CE Week #1: “The Stimulus Time Machine”
That $355 billion in spending isn’t about the economy.
The stimulus bill currently steaming through Congress looks like a legislative freight train, but given last week’s analysis by the Congressional Budget Office, it is more accurate to think of it as a time machine. That may be the only way to explain how spending on public works in 2011 and beyond will help the economy today.
According to Congressional Budget Office estimates, a mere $26 billion of the House stimulus bill’s $355 billion in new spending would actually be spent in the current fiscal year, and just $110 billion would be spent by the end of 2010. This is highly embarrassing given that Congress’s justification for passing this bill so urgently is to help the economy right now, if not sooner.
And the red Congressional faces must be very red indeed, because CBO’s analysis has since vanished into thin air after having been posted early last week on the Appropriations Committee Web site. Officially, the committee says this is because the estimates have been superseded as the legislation has moved through committee. No doubt.
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AP
David Obey.
In addition to suppressing the CBO analysis, Democrats have derided it. Appropriations Chairman David Obey (D., Wis.) called it “off the wall,” never mind that CBO is now run by Democrats. Mr. Obey also suggested that it would be a mistake to debate the stimulus “until the cows come home.” We’d settle for a month or two, so at least the voters can inspect the various Congressional cattle they’re buying with that $355 billion.
The stimulus bill is also a time machine in the sense that it’s based on an old, and largely discredited, economic theory. As Harvard economist Robert Barro pointed out on these pages last Thursday, the “stimulus” claim is based on something called the Keynesian “multiplier,” which is that each $1 of spending the government “injects” into the economy yields 1.5 times that in greater output. There’s little evidence to support this theory, but you have to admire its beauty because it assumes the government can create wealth out of thin air. If it were true, the government should spend $10 trillion and we’d all live in paradise.
The problem is that the money for this spending boom has to come from somewhere, which means it is removed from the private sector as higher taxes or borrowing. For every $1 the government “injects,” it must take $1 away from someone else — either in taxes or by issuing a bond. In either case this leaves $1 less available for private investment or consumption. Mr. Barro wrote about this way back in 1974 in his classic article, “Are Government Bonds Net Wealth?”, in the Journal of Political Economy. Larry Summers and Paul Krugman must have missed it.
The government spending will be a net stimulus only if its $1 goes to more productive purposes than those to which private investors would have put that same $1. There are some ways we may want the government to spend money — on national defense, say — but that doesn’t mean it’s a stimulus.
A similar analysis applies to the tax cuts that are part of President Obama’s proposal. In contrast to the spending, at least the tax cuts will take effect immediately. But the problem is that Mr. Obama wants them to be temporary, which means taxpayers realize they will see no permanent increase in their after-tax incomes. Not being fools, Americans may either save or spend the money but they aren’t likely to change their behavior in ways that will spur growth. For Exhibit A, consider the failure of last February’s tax rebate stimulus, which was a bipartisan production of George W. Bush and Mr. Summers, who is now advising Mr. Obama.
To be genuinely stimulating, tax cuts need to be immediate, permanent and on the “margin,” meaning that they apply to the next dollar of income that an individual or business earns. This was the principle behind the Kennedy tax cuts of 1964, as well as the Reagan tax cuts of 1981, which finally took full effect on January 1, 1983.
If the Obama Democrats can’t abide this because it’s a “tax cut for the rich,” as an alternative they could slash the corporate tax to spur business incentives. The revenue cost of eliminating the corporate tax wouldn’t be any more than their proposed $355 billion in new spending, and we guarantee its “multiplier” effects on growth would be far greater. Research by Mr. Obama’s own White House chief economist, Christina Romer, has shown that every $1 in tax cuts can increase output by as much as $3.
As for all of that new spending, CBO will release an updated analysis this week. And we anticipate that the budget analysts will in the interim have discovered that much more of that $355 billion will somehow find its way to “shovel-ready” projects that the Obama Administration can start building before the crocuses bloom. But in the real world, the CBO’s first estimate is likely to prove closer to the truth.
The spending portion of the stimulus, in short, isn’t really about the economy. It’s about promoting long-time Democratic policy goals, such as subsidizing health care for the middle class and promoting alternative energy. The “stimulus” is merely the mother of all political excuses to pack as much of this spending agenda as possible into a single bill when Mr. Obama is at his political zenith.
Apart from the inevitable waste, the Democrats are taking a big political gamble here. Congress and Mr. Obama are promoting this stimulus as the key to economic revival. Americans who know nothing about multipliers or neo-Keynesians expect it to work. The Federal Reserve is pushing trillions of dollars of monetary stimulus into the economy, and perhaps that along with a better bank rescue strategy will make the difference. But if spring and then summer arrive, and the economy is still in recession, Americans are going to start asking what they bought for that $355 billion.
Okay, so I agree with the author of this article. A stimulus is not going to solve our economy’s problems. However, a tax cut, especially a corporate one, is not going to help either. A corporate tax cut just moves us closer laissez faire. That’s what got us into this mess in the first place. Businesses decided to make really risky investments so they could get more money. They also decided to give themselves bonuses instead of hiring more workers and making more products and reinvesting in their businesses. They wanted the money for themselves instead letting it trickle down. That’s what’s supposed to happen in laissez faire, free market stuff. It’s supposed to take care of itself. But it can’t when those greedy corporate buffoons put money in their own pockets instead of spending it. That’s how our broken economy is supposed to work. If everybody spends, then everybody keeps his job and his house. When the corporate fat cats keep the money, the whole thing turns to dust. They must be punished for their greediness. That is what the corporate tax is for. If they refuse to help trickle down, they get taxed. Taking it away will just make things worse. The fact of the matter is that if we want our economy to be fixed, we need a WWIII where all of the countries involved are buying our weapons. Then we will make loads of money and everything will be better again. Maybe. But we have to have confidence, right? We have to hope.
Connections: The reason why Iraq and Afghanistan aren’t refilling our pocketbooks is because those wars have no one but us in them. No one to buy weapons. If we hadn’t angered the rest of the Earth with our despicable tactics, then maybe we get sell some AK-47s and end our crisis.
I’m probably like all of America in that I don’t understand a thing about the budget. Or the stimulus package. Or anything. I’m content with just coasting through life not knowing what tax bracket I’m in or where my money is even going. But I guess I kind of have to pay attention now that I’m going out into the world to make my own life. Only kind of though. I just need to understand how much money I pay and then I’m done.
I am really curious though: What is that “mere” 110 billion being used for? I guess in the article it talks about some projects that Obama has planned, but I just want to know where all of it is going. Does any of it really benefit people or things that affect me? Though I guess I can’t really know the answer to that because I’m not a government guru or a magician so I’m content in the knowledge that our president has our best interests at heart and nothing he does will intentionally destroy us. But really, that’s all I can do. All that stimulus stuff and money equations mean nothing to me. I’m not even sure how a stimulus plan works.
Connection: I’m sure that we’ve talked about the stimulus plan in class only a million times. And it’s all over the news. With the advent of chapter 14, it’s a good way to start us off current event wise. It really seems to be the only thing political pundits seem to talk about, and I wish I could understand it better.
I guess I just don’t really understand what the economic stimulus package is. What is it? I understand that it is $355 billion, but I don’t get what they are going to do with the money. I think that there has to be some other way to help the economy other than spending more money or cutting taxes. It seems that these are the only two options that anyone ever talks about, and both have negatives. Spending more money and putting it into the economy has the possibility of helping the economy, but it could also end up being ineffective, as this article points out. But making generous and permanent tax cuts does pretty much the same thing. While it does allow the people to have more money in their pocket, it lessens the amount of money that the government can spend. It seems that if the government has less to spend, all that can happen is for the deficit to increase even more, or the prices of everything else to go up so that the government can try to make up for all of the money that they are losing by collecting less taxes. Both methods seem like a gamble, and they will just have to pick one and go for it. It seems most likely that Obama will go for the spending option rather than the tax cuts even if this stimulus package does not pass.
Connection: The clip from the Daily Show that we watched today in class referred to this stimulus package and made it seem like it would be sending Americans extra money, but that is not what this article makes it sound like. I wonder what affect it would have if the government did just send all of the people a check for a certain amount of money.
I cannot believe this. I thought that Obama could be trusted. I thought that this package would actually be good for the economy. The more I hear about the economy and how the budget works the more conservative I find myself being. I have always thought myself of as a fairly moderate liberal. Now I don’t know what to believe I am. If I continue to lean towards the Democratic side then I will have to tack on fiscal conservative when people ask me what my political persuasion is. There needs to be some sort of line item veto, whether it is in Obama’s hands or maybe in the hands of the Speaker of the House. Pork Barrel spending needs to go. I do not like being lied to. Having someone who is supposedly trustworthy lie to me is a kick in the teeth. If these allegations are true then Obama has some explaining to do.
Connection: Loss of trust in the government and reelection- If the economy does not rebound quickly then Obama can expect to see a one term presidency. with Obama’s strong points in the economy and having the economy fail the Republicans can expect to exploit that and have a good chance at winning away the presidency four years from now.
The fact that the government is okay with spending so much money that we do not have is quite disconcerting. We are becoming just like the people who pay for everything in credit and get in debt which makes everything is great for a while until they get slapped in the face by reality. We have been “slapped in the face,” now is not the time to disregard the reasons we got here in the first place. If the government is going to do something to help they had better do it right, make fixing the economy the goal not just making an excuse to get money for the programs they want. It seems the meaning of frugality has been forgotten. I am no economic expert but I believe that spending more money than you have makes you lose money not gain it -1-1= -2 not +1.
Connection: In class we discussed how the stimulus package, or whatever we use to help get out of the economic turmoil is going to be a hit or miss situation; we only have one bullet and one shot. We don’t have the money or the time to do this and do it wrong.
Ryan,
You are absolutely right; we have a huge national debt and because of it, we should just stop spending. Uh… ya right.
That can’t happen. It’s impossible. In order for the government to survive it’s going to have to spend money. He stimulus package is about spending our money in order to “stimulate” the economy. I know, it can be a hard concept to grasp. The democratic goal is to pump money back into the majority of the American people.
Spending money is not what got us into this mess to begin with. I do believe president Clinton organized a tax plan to relieve America of its debt by 2013. And then President Bush became president. I know the blame is never solely on the president and that they are credited for much more then the public eye sees. Bush changed the tax plan dramatically and since, the majority of America has lost confidence in the economy.
Whether it was a democrat or a republican holding the presidential office now, I think they would agree, though spending money doesn’t seem like the right way, it is the only way. History shows that America has gone though times of depression and of prosperity. America is a great nation and finds its way to survive.