Monday, January 19, 2009

10 questions about the economic stimulus bill

By Brian Riedl
The Heritage Foundation

The $800 billion economic "stimulus" bill may be more appropriately called the "Obama debt plan." It will, after all, dump $6,700 per household of new debt into the laps of our children and grandchildren. Whether it will actually stimulate the economy is another matter. So perhaps politicians can first answer a few questions from the back of the classroom:

» President-elect Barack Obama claims that spending approximately $800 billion will create or save 3.675 million jobs. That comes to $217,000 per job. This doesn't sound like a very good value, especially with the national average salary around $40,000. Wouldn't it be cheaper to just mail each of these workers a $40,000 check?

» Politicians say deficit spending will expand the economy (as if President Bush's $300 billion budget deficits brought economic nirvana). If that were true, then the current $1.2 trillion deficit -- the largest in history -- would already be rescuing the economy. It's obviously not. So why would $800 billion more of the same suddenly end the recession?

» We're told that government spending will add new spending power to the economy. But Congress doesn't have a vault of money waiting to be distributed: Every dollar lawmakers "inject" into the economy must first be taxed or borrowed out of the economy. If government borrows the money from American investors, investment spending drops accordingly. If it's borrowed from foreigners, net exports drop accordingly. How does borrowing $800 billion from one group of people and giving that $800 billion to another group of people make us wealthier?

» Some answer the previous question by saying that transferring income from savers to spenders keeps more money circulating through the economy. That made some sense in the 1930s when people hid their savings in mattresses because they didn't trust the banks. But today, people use their savings to pay down debt, invest or put it in banks -- in each case, making the purchasing power available to others wishing to borrow. Thus, savings circulate through the investment spending side of the economy. How does transferring money out of investment help?

» Policy-makers are basing the "stimulus" bill on economic models that wrongly assume every $1 of government spending increases the economy by approximately $1.60. Is it really that simple? By that logic, debt-ridden, big-government countries like Italy, France and Germany should be wealthier than America. And why stop at $800 billion? Such logic suggests unlimited prosperity could be guaranteed by the government borrowing and spending $800 trillion. Should America be basing such costly decisions on these types of economic models?

» Lawmakers tell us every $1 billion in highway "stimulus" can be spent creating 34,779 construction jobs. But Congress must first borrow that $1 billion out of the private economy. Won't the private sector then lose the same number of jobs?

» During the 1930s, New Deal lawmakers doubled federal spending -- and unemployment remained above 20 percent until World War II. More recently, Japan responded to a 1990 recession by passing 10 "stimulus" bills over eight years (building the largest national debt in the industrialized world) -- and their economy remained stagnant. Why do lawmakers believe the same failed approach will succeed for the U.S. today?

» The economy sank because people over-borrowed for houses they couldn't afford, and financial institutions over-borrowed for investments they badly misjudged. Washington's solution is to borrow $800 billion that it cannot afford. How will adding $800 billion to the national debt (which will also raise interest rates) solve a recession created by imprudent borrowing? And who will bail out the American taxpayer when the bill comes due?

» Temporary tax rebates were implemented in 1975, 2001 and 2008, and most economists agree they failed to help the economy. Long-term marginal tax rate reductions implemented in 1982 and 2003 both substantially increased economic growth. So why are lawmakers planning another round of temporary tax rebates, followed by an increase in tax rates?

» Mayors have pledged to spend stimulus funds on items such as a mob museum in Nevada, a polar bear exhibit in Rhode Island, and curbing prostitution in Dayton, Ohio. As National Review asked, how come one Bridge to Nowhere is a national embarrassment and 1,000 Bridges to Nowhere are a "stimulus?" Given the 11,000 annual earmarks, why should taxpayers trust politicians to spend this money better than they would spend it themselves?
Brian M. Riedl is the Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
(c) 2009, The Heritage Foundation

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