Here’s a question to ask yourself: If the government spends an extra $510 billion from 2011 through 2019, will that improve the current recession? If you answered no, you are clearly not a member of the economic team behind the American Recovery and Reinvestment Act of 2009, President Obama’s stimulus plan. The bill is poised to make a navigation through the Senate after passing in the House on a near party-line vote.
Before dissenting, I should explain the logic behind fiscal stimulus, since the media has done a poor job giving its own side’s argument. The spending part of the stimulus plan has a host of components to it – everything from expanding Internet coverage to rebuilding our nation’s transportation system. The way pundits discuss the plan, one gets the sense that Democratic economists expect better highways to instantaneously stimulate the economy.
But the actual point of the spending is not the ends but the means. Fiscal stimulus plans are spending for the sake of spending. The idea is to pump money into the economy quickly by increasing government purchases. The sellers take that money and spend some of it. Whoever gets that money spends some of it, and so on. The spending is supposed to accumulate in what is known as the “multiplier effect,” increasing employment, consumption and sales.
Sounds pretty good, right? So what’s the problem?
There are two major reasons to be skeptical of any fiscal stimulus, much less the behemoth considered by Congress. The first is the problem of time. Government spending takes a substantial amount of time to unwind. Even after getting through Congress, a cumbersome task itself, much spending still requires long delays before projects are ready to go. The process of planning specific projects as well as contracting can take years. Even after they begin, many are slow-moving, like construction activity. This further delays the flow of dollars.
Despite the depth of the current economic downturn, many economists predict that a natural recovery will begin by the end of the year, according to the Associated Press. Yet if the Obama plan is passed immediately, which is not a sure thing, the Congressional Budget Office has reported that only $93.1 billion will be spent during fiscal year 2009. The other $510.9 billion will be spent unnecessarily from 2010-2019 after the economy has already started recovering. Apparently, liberals think that keeping Iraqis free wasn’t worth a deficit, but spending taxpayer money in 2015 to expand Internet broadband services is well worth burdening future generations.
The other argument against the Obama plan is that recent empirical studies done by economists have cast doubt on the power of fiscal stimulus packages. Several recent investigations, including one published by Christina Romer, suggest that tax cuts are significantly more stimulatory than increases in government spending. Perhaps Romer could discuss her ideas with her boss – she is the new head of the Council of Economic Advisers. Even some traditional supporters of fiscal stimulus have changed their tune in light of recent research.
The plan does have some “tax cuts,” but these are really just rebate checks that do nothing to change the incentives in our economy. A cut in the payroll tax rate for both employees and employers would be a great idea. Not only would it put money into the economy quickly, but it would also encourage employers to hire by decreasing the cost of paying workers. But with Congress and the White House controlled by the party that gets headaches when it tries to read supply-and-demand graphs, I’m not holding my breath.
Michael Lewis is a senior in economics. He can be reached at [email protected].
