scenario, the irrational mega-projects seem less promising. Hence, contrary to popular belief, it may be easier for smaller businesses to compete in high interest rate scenarios.

This is particularly true when there is some demand in the system.

What happens when there is no demand?

When there is no demand in the economy, low interest rates / ZIRP / NIRP etc are said to stimulate this demand. This, to my simplistic mind, sounds like offering desserts to the already overfed diner  (AOD) with the hope to eliminate world hunger. Let me explain.

We hope this AOD, when offered with a free desserts will take them and pass them along to the hungry. In this method we depend on the magnanimity of intentions of our already overfed diner. Then we presume he shall act on his instincts and find worthy hungry who can transmit the benefits to others. It is quite possible our Glutton may pass the desserts to his friends or family and each can be a little more fatter. Are we, then to wait for all the gluttons to be severly beefed up or porked up before the trickle down starts to the hungry?

It sound like bull-shit method to me. Particularly I cannot understand why you are preventing the hungry from feeding themselves - either by employing them or letting entrepreneurs do it by financing them with reasonably priced debt/credit. These entrepreneurs are left to finance their ventures with credit cards, overdrafts and other very high cost financings at considerable peril. Now since these financing schemes are not on the business side, they are paid out of the post-tax income generated by the firm (but they should have been tax deductable at firm stage itself). This is doubly onerous for the entrepreneurs. 

Treat Interest rate like friction

A better model is to think of interest rate like engineers think of friction. Some is good, too much is bad, too little is bad too. In fact friction analogy should be best suited for determining neutral rate of interest. 

Economist too think of interest rate as friction. To the economist - road mileage of the car represents growth, fuel represents capital availability or liquidity. The economists' metaphor of friction is flawed. They need to get their metaphor right.

Engineers will tell you - you need to maximize friction at the tyres and eliminate it from the engines. At the clutch and brakes too you need friction. So you need interest rates high at some places and low at some others. So Economists better figure out where you want low interest rates and where you want high interest rates. Note the question is where not when. 

In Sum

The hazards of the LIRP, ZIRP and NIRP far outweigh the benefits. These policies do not pass the smell test. We need a better understanding of interest rate as a tool for improving economic growth.

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms". A version of this argument was made in Subverting Capitalism back in 2010 and also posted on this blog in 2012. Nothing, it appears, has changed.

Why are taxes so complicated?

Apple’s skirmishes with the taxman have brought the issue of taxes to the fore again. It all started with Warren Buffet’s assertion that he paid less tax than his secretary. We wondered what magic formula achieved that!

What is wrong with taxes? Why don’t we understand what is going on? Many reasons but mainly because tax is complicated — too damn complicated. I haven’t met a person who can mentally calculate his or her taxes even when they know their income precisely — not even with a calculator. These calculations aren’t even in the ballpark. So why is tax so complicated? Politicians and taxmen alike tend to confuse the debate with many terms and jargon.

What is a Tax?

Tax is actually a charge paid to the government for the services it renders — i.e. maintaining law and order, national security and general governance to cover the costs for that (such as salaries of army, police, judiciary, bureaucracy etc). It is also a source of finance for government investments say in infrastructure (think highways, dams, railways, space program etc). Taxes also pay for government expenditure on other things such as bailouts, promotion of job-creating industries, pensions, healthcare etc.

To pay for all these activities, government formulates a “tax strategy”. Tax strategy is combination of various taxes imposed on the public (citizens and non-citizen residents) to make up its income. It generally combines Direct and Indirect taxes, income and expenditure taxes etc. It may also include tariffs, duties, cess and fees under many different names.

Direct versus Indirect Taxes

Now government can take the taxes in two ways. Direct taxes are taxes those directly collected by the Government like, say, income tax etc. Indirect taxes are levied on the manufacturers or employers and these are then passed on to the citizens.

The direct and indirect taxes are important because of ease of collection. Indirect taxes are easier to collect but increase the transaction costs in the economy. Thus, if there are excise duties across the value chain, then such products have to be that much more competitive with respect to other global products just because of tax accounting.

Income Tax and Expenditure Tax

Government has at its hand two types of taxes. It can tax income at the hands of the earner. It can tax the consumer at the time of consumption. Notice that the timing the taxes are collected is different. That has an important bearing on this discussion. Between receipt of income and actual consumption is a quantum of time that can be controlled by the citizen. This has important bearing on the nature of tax government wants to impose.

When recessions strike the government is required to give a fiscal stimulus. When the tax backing such investment can be collected is now left to the consumer. After recessions typically, the consumers are reluctant to spend thus delaying the tax collection and putting government commitments to lenders at risk. An income tax, however, comes in as soon as income recovers. That used to create a big problem for the governments. However, with present technology and statistical analysis, governments need not have these

Expenditure tax has its advantages. It penalises those who consume more as against those who consume less. The argument against expenditure taxes is that incomes are higher than expenditures and thus tax collection is more. The counter argument is that expenditure tax leads people to invest rather than consume.

Tariffs, duties, cess and other fees

All these items are basically a charge on specified group of persons (natural persons i.e. people or legal persons i.e. corporations). These charges are meant to nullify some anomalies arising out of policies. Thus, if tax on cars is 30% on price of car, then if you import the car then you will also have to pay 30% “import duty” to bring you inline with those buying locally.

Why are taxes so complicated?

There are three sources of complexities in taxes. First is that tax law itself is complicated. Secondly, the constitution of the country creates complications that show up as complexity in taxes. Third type of complexity is result of Governments using tax laws and bending constitutional mandates to further their public policy.

Complications of Tax law

When you read the tax law, it is usually in two parts — tax rates and “interventions”. Interventions generally take the form of exemptions,deductions and tax breaks.

First part deals with tax rates. Tax rates by themselves may be different. Income tax rates are decided on slabs. For example, income below $20,000 may not be taxable, between 20,001 to 50,000 be taxed at 10%, between 50,001 to 100,000 be taxed at 15% and so on. It is easy to understand that the higher the tax exempt income, higher the tax rate others have to bear.

Exemptions are incomes or expenditures by law exempted from tax. Thus, income from renting a housing may be exempt. So when computing your taxable income, you don’t include the rent in it.

Deductions are amounts you invest in certain schemes that you can deduct from your taxable income. Thus, amount invested in pension plans may be deducted from your taxable income before tax is computed.

Then there is something called Tax-break. These are most notorious of all interventions. By this mechanism certain persons (natural or legal) can be made exempt from paying taxes if they satisfy certain conditions.

If taxes seem complex by now wait till you hear of this new type of complexity.

Constitutional complexity

The constitution in most countries grants the right to the government to levy tax. Now no country has one government, there are at least three sets of government in any country — city level, state level and national government. Constitution has granted each of them some tax they can levy. It is different for different countries but the principle is the same. These taxes taken together result in massive compliance exercise that is both time consuming and complex.

Governments overreach when they want to increase tax collection. So they invent some other thing to add to the tax burden adding to complexity. For example, if state or city government can tax land, national government may impose environmental cess on those lands which are not tree covered. It may be so that environmental policy is with national government, and land taxes with city government but now national government has got its pound of flesh out of land taxes.

Tax as an instrument of public policy

Governments, with all nice intentions, tend use taxes to further their public policy aims. For example, to promote job growth, they may want to give tax exemptions to various industries, tax breaks, they decide what the level of exemptions — what incomes are exempt from taxes. Or, say when they want to support home buying, then the government may give you deductions if you buy a house and lighten your tax burden. All these things combined make the tax calculations too complicated. These interventions are nothing but Government trying to influence society — they are using tax as instrument of public policy. It is wrong for many reasons.

The concessions given to further public policy have two ill effects. Firstly, they do not convey transparently what benefits were given to whom and thus it is underhanded. Secondly, they are wasteful as they cannot be pin-pointed to deserving persons. There remain, deliberately or not, various loopholes that creep into the legal draft of the law when it does come out. US tax code is rife with instances where industries on one side of the road has received tax-break while that on other side hasn’t.

I once heard a (fictional I think) story about Britain. In the 90s it was noticed that more Brits preferred to stay single than to marry. Naturally, the cable channels were quick to host debate shows on declining moralities of the Brits. It was then discovered that despite not marrying, Brits tend to stay with same partners. Quickly the hollow debates went after religion values of marriage etc. Ultimately it was discovered that this so-called moral decline was because of an innocuous clause in the tax code which imposed additional tax on married couples than two single adults. Talk of unintended consequences!

If government wants to subsidise certain industry let it do it by direct transfers or refunds. The problem with this argument is that citizens themselves do not accept it because government is quick to accept money but very lethargic when it comes to a refund. In corrupt countries there are palms to grease — if you are in India you have to grease the entire bureaucratic system and bureaucrat themselves.

The resulting of Complexities

The complexities in Tax system are not the only problem. They are genesis of the worse problems.

Individuals v/s corporates

There is a fundamental flaw in the tax system that treats income tax of individuals and corporates differently. The tax system believes that income of the corporation is its profits which is revenue less costs (crudely). In case of individual no consideration is given to expenses. Thus individual is taxed on revenues while corporates are taxed on profits. This difference has to go away. Now to be fair, individual tax rate is lower than corporate tax rate for precisely this reason. Yet, this difference coupled with tax avoidance mechanisms and other invented devices contribute heavily to discrepancy between the individual who cannot game the tax system and the corporate which can.

Tax avoidance

When the underlying system is complex, private parties more than government agencies are able to take advantage of the system. In the 2008 financial crisis, the average paying rating agencies were not competent enough to see through the complexities created by highly-paid bankers. Same logic holds for tax too.

With loopholes this wide, rich people with boundless ingenuity come up with schemes that help them avoid taxes. So people invest more in housing if rents are tax free. Such tax avoidance has created an industry of accountants whose only job is to avoid taxes. It is also in the interest of these accountants to keep tax codes unnecessarily complex.

When tax avoidance increases the burden falls on the poor who are ill-equipped to handle the complexities of taxes.

Transfer pricing — The bigger problem Tax evasion

One of the worst ways of evading taxes is by using transfer pricing technique. Let us imagine I make shirts under my company X Inc. and it costs be $50 to make the shirt which retails for $100. But I am based in a country where tax rate is 20%. So I make incorporate a different company X Ireland Inc. where tax rate is 1%. So X Inc. sells all the shirts to X Ireland Inc. at $51. And I pay tax on $1 at 20% i.e. 20 cents. Then X Ireland Inc. sells the shirts at $100 world wide. I pay 1% on $49 profit i.e. 49 cents. So my total liability is 49+20 = 69 cents. If I was doing business completely from my home country I would have to pay 20% of $50 i.e. $10 in taxes. This $9.31 is deemed to be legitimately avoided. I think not! This is tax evasion not tax avoidance. A small business cannot compete with this company.

This transfer pricing game is played at various levels. Corporates play countries v/s countries, pit state v/s state and city v/s city to extract maximum benefit. This benefits are solicited through industry bodies, professional institutes and other mechanisms of lobbying. Eventually tax payers are paying for this too.

Money laundering

The Global cooperation in taxes was brought about because of money laundering. All money laundering channels were discovered and they remain operational because of their use in tax avoidance / tax evasion. These networks have now been used to finance terror network which brought them into focus.

Taxes need urgent global reform

We need a simpler tax system that is easy to understand and easier to comply with. The complexities need to be resolved. Most of the countries in the world have a unified expenditure tax system (GST it is usually called). Such a system should be created for all taxes. We need to do away with exemptions, deductions and tax-breaks. The government aid, if necessary, should be given directly by cash transfer.

Second, we need international cooperation with respect to tax regimes. It is in the interest of all the countries of the world that tax is paid to the government to which it is due. There are efforts being put together to track and prosecute tax evasion through Global Forum on Transparency and Exchange of Information for Tax Purposes. This is a welcome initiative, though too many bureaucrats are discomforting. I hope it does not end up complicating the Taxes rather than simplifying and checking evasion.

If tax is a necessary evil, it is unnecessarily complex convoluted evil. May the Founding fathers should have put in a fundamental right that taxes shall be simple to understand and easy to compute and pay. Taxes should be simple and straight-forward. A healthy global tax system will empower our governments.

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Should banks create money?

Bloomberg has a post about centralizing money supply - whole money, as they call it. It is not a very good idea. This is not the first time such suggestions have come up. As mentioned in the article, Irving Fisher first proposed a similar plan in the wake of the great depression. Since then many have proposed this idea but not many understand money creation.

Taxonomy of centralized money creation idea

The money creation ideas are varied:

1. Gold money: This is natural money creation. No one has any control over the money creation. Previously, gold, silver, diamonds, precious stones and other valuables (and sometimes sea shells too) were used. Many serendipitous discoveries of valuables created havoc with the money supply. Discovery of Potosi in South America and thereafter further discoveries of gold and silver had the effect of expanding Spanish money supply. 
1. Not under any control: Neither governments nor banks, no one has any control over the money creation process.
2. But Non-Arbitrary: It depends on the amount of gold you have. If you want more gold, you better import more gold by giving some valuable service to the other countries  who have gold. Over time as the total amount of gold available starts reducing you need to offer more and more to the countries that have gold.
3. Though subject to Nature: If by chance you discover a gold mine, you will be filthy rich, though if you discover too much then it may unleash inflation. Spain is believed to have faced such inflation on the discovery of silver mines in the South American colonies.
4. Deflationary and restrictive: As economic activity grows it becomes too high compared to the total amount of gold available to back it. Thus it tends to slow the economic growth pace. (Don't know if that is good or bad).
5. Favours status quo, old money and advantageous to miserly: Since total value of gold you have increases with time, people tend to postpone purchases and hold on to gold. Spending happens when absolutely necessary.
6. Exploitation and Theft prone: A doctor can charge atrocious fees from a rich person because of bargaining power equations. Gold can also be stolen. Stealing credit cards is less useful.
2. Gold-backed money: Introduced to circumvent the deflationary gold currency, countries peg the value of their currency to the gold they can back it with. When people talk of gold standard they are referring to this type of money creation. 
1. Partly Government controlled: Government issues currency and states the total amount of gold they back it with. So a gold-to-dollar exchange rate is established. The government can improve its reserves and thus improve money creation. 
2. Non-arbitrary: In its pure form it is non-arbitrary and similar to gold-money.
3. Not purely nature driven but subject to shocks: Since the government has control over the amount of money and amount of gold, the money creation is not as whimsical as simply discovering a gold mountain. Governments can reset the exchange rate to compensate for some changes. But arbitrary government intervention results in shocks and disruptions.
4. Mostly deflationary: Governments cannot measure economic activity easily (yes GDP calculations are guess-work and there is no Santa Claus just in case you were wondering). That leaves money creation open to political whims and fancies and invites tampering of measurement of the economic health. Mostly governments are slow to acknowledge the real growth in economy since it is always backward looking. It realises the growth till the growth results in deflationary pressures then increases money supply and causes a spike.
5. Perception of money losing value as government reset gold rate: As total amount of product and services of value in the economy rise more than amount of gold to back it up, the government is forced to alter the gold-dollar exchange rate downward leading to people feeling that each dollar is worth lesser in terms of gold though purchasing power may be higher.
3. Government-created money: This is non-gold standard money. Simply speaking the government issues money and backs it with a promise. This is what people wrongly believe is the current regime. 
1. Full government control: The government has effective control over the process. This is a mixed bag. It depends on the government. 
2. Some central bank control: The exact control depends on how money is created, is it by using government bonds then bought to a certain extent by central banks or some other way (simply printing).
3. Depends on confidence in Government: Prudent governments enjoy advantages but if you are Zimbabwe then you will end up in trouble.
4. Inflation/deflation depends on policy: If a government print too much then it stokes inflation and too little results in deflation. Prudently executed (Milton Friedman's about 3% money supply growth) works fine.
5. Value of money depends on inflation: If the government is able to deal with money creation effectively then a mild inflation - say 2% may result. There is not too much loss in value and it can be notices only over long time frames when quality of life changes are also noticeable.
4. Money created by banks: Mostly commercial banks create money by giving loans. These loans do not exist as money. This is the most misunderstood money creation mechanism. It is distributed money creation, without extreme control. Bankers and regulators forget that its success depends on devising proper incentives. 
1. Less government control:No country uses this method exclusively. Both Government-created and bank-created money is deployed. Thus there is always government control of some sort. Also since government is also a borrower (a big one at that), it has control.
2. Part central bank control: Central bank exercises additional kind of controls in this mechanism. First, it can partner with government in its money creation process by buying government bonds etc. Second, it controls the lending to the banks and thus influences at what levels of risk do banks create money. The key word is influences and not dictates. Thus this process is often likened to "pushing at a string" (which is difficult, you can pull at a string pushing does nothing unless there is pulling at other end by the banks).
3. Control to banks: In this scenario, Banks can ALSO determine whether to create money or not. That decision is based on whether the person demanding the money will be able to repay it or not. If he can, it means he is creating value with this money and thus able to repay it. 
4. Decision at the point of demand of debt: The decision to create money is forward looking. It is made at the point the person makes a demand for the debt. That borrower is expecting to create future value. If by banks assessment that value can be generated ONLY then money is created.
5. Depends on incentives: After reading this if you wonder why banks lend for consumption goods or lend to uncreditworthy borrowers - it is because of incentives. The power to create money is substantial power and with bad incentives, it can cause systemic harm as seen in 2008 crisis.
6. Central bank oversight: Central banks have oversight duty to watch what kind of money is created by the banks. The nature of lending is supposed to be value-focussed. Some consumer lending at the time economy is entering a pro-longed boom phase can be advantageous. But in an economy which cannot sustain a prolonged growth phase, these are risky loans and their proportion needs to be limited.

My suggestion

Out of the options, I prefer the last one - a combination of bank created and government created money. It is quite forward looking and takes place at the point of demand. It needs a lot of oversight and decentralisation. I have argued that IT systems have in fact centralized the loan decision making than allow the front-line managers to make them. This has resulted in an inaccurate assessment of borrowers and partly responsible for the 2008 crises. Amar Bhide also makes a case for intelligent decision making in his book "A call for judgement".

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms". 

What should governments spend on when faced with fiscal stimulus?

At the time of financial crisis of 2008-09, we were lucky to have the best monetary policy experts around. They seemingly used their various tools - some conventional and other unconventional. Yet about 8 years after we find we need fiscal stimulus as Mario Draghi put in an ECB statement in early summer. Luckily the US presidential candidates agree with this view. So in all likelihood, we should see some fiscal stimulus coming in.

Yet, the understanding on the fiscal side does not seem to be as well developed as the monetary sides. For one, exactly what Keynes prescribed is still much debated. Second governments don't know what to spend on. Obama famously called for "shovel-ready" projects. Milton Friedman (who died in 2006) would cringe in his grave. There is nothing more dangerous than a government committed to a fiscal stimulus that does not know what to do with it.

Looking at Roosevelt/Eisenhower

It is, however, well-accepted that after the World War II, the Roosevelt/Eisenhower initiative of building inter-state highway was one of the biggest fiscal stimuli to the US economy. The genesis of this project was the cross-country trip Roosevelt took in mid-1920s which may have given him a hint of its potential. Once it was implemented, its fruits accrued at least till late 1990s. Even in the era when the internet made distance irrelevant, these highways continued to contribute by way of lower transportation cost thereby giving firms advantage in making supply available at lower costs than otherwise. 

If fiscal policy is to be deployed today where can we deploy it? What areas would have as much purchase as did the highway program of 1930-40?

To answer this we need to imagine the economy as a network of value chains. Such a network has some common elements which need government support. These are the areas where fiscal policy needs to be directed. This is the efficiency angle. If any government wants to orient its economy in a certain direction then this would be the time to make investments in the missing parts of the value-chain that can be shared in the new era. 

A few I can think of:

1. Going green: Reducing Oil-dependance is an option : The very basic pieces of all value chains do contain energy. So an advantage in green energy may be quite advantageous in the long term. Green energy needs a lot of work but could be a potential candidate. It could do with some sort of Manhattan Project 2.0 (the first was for nukes) for making green energy possible. They could standardize the electrical charging stations for hybrids, developing standards and technology to allow smaller wind mill operators to supply into the grid at a time of their convenience. Tesla is looking at this vision through private means.
2. Going blue: Usable water: Food and water will continue to form part of value chains at a very basic level. While global food production is quite high (we destroy a lot of excess food), same cannot be said of global nourishment.  It is undeniable that whatever food we grow we will need potable water. Many say if we find green energy then we can desalinate the water. But low fresh water has an ecological impact on bio-diversity, food-chain dynamics etc. that cannot be dismissed. In that sense, the bio-diversity advantage may trickle into better nourishment and healthier foods - who knows. So I would focus on water management.
3. Carbon catchment could be more urgent: In his TED talk Bill Gates made a very poignant statement - we need ZERO emissions, not lower emissions. It is clear that we cannot cut emissions fast enough. But can we trap emissions before they cause global warming? Maybe we should! This is more engineering problem rather than technology problem and may be more beneficial. Alas, its effects are very difficult to quantify.

The nature of fiscal stimulus

The exact quantum of fiscal stimulus is immaterial, though it has to substantial. What matters more is how long is that quantum spread and the conviction behind it. That will decide its efficacy. The fiscal needs to be prolonged, substantial and certain. An uncertain prolonged stimulus or variable stimulus without visibility will have no appreciable impact. 

Ideally, it should also be employment intensive. Higher employment intensity will allow the benefits to spread faster through the economy.

The goal of the stimulus is to increase the certainty of jobs and employment while laying down a basic infrastructure for the future. If it achieves this then such a stimulus will work. With a certainty of income will come spending and further downstream positive economic effects.

Note: the suggestions made are simply most promising areas at the moment as per my reading. 

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".